(Bloomberg) — South Korean President Yoon Suk-yul’s surprise decision to impose martial law in South Korea for the first time in more than 40 years — and then reverse course just as quickly — sent shockwaves through the country’s offshore-traded assets and caught fire globally. Markets were caught off guard, at one point sending US Treasury yields lower as traders sought a safe haven from potential instability.
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In an emergency live address to the nation, Yoon surprised voters, lawmakers and investors alike by declaring martial law on Tuesday after accusing the opposition of trying to paralyze his administration.
Yoon said the decision was made to protect freedom and the constitutional order, but the market’s early judgment was swift: ETFs linked to South Korea, its currency and most-traded stocks weakened sharply, while US government bonds and even bitcoin briefly fell. Trapped on a perilous journey towards quality.
Korean stocks and the won then recovered some of their losses after South Korean authorities pledged to provide “unlimited liquidity” to markets as needed and lawmakers voted to request the shock measure be lifted, which Yoon eventually agreed to do. However, the move, however brief, created uncertainty within a major economy and a pillar of global trade, keeping investors on edge.
“This will clearly raise longer-term concerns about investing in Korea,” said Mark Ledger Evans, investment analyst at Ninety One UK Ltd. “A higher risk premium will be needed.”
South Korea’s iShares MSCI exchange-traded fund (ticker EWY) fell as much as 7.1% in US trading, while London-listed Samsung Electronics shares lost as much as 7.5%. The local Korean won fell by up to 2.9% to reach 1444.65 per dollar, which led to losses among currency markets amid weak trading during the New York session.
“Domestic uncertainty is adding to external pressures in recent weeks, as the market begins to price in higher US tariffs under the new Trump administration,” said Arup Chatterjee, a strategist at Wells Fargo Bank in New York.
Trading volume for the $3.9 billion iShares MSCI South Korea ETF reached a record for any full day during the fund’s 20-plus-year life. About 32 million shares had traded hands as of 1:45 pm in New York, about 17 times the 20-day average at this time of day.
Other South Korean interest rates also fell. E-commerce company Coupang Inc. fell. As much as 9.8% in US trading, along with losses in steel processing company Posco Holdings Inc. and KB Financial Group Inc. The Korea Stock Exchange, the country’s main exchange, said Wednesday’s trading was under review.
What Bloomberg strategists say…
“Although the knee-jerk reaction to South Korea’s declaration of martial law has been largely contained to domestic assets, there are still global ramifications that investors should monitor given the country’s extensive trade ties. Globally, markets are well aware of how… Political disagreement over budgets can disrupt financial assets.
— Nour Al-Ali, Macro and Macro Markets, London
Local stocks trimmed some of their losses, ending the session at 1,428.50 per dollar. The currency remains the worst performer in Asia this year, weakening by more than 9%.
“Martial law seems like a bit of an exaggeration,” said Mark McCormick, global head of FX and emerging markets strategy at TD Securities in Toronto. “The target appears to be deflection, reflecting low approval ratings and a fair amount of scandal. Policymakers want to maintain their grip on the South Korean won, so I expect some volatility to stabilize after today’s big move.
Tuesday marked the first overnight shock for the won, which began long-hours trading in July amid a widespread crackdown by authorities to include its stocks and bonds in more global indices. Previously, trading in the currency was halted at 3:30 pm local time.
Win Thein, global head of markets strategy at Brown Brothers Harriman, said investors should continue to buy the US dollar as uncertainty persists.
“President Yoon may have overstated his position, but the situation is still fluid,” he said. “Coups in South Korea were a real thing when I was growing up, but I think most people (myself included) think the country is past that.”
Declaring martial law would likely exacerbate an already protectionist zeitgeist, according to Joe Gilbert, portfolio manager at Integrity Asset Management, adding that he believes “there is a viable slope to improving the situation with the Korean parliament.”
Meanwhile, Gilbert said he’s keeping an eye on semiconductor stocks, which he says could be winners in the short term if there are any interruptions in chip production with South Korean giant Samsung.
South Korea’s financial authorities said they will use all possible measures to stabilize the markets, according to a statement issued by the authorities. The Ministry of Finance pledged to provide “unlimited liquidity” to the market, and the Bank of Korea said its monetary policy board would hold an extraordinary meeting on Wednesday morning.
A Finance Ministry spokesman said in a text message that the stock market will open as usual at 9 a.m. local time on Wednesday.
–With assistance from Nora Mulinda, Isha Dey, Carolina Wilson, Karim Karakaya, Matthew Burgess, and Julia Light.
(Adds confirmation of stock market open. An earlier version of this story corrected an analyst’s website.)
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