In the early hours of December 4, a sudden political upheaval in South Korea sent the nation’s currency, the won, into a tailspin, plunging it to alarming lows against the US dollarFollowing an announcement by the President of South Korea regarding a state of emergency, the won suffered a significant drop, briefly dipping below the 1,443 mark before rebounding to 1,414. Nonetheless, this value still represents a sharp decline from the pre-crisis level of about 1,400 won per dollar, suggesting ongoing instability in the market.

This situation cast a shadow over Korean assets traded in international markets, particularly those in Europe and the USStocks of major companies like Samsung plummeted on the London Stock Exchange, where Samsung's Global Depositary Receipts suffered a notable drop, although some recovery was observed shortly thereafter.

Similarly, Coupang, a prominent Korean e-commerce platform listed on the New York Stock Exchange, saw its shares plummet during the trading hours but managed to regain some losses

However, it remained at a notable discount from where it stood before the crisis began.

The significance of this turn of events cannot be understated, particularly given South Korea's crucial role in the global technology supply chain, especially in high-end semiconductorsThe country is home to numerous large-scale memory chip manufacturing plants and serves as a critical hub for the storage supply chain worldwideConsequently, any turmoil in the Korean political landscape not only pressures domestic assets but also raises concerns about international investors’ confidence in the region.

In response to the emerging crisis, South Korea's Ministry of Finance and the central bank took swift action to calm financial marketsAuthorities signaled their readiness to inject "unlimited liquidity" into the economy if deemed necessary, demonstrating a proactive stance toward stabilizing the financial landscape.

Earlier today, the Bank of Korea proclaimed a series of temporary measures to bolster short-term liquidity levels aimed at mitigating market fluctuations triggered by recent political uncertainties

• Debt Costs Soar as Banks Reevaluate Deposit Strategies
• Bitcoin Breaks $100,000 Barrier
• Crypto Surge Pushes Major Indices to New Highs
• MCU: Struggles and Breakthroughs
• Oil Prices Expected to Fall to $65/Barrel Next Year

This includes unconventional repo operations to diversify the types of securities acquired and broadening the categories of financial institutions eligible for repo transactionsWith these actions, authorities aim to enhance the liquidity of the won amidst the growing turmoil.

Moreover, the central bank committed to providing foreign exchange liquidity through currency bond repurchase transactions and pledged to implement stabilization measures in case of dramatic currency fluctuations.

Additionally, the Bank of Korea has allowed financial institutions to rapidly increase net borrowing limits and adjust collateral arrangements to ensure smooth payment and settlement processes, further underscoring the urgency of maintaining financial stability during this precarious time.

Rumors have also surfaced about South Korea's financial regulatory body readying a substantial investment—around 100 trillion won ($70.7 billion)—into a stock market stabilization fund to help alleviate pressure on capital markets

This temporary measure is slated to be effective from December 4, 2024, to February 28, 2025.

It's noteworthy that just towards the end of November, the Bank of Korea unexpectedly lowered its benchmark interest rate by 25 basis points, marking a second-cut within the month, reducing the rate to 3.0%—the lowest since October 2022. Such moves could lead to further declines in market rates, adding to the overall complexity of the economic environment.

As the crisis unfolds, the South Korean stock market has taken a hitAccording to data from Wind, the KOSPI index closed down 1.44% as of December 4, indicating a cumulative decline of 7.20% for the year so farIn contrast, the KOSDAQ index dropped by 1.98%, reflecting a staggering cumulative loss of 21.86% year-to-date.

Looking at individual stocks, Samsung Electronics saw a small decrease of 0.93%, whereas rumors emerged that SK Hynix would rely on TSMC’s 3-nanometer process to produce custom HBM4 memory chips to meet demand from major US tech firms like NVIDIA, pushing its shares up by 1.88%. Conversely, KB Financial Group, the largest commercial bank in Korea, suffered a more severe decline, plummeting 5.73% as investor confidence wavered further.

The momentum surrounding the situation has expanded the yield spread between South Korean and US ten-year bond rates

The difference has swelled from a negative 62.9 basis points in mid-September to a staggering negative 154.5 basis points by December 4. This widening spread hints at potential capital flight from Korea, raising questions about whether the Bank of Korea and the Ministry of Finance can effectively curtail this outflow.

Other macroeconomic factors are also playing a role in shaping global currency dynamics, particularly the fluctuating fortunes of the euro amidst political uncertainties in FranceOn December 4, a no-confidence vote against the Barnier government was scheduled, stemming from a failure to reach consensus on a 600 billion euro tax increase and spending cut proposalShould the vote pass, instability in France could impede the formation of a new government and complicate the emergency budget ahead of the year's end.

Despite some signs of recovery in Chinese consumer confidence and potential spending boosts in the US due to interest rate cuts, which have modestly driven the stock prices of luxury retailers like LVMH and Hermes, the widening yield spread between French and German government bonds signifies escalating risk perception

Such disparity highlights the growing concern among international investors regarding France's financial health amidst looming political turbulence.

The euro has continued its downward trend against the dollar, falling from a recent high of 1.119 in late September to approximately 1.051, a decline of 6.1%. Against this backdrop, while the Federal Reserve’s rate-cutting measures continue to take shape, and anticipation of a possible interest rate increase by the Bank of Japan fuels a stronger yen, the dollar index remains notably high, consistently holding above the 106 threshold.

Looking ahead, market participants are keenly awaiting crucial economic data releases, including the ISM services purchasing manager index due to be disclosed on Wednesday eveningFederal Reserve Chair Jerome Powell's speech and the associated Beige Book—with its analysis of the US economic outlook—set to follow on Thursday, alongside trade and employment data releases, could prove pivotal in steering the Fed's interest rate strategy