| Total bolt-from-the-blue surprises are thankfully rare. South Korea staged one in the middle of the Korean night Tuesday, when President Yoon Suk Yeol announced martial law. In the hours that followed, the army deployed to the National Assembly, legislators nevertheless entered the building and voted unanimously for a request to lift the decree, and then Yoon made another broadcast announcing that he would desist. This sequence of events played out over a little more than six hours. They’re well covered elsewhere on Bloomberg, and I’ve provided links. To gauge how traders felt about this, the following chart shows how the won (which closed before Yoon’s second announcement) and the main exchange-traded fund for South Korean stocks (which hadn’t opened for his first announcement) moved during the day. It was dramatic: At the time of writing, with Wednesday trading underway in Seoul, angry demonstrators were in the streets and the opposition was pressing for Yoon’s impeachment, likely meaning an election early next year. Korean markets were open, and trading with relative calm. The Bank of Korea had an extraordinary meeting, and was providing liquidity to help the markets but decided that it needn’t cut rates — a positive sign. The KOSPI index, the main benchmark of Korean stocks, was down above 2%, but put in the context of what has been a very tough year, that counts as quite positive. The KOSPI is still above its low set last month:  The effect, or lack of it, on global markets is more interesting. South Korea is a remarkable dynamic economy. It’s home to global companies, sits right on one of the world’s most dangerous political fault lines, and is a critical ally for the US as economic conflict with China intensifies. Some contagion from a sudden departure from democracy after 40 years was therefore inevitable, particularly as this blindsided everyone, both in Korea and beyond. The drama played across screens in trading rooms across the world. But if we look at FTSE’s index of global stocks, the impact wasn’t great. You can see when martial law was announced clearly enough on this chart of the week’s trading so far, but the index was never down for the day, and Yoon’s retreat was enough to mend all the damage. The S&P 500 even hit yet another all-time high:  The VIX index of equity volatility fell for the day, and there was no rush to gold. So how to gauge the importance of this event? In Korea, where it’s unusual for parliament to be controlled by the opposition, politics had been growing fractious for a while. It’s encouraging that martial law was resisted, but terrifying that it was even tried, and uncertainty lies ahead. At present, it looks like Yoon’s bid for power rather resembles the coup against Mikhail Gorbachev by Communist hardliners in 1991, which failed quickly and precipitated the fall of the Soviet Union. Attempting such a thing is a sign of weakness. Defeat can be final. So Korea’s defenses have been tested, and it looks like democracy has survived, which most of us will be happy about. But the analogy with the Soviet Union is still not encouraging; there, the old order was ready to fall, but it was followed by years of chaos.  Serious political uncertainty. Photographer: Woohae Cho/Bloomberg Stand further back, however, and it’s notable that the list of normally stable and healthy democracies now mired in serious political uncertainty — France, Germany, Japan, South Korea — reads like a roll call of the greatest beneficiaries of the postwar Pax Americana economic order that now appears to be ending. If any country was the ultimate exemplar of globalization, it’s South Korea. This probably isn’t a coincidence. These nations face a big test, and electorates and political establishments are fragmenting under pressure. Countries around the world have punished incumbents this year. This has led to increasingly intractable logjams (as in France), and desperate attempts to assert order (most notably in Korea). It’s obvious that voters across the world cannot abide the status quo and are looking for new, more populist alternatives. Thrashing out exactly what that alternative will be, while the global hegemonic power withdraws support, promises to be perilous.  | | | A further cut of 25 basis points to the Federal Reserve’s policy rate later this month looks ever more likely. Ahead of the non-farm payrolls data for November, due on Friday, which could still slip things up, the Fed seems plainly to be moving in that direction. They also seem highly unlikely to cut any further at their first meeting of next year. Amid all the excitement in the month since the Federal Open Market Committee last met, only hours after the US election, expectations for the central bank have been remarkably calm. Overnight index swaps suggest that rates will continue to come down, but only steadily, over the next year:  One data point to support the doves came from manufacturing supply manager data, which has unduly bearishly signalled for a year that the industrial sector is in recession. In 2021, its numbers proved to be a good leading indicator that price rises were coming unanchored. Surprisingly, the latest reading has dropped right back to the 50 level that suggests prices are in balance. That makes it far easier for the Fed to cut: The Job Openings and Labor Turnover Survey (JOLTS), which comes out with a month’s lag, suggested that the numbers of people quitting their jobs rose in October, as did the total number of openings — not the direction that would reassure the Fed that it can relax its inflation guard: However, closer examination shows little in the JOLTS that would put off the Fed from making at least one more cut. The numbers are volatile, and Samuel Tombs, chief US economist at Pantheon Macroeconomics, suggests that the latest report actually bolsters the case for a December cut. Comparing the official data with the new job postings index kept by the internet job search company Indeed, he shows that they’re consistent with a continuing gradual downward trend. Meanwhile, the quits rate is a great leading indicator for private sector wage growth, a critical measure for the Fed. Even with the latest slight pickup in voluntary deparatures, it points to continuing deceleration in pay rises. Fed speakers have been out in force. While none will promise a cut this month, and stress that there’s more data coming in the next two weeks, they leave little doubt that the most likely path involves a cut at the Dec. 17-18 meeting, and then a pause. Governor Christopher Waller gave the clearest steer at a conference on Monday: At present, I lean toward supporting a cut to the policy rate at our December meeting. But that decision will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation.
The most important factor, which Fed voices cannot address directly, is politics. The Trump agenda could reignite inflation, while the Fed might come under pressure to make further cuts. With a new chair due to be nominated in about a year, and the incoming administration batting around possible changes to the central bank’s independence, they need to be as unobtrusive as possible for now, and retain options for whatever 2025 might bring.  Trump nominates Jerome Powell as Fed chair in 2017. Source: Bloomberg Having cut by a full percentage point to end the year, the Fed also then has greater credibility in the opening months of Trump 2.0, when its credentials could be tested. Absent a shockingly strong employment report later this week, it’s best to pencil in a December cut, and then leave the paper completely blank for 2025. Oil is on the move, rising by more than 2% to its highest point in about two weeks after the US announced sanctions targeting Iranian oil that could potentially limit supply. But despite geopolitical risks like this, a glut has kept prices in check for the last two years. Indeed, it’s trading more than 4% lower for the year, despite escalation in the Middle East and nuclear fears in the conflict between Russia and Ukraine. Through wars and a pandemic, oil has climbed less than 9% since 2020.  The Organization of Petroleum Exporting Countries’ plans to limit supply partly explain oil’s upward movement. The cartel, meeting later this week, hopes to delay increasing production — due to commence with an initial hike of 180,000 barrels a day in January — by another three months. But trying to limit the glut coexists with limited demand. Trump 2.0 could act as a further drag. How so? Bank of America’s commodity team argues that if the global economy is poised for a soft landing, an abrupt shift in US policy would increase the short-run risks to global growth and therefore the entire commodity complex. The BofA team led by Francisco Blanch argues that with non-OPEC supply poised to increase meaningfully in 2025 and demand growth likely to remain steady (or drop materially if Trump tariffs come into play), incremental supply could outpace the projected demand increase: Oil markets have already been trending lower for some time, only gaining occasional support from geopolitical tensions in the Middle East. As prices slip lower, energy exploration and production private companies could cut back on well completions and, ultimately, crude oil production growth, eventually allowing for some price support.
With prices hovering around $73 per barrel, there’s some incentive for producers to ramp up output, or “drill, baby, drill,” as Trump would put it. Recent surveys from the Federal Reserve banks of Kansas and Dallas estimate producers’ breakeven price at about $64 per barrel. While the price has stayed above this floor post-pandemic, its impact on companies’ margins is profound. Respondents in the Kansas survey suggest $89 per barrel (30% above current levels) is needed for a “substantial increase” in drilling to occur. Without a dramatic price increase, Trump’s energy policy faces severe constraints. Harry Colvin of Longview Economics adds that Energy secretary-nominee Chris Wright’s planned attempt to boost production would mean less regulation and more permits. It’s unlikely to make any meaningful difference. Overall, weak demand is keeping a lid on the oil price, and neither OPEC+ nor the frightening geopolitical risks of the moment can lift it. The key development that could change that would be economic revival, particularly in China. —Richard Abbey With South Korea back in the news, and the latest developments suggesting the situtation is being resolved peaceably, it’s time to get back to by far the most entertaining interview about that country ever broadcast. The professor involved took his sudden fame well.
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