Good morning,

South Korean elections could have ramifications far from home

Moon Jae-in, a known moderate and someone who’s campaigned for diplomacy and the opening of communication lines with North Korea, took the Presidency in Seoul yesterday. The South Korean electorate who, arguably, have the most to lose from conflict on the peninsula have voted for a leader who directly counters the stance of the new US president, falling much more in line with the Chinese preference for dialogue and sanctions pressure over any provocation or threat of military action. It’s clear that this strategy from China is already taking effect – yesterday, Beijing extended an invite to North Korea to attend an economic summit.

The political shift in Seoul along with Trump’s decision to sack the director of the FBI suggests tensions in the Far East could ease somewhat for a month or two while the new South Korean regime settles and Trump deals with the inevitable backlash of firing a man who was actively investigating him for ties with Russia. Markets have been slightly ruffled by Trump’s decision, with the dollar and US equity futures both slightly weaker this morning.

Dreary markets raise fears of complacency

In a word, yesterday’s currency markets were dull. So dull in fact that the main talking point wasn’t even about currencies, but equities. In the US, stock price volatility as measured by the VIX Index fell to levels not seen for close to a quarter of a decade. In fact, in recorded history, the VIX Index has only been lower than it has been this week a handful of times. You can read into this in a number of different ways: investors are surprisingly placid about market conditions, record low interest rates are finally working or that the data is so distorted that it isn’t worth the paper it’s written on.

Either way, it’s been a long while since prices have been this tepid and a number of analysts have been quick to point out that previous periods of calm have instilled complacency, which often predicates an unseen market event or ‘black swan’ as was the case in 1929, 1992, 2000, 2008 and the rest.

Fed hawks continue to eye June

It appears the Federal Reserve’s theory that March’s particularly weak jobs growth number was a one-off and not the beginning of a larger trend was correct. And, as such, a number of members of the Fed’s rate-setting committee continue to believe that a rate hike as early as June would be prudent – and markets continue to buy into this belief (a 25bps rate hike in June has been over 80% priced in by futures markets). The gentle, yet insistent, rhetoric should keep the dollar from falling much further from recent highs.

Elsewhere today, the data calendar remains quiet, but the ECB President is due to be speaking to Dutch parliament which could garner some interest over his bank’s policy tapering plans.

Have a great day.