Busy Week in Worldwide Politics

Editors’ Note: MarketMinder prefers no politician nor any party. We assess developments for their potential market impact only.

What a two days it has been! When last we brought you some political coverage, France’s government was on the verge of collapse. That collapse is now complete. Yet Korea has topped it in headlines, giving investors a double dose of uncertainty. But on our shores, political uncertainty continues easing a smidge, with the House results now in. Here is a brief look at the latest and greatest.

What Next in France?

France’s budget standoff, which we covered Monday, has now entered a new chapter. Prime Minister Michel Barnier lost today’s no-confidence vote, leaving France sans government. The last time this happened, in 1962, the path forward was simple: Then-president Charles de Gaulle called a snap election, which his party won, returning the ousted Georges Pompidou to his post. But President Emmanuel Macron played the snap election card in June, and French law prohibits him from doing so twice within a year. So for the time being, Barnier’s cabinet will serve as a caretaker administration while Macron ponders the next step.

There are a few potential paths. To simplify, one of our colleagues made you a picture.

Exhibit 1: The Potential Paths Forward

Source: French law. Thanks to Fisher Investments Capital Markets Analyst Ori Powers.

Essentially, Macron can resign, form a new government or use extraordinary measures to secure a new budget—a process that might involve extending 2024’s budget and even a government shutdown. Never say never, but resignation seems unlikely based on Macron’s recent rhetoric. He will probably find a new prime minister in hopes he or she will have more success negotiating with the other parties, or he could attempt to pass a budget without an official, functioning government.

Needless to say, there is a lot of uncertainty here, extending the headwinds French stocks have dealt with since summer. But we will eventually get clarity, one way or another, helping markets learn the lay of the land and move on. Simply getting past this saga will probably be a relief for markets.

Oh, one more thing. All week, news coverage has made sweeping, generalized statements about French borrowing costs “soaring” or “spiking” during this standoff. That. Simply. Is. Wrong!

These statements refer to the gap between French yields and German yields for identical maturities, which some consider a measure of sovereign risk. This gap, or “yield spread,” has widened lately. But the actual cost of servicing debt—French bond yields—has fallen throughout the budget dustup. This, friends, is more meaningful to whether you consider this a fiscal crisis of sorts. And with yields down, we think it is a stretch to see one underway or likely ahead.

Exhibit 2: French Yields Are Falling, Not Soaring

Source: FactSet, as of 12/4/2024. Benchmark 10-year OAT yield, 12/31/2023 – 12/4/2024.

Meanwhile, Over in Korea

Not to be outdone, South Korea is having its own political crisis. On Tuesday, President Yoon Suk Yeol of the People Power Party (PPP) declared martial law. While there had been murmurs of such a move in the Korean press, this still caught the world by surprise, likely because South Korea is a thriving democracy whose laws permit martial law only in times of war or threatened public safety.

Yoon’s rationale was rather roundabout, claiming the opposition Democratic Party’s (DP) refusal to hold a floor vote for the 2025 budget—and partisan disagreements over misconduct investigations (which presently target Yoon’s wife)—made the country vulnerable to a North Korean attack. Later the same day of his declaration, Parliament rather vehemently disagreed, voting unanimously to overturn the declaration, which Yoon then lifted.^[i] Wednesday, the legislature followed up with a motion to impeach. If it passes, it would be South Korea’s second presidential impeachment in less than a decade.

Whether that happens is unclear. Impeachment requires a two-thirds majority in Parliament. The opposition holds 191 of 300 seats, leaving it a few votes shy. The motion would require some PPP legislators to defect, which isn’t impossible—20 joined the motion to end martial law. Should it pass, the constitutional court would need to confirm it with a two-thirds vote. This may not be possible, considering three of nine seats remain vacant amid partisan bickering over appointments. If the impeachment does go through, it would likely trigger a snap presidential election, with the prime minister serving as interim president. It is possible the prime minister could serve out the full term, which ends in 2027, as caretaker, but a snap election did follow the last impeachment.

So, as in France, uncertainty is high. But it will gradually fade as the saga plays out. In the meantime, the market’s reaction is instructive. Korean stocks initially fell sharply on the news, but largely reversed it swiftly. So it looks mostly like they are bouncing around the lows of a downturn that began in mid-July—which has hit shallow bear market territory (breaching -20%) when using price returns in Korean won.^[ii] (Declines in USD are a mite deeper.) Political uncertainty, while new to headlines here, has been weighing for a while. This saga seems just like the latest, most dramatic, turn.

The House Results Are Finally In!

US investors got a bit more clarity Wednesday, extending the falling uncertainty stocks have enjoyed since the election. The final House race was called at last, with California Democrat Adam Gray unseating Republican incumbent John Duarte. This gives the Republicans a 220 – 215 edge, slightly narrower than they had to start the current Congress.

And so now we know the exact, slim margins President-elect Trump will have to work with: five seats in the House and six in the Senate. That isn’t the traditional partisan gridlock we think stocks like best, but it is the next-closest thing, especially given the divisions within the Republican party. It won’t take much internal opposition to sand down legislation or scupper contentious cabinet picks, as we have already started to see.

Soon more clarity will arrive as those cabinet picks get confirmation votes and the new administration gets down to business, shifting from talk to action. We will have more to say about this and how it might affect markets next year in a few weeks, but for now, we think the gradually easing uncertainty is a tailwind.