"Flood of Political Risks Worldwide, Room for a 'Happy Ending' Rather Than Major Downside"

On October 15, iM Securities stated that despite the recent resurgence of US-China tariff tensions and political instability in Japan and France, political risks in various countries are unlikely to become major negative factors for financial markets and there is ample room for a happy ending.

Park Sanghyun, a researcher at iM Securities, made this assessment in a report titled "Political Season, No Other Choice but a Happy Ending," published on the same day. He said, "Various political uncertainties, including US-China tariff tensions, are expected to be resolved around the time of the Asia-Pacific Economic Cooperation (APEC) summit." The report's title, "No Other Choice but a Happy Ending," is also the name of a Korean original musical that received great acclaim, winning six Tony Awards this year after its debut on Broadway in New York.

On the 14th, when the KOSPI hit an all-time high during the session, the status board in the dealing room of Hana Bank in Jung-gu, Seoul displayed the KOSPI, won/dollar exchange rate, and other information. 2025.10.14 Photo by Jo Yongjun

First, Park identified the recent political risks increasing asset price volatility as the US-China tariff conflict, political instability in Japan surrounding the selection of a new prime minister, the upcoming Fourth Plenary Session of the 20th Central Committee in China next week, and political instability in France. He analyzed, "Although the rally in major asset prices is ongoing, various unexpected political events are increasing volatility in asset prices and foreign exchange markets, including the stock market."

Specifically, he noted, "In addition to the risk of a US federal government shutdown, the somewhat unexpected rekindling of US-China trade tensions is also largely driven by political factors." He added, "Just as US President Donald Trump is using China for political purposes, Chinese President Xi Jinping is also emphasizing a hardline stance against the US ahead of the Communist Party's Fourth Plenary Session of the 20th Central Committee, to be held in Beijing from the 20th to the 23rd." There is speculation that through this plenary session, Xi aims to demonstrate his strength both domestically and internationally and to solidify the foundation for a 20-year long-term rule by highlighting trade conflicts with the US.

Park also pointed out the uncertainty in Japanese politics, saying, "The rally in the Japanese stock market and the weakening of the yen, sparked by expectations for the newly nominated prime minister, known as the 'Takaichi Rally,' have also hit unexpected obstacles." The Komeito Party has not only declared its withdrawal from the coalition with the Liberal Democratic Party (LDP) but has also announced that in the prime ministerial nomination election, it will support its own leader, Saito Tetsuo, instead of Sanae Takaichi, the new LDP president. He explained, "If the three opposition parties unite, their combined seats would reach 210, surpassing the LDP's 196 seats, making a change of government a possible scenario."

Furthermore, he commented, "It is difficult to predict what lies ahead for France, where fiscal risks are emerging." He explained, "President Emmanuel Macron reappointed former Prime Minister Sebastien Lecornu just four days after his resignation on October 10, and formed a new cabinet within two days. Naturally, this has provoked strong opposition from the opposition parties, and has heightened instability not only in France but also across the Eurozone, leading to a significant decline in the value of the euro."

Park noted that while there are some positive political events, such as President Trump's signing of a peace agreement for the Gaza Strip, "since October, political risks in major countries have become more prominent than economic fundamentals, increasing volatility in asset markets such as stocks, and causing the dollar and major currencies to move in unexpected directions." Due to various external uncertainties, the won-dollar exchange rate has surged to the mid-1,430 won range per dollar, the highest level since early May.

Accordingly, Park diagnosed, "The tail (political uncertainty) is not yet wagging the dog (economic fundamentals), but it is undeniable that 'tail risk' is growing." However, he also noted that President Trump has ultimately taken a step back in his approach to China, following what is known as the TACO (Take A Cautious Option) strategy, and thus, "There is a high possibility that the US-China tariff conflict risk will be patched up once again." He added, "President Xi is also likely to actively engage in negotiations with the US after the Fourth Plenary Session, and the political instability in France is also likely to subside again."

Park concluded, "From Korea's perspective, if meaningful results regarding tariff negotiations are achieved through a Korea-US summit just before the APEC summit, this could mark a turning point for a decline in the dollar-won exchange rate." He summarized, "Although the financial market has entered an unexpected political season, there is ample room for political uncertainty to end not as a major negative factor for the financial market, but possibly as a happy ending."