Long-term investors often take geopolitical shocks in stride, says CFRA’s Stovall

Police stand guard in Seoul on Tuesday after South Korean President Yoon Suk Yeol declared martial law.

Investors weathered a geopolitical whirlwind on Tuesday — with a declaration of martial law by South Korea’s president sparking flows into haven assets, sinking the country’s currency and raising concerns about political unrest in a country that’s a key U.S. regional ally and a crucial link in global supply chains.

What happened?

The first declaration of martial law in the country since 1979 saw South Korea’s parliament suspended and the army ordering striking doctors back to work. But by a 190-to-0 vote, the parliament voted to overrule South Korean President Yoon Suk Yeol declaration of “emergency martial law.”

The military said it would enforce the order until it was lifted by the president. Hours later, Yoon said he would lift the order.

South Korea’s stock market will open for regular business at 9 a.m. local time on Wednesday, a Finance Ministry spokesperson told Bloomberg News

How did markets react?

U.S. stock-market investors seemed to barely bat an eye, with Wall Street analysts looking for the crisis to pass quickly. The S&P 500 was little changed on the day, while the Dow Jones Industrial Average edged lower.

But market watchers noted that the incident did appear to spark some buying interest in traditional haven assets, including U.S. Treasurys, while the South Korean won fell to its weakest versus the U.S. dollar in more than two years.

Investors were also weighing a budget showdown in France that sparked a selloff in French government bonds and had traders weighing the prospect of a sovereign debt crisis, though analysts noted little signs of any spillover to other markets so far.

While the situation in South Korea didn’t shake global markets in a material way, it did trigger safe-haven flows into the U.S., Japan and Switzerland, said Krishna Guha, head of the global policy and central-bank strategy team at Evercore ISI, in a note.

The price action managed to push 10-year Treasury yields as low as 4.164%, bringing the benchmark yield back to the lowest level since October, and convincingly filling Monday’s opening gap on the daily chart, said Ian Lyngen, rates strategist at BMO Capital Markets.

In the end, the short-lived flows weren’t enough to prevent a rise in the yield on the 10-year Treasury, which climbed 2.8 basis points to 4.221% on the day. Yields move opposite to debt prices.

The U.S. dollar soared versus the South Korean won before trimming its gains. The greenback remained 1% higher versus the won in late-afternoon U.S. trading. Korean stocks fell sharply, though U.S.-listed shares of companies and ETFs tracking the nation’s market trimmed declines to hit session highs after Yoon lifted the martial-law order.

What’s next for U.S. investors?

U.S. investors appeared justified in paying little heed to the headlines out of South Korea.

“I think it’s something you take in stride because it’s something that’s unplanned, unanticipated and it’s probably going to be short-lived,” Sam Stovall, chief investment strategist at CFRA, told MarketWatch. By the time many investors would react by bailing out, the bottom would already be in place, he said.

Global investors, meanwhile, will keep a watch on developments.

“Korea warrants particular attention given its prominent role in global supply chains,” Guha said. Meanwhile, political ructions will likely continue to play out, with strategist Rory Green of TS Lombard warning, in a note, that Yoon is likely to face impeachment followed by an election next year.

“Volatility as a result of political events in South Korea is ongoing and unlikely to end even as the imposition of martial law appears to have been short-lived,” said Bob Savage, head of markets strategy and insights at BNY, in a note.

“The split between parliament and the president and expectations of a U.S. trade shift will test South Korean policymakers,” he added.