Muzinich Weekly Market Comment: Political alarm, but markets stay calm

December 9, 2024

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In our latest roundup of the key developments in financial markets and economies, we look at why risk assets continue to perform well despite elevated political risk.

Political events have taken centre stage for much of 2024. That was the case again last week, with turbulence in France, South Korea and Syria dominating the headlines.

Starting in France, Prime Minister Michael Barnier was forced to resign on December 5, less than 2 months into the role, after losing a non-confidence vote in parliament.^[1] This followed his attempt to pass through a budget intended to improve the country’s dire fiscal position without parliamentary backing. His proposed measures included €40 billion of spending cuts and €20 billion of tax hikes.

This puts the country back to square one – without a government, a prime minister or a plan to get its public finances back on track. Logically, such a major event would have an impact on domestic markets. But the lack of surprise at Barnier’s demise meant there was little reaction in French financial markets; in fact, government bond yields rallied, while the benchmark CAC 40 equity index was up almost 4% on the week.

This seemingly counterintuitive ‘risk-on’ sentiment was also evident in Germany, itself going through a political crisis after the collapse of the governing coalition in November, and across Europe. Despite weakness in the Eurozone economy and concerns over the impact of the Trump administration’s trade and tariffs policy, the Euro Stoxx 50 has rallied over 5% since late November. Credit markets also benefited from the risk-on mood, with spreads tightening across the board.

Law and disorder

In Asia, we saw perhaps the shortest period of martial law ever to take place in a country with a long history of them, South Korea.

At around 10.30pm local time on December 4, President Yoon Suk Yeol of the ruling People Power Party (PPP), declared martial law in a livestreamed address, banning all political activity, strikes and protests, and imposing controls over the press.

After months of tensions with North Korea and opposition parties within South Korea, Yoon solemnly stated: “I declare martial law to protect the Republic of Korea from the threats of North Korean communist forces, to immediately eradicate the unscrupulous pro-Pyongyang anti-state forces that pillage the freedom and happiness of our people and to protect free constitutional order.”^[2]

But within six hours, it was all over after 191 lawmakers (including 18 from the PPP party) unanimously voted to repeal martial law. A subsequent bid to impeach Yoon failed, although the leader of his own party and prime minister said he would be ‘excluded from his duties’, while the Seoul High Prosecutor’s Office has opened an investigation against him on charges of treason and abuse of power.

While the drama played out in parliament, the Bank of Korea and Finance Ministry quickly acted to bolster markets, committing to “inject unlimited liquidity into stocks, bonds, short-term money market as well as forex market for the time being until they are fully normalised”.^[3]

Highlighting again the ability of markets to shrug off political turbulence, Korean bond yields were flat or moderately down over the week, the benchmark Korea Composite Stock Price Index dropped just 2%, while the won only weakened slightly against the US dollar.

Meanwhile, over the weekend, opposition fighters stormed the Syrian capital of Damascus, forcing President Bashar al-Assad to flee and seemingly bringing an end to over half of century of his family’s rule over the country. While many world leaders hailed the end of Assad’s rule, concerns were raised at what happens next and the possible knock-on effects to the Middle East.

US risk assets continue to surge

After the noise surrounding November’s presidential election, and the eyes of the world focused elsewhere, investors could be forgiven for thinking it was a relatively uneventful week in the US. But there were still noteworthy developments.

On the employment front, November nonfarm payroll numbers were released on Friday, showing employment increased 227,000, higher than the 12-month monthly average, while unemployment was up marginally to 4.2 percent from 4.1%. September and October figures were revised upwards.^[4]

These good, but not spectacular, numbers, were in line with expectations. The overnight interest-rate swap market is now pricing in an 85% probability of a 25-basis points cut to the Fed funds rate on December 18.^[5] In our view, it would take unexpectedly strong November Consumer Price Index and Producer Price Index data, released later this week, to stop the Fed from cutting.  

Financial markets continue to react positively to the election outcome, with the S&P 500 at all-time highs and money pouring into stocks and bonds. US equity funds have seen inflows of almost US$140 billion since Trump’s victory on November 5, according to data provider EPFR, with November the strongest month ever. Bond funds are also on course for a record year of inflows; since the election, corporate bond funds have attracted more money than their government bond counterparts.^[6]

However, the bullish sentiment towards stocks and corporate credit pales in comparison to cryptocurrencies, with Bitcoin passing US$100K for the first time on December 4. The latest spike followed Donald Trump’s nomination of deregulation and crypto advocate Paul Atkins as Chair of the Securities and Exchange Commission.^[7] Bitcoin has risen c.45% since the election.

Despite the ebullient mood of many investors, plenty of capital continues to flow into money market funds. US money market fund (MMF) assets rose by rose by US$196.1 billion in November to exceed US$7 trillion for the first time.^[8]

If, as seems logical, that there will be a shift away from MMFs as rates continue to head down, this could be supportive of risk assets in 2025, despite equities at record highs and tight credit spreads.

 

Past performance is not a reliable indicator of current or future results.

References

[1] Politico, ‘Why markets and the EU aren’t panicking over France’s budget mess — yet,’ December 5, 2024
[2] Korea JoonAng Daily, ‘President Yoon Suk Yeol’s speech to declare emergency martial law,’ December 4, 2024
[3] Reuters, ‘South Korea rushes to stabilise markets after Yoon's martial law bid,’ December 4, 2024
[4] US Bureau of Labor Statistics, ‘Employment Situation Summary,’ December 6, 2024
[5] Bloomberg, ‘Market implied policy rates,’ as of December 6, 2024
[6] EPFR, Money flows to the eye of future storms, December 2, 2024
[7] CBS News, ‘Bitcoin tops $100,000 for the first time. Here's what's driving gains,’ December 5, 2024
[8] Crane Data, Money Market News, December 7, 2024

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account. The opinions expressed by Muzinich & Co. are as of December 9, 2024, and may change without notice. All data figures are from Bloomberg, as of December 6, 2024, unless otherwise stated.

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