(Bloomberg) — Emerging markets were hit hard by the resurgence of the “Trump trade” Wednesday as the dollar and US yields soared following Donald Trump’s election.
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Mexico led a currency meltdown, with the peso — often seen as the most vulnerable to Trump’s trade policies — tumbling as much as 3.5%. Currencies in Eastern Europe and South Africa lost at least 1.9%, setting up the emerging-market currency gauge for its worst day since February 2023. China’s stock indexes in Hong Kong slid more than 2.5% as traders priced in punitive tariffs for the world’s second-biggest economy.
Trump’s pledges of stronger restrictions on imports and immigration are fueling bets on higher US borrowing costs and a stronger greenback, dampening the appeal of risk assets. It was Trump’s trade war against China during his first term that halted an EM equity rally and sparked an underperformance versus the US that continues to this day. His signals of an expansive fiscal policy that’s seen as inflationary could undermine the Federal Reserve’s ability to lower borrowing costs — an effect that could ripple out into developing nations.
“A Trump presidency will implement harsher and broader tariffs than during the last Trump administration,” with China targeted more than other countries, said Rajeev De Mello, chief investment officer at Gama Asset Management. “An expansionary fiscal policy will lead to higher bond yields, especially for bonds with longer maturities, resulting in a double whammy for emerging markets through a stronger US dollar and higher US yields.”
The currency selloff was widespread as Trump cruised to victory Wednesday. Eastern European currencies posted some of the biggest losses, helping fuel a drop of 0.9% in the MSCI EM Currency Index. The gauge is less than 0.6% away from erasing its 2024 gains.
Traders had been preparing for a Trump victory in recent weeks, with currency volatility soaring in the lead up to the vote. The Republican’s proposals would hit Mexico — the largest trade partner with the US — particularly hard. On the campaign trail, Trump said automakers building plants in Mexico are a “serious threat” to the US.
“The first moves will be in FX and reflect the stronger US dollar and in short-term euro-sensitive currencies and some Asia FX, and the Mexican peso,” said Cathy Hepworth, managing director and portfolio manager at PGIM Fixed Income. “The EM rates trade will be a bit less clear because there are growth implications for Euro area, central and eastern Europe, and potentially parts of Asia, but FX volatility may cap what central banks can do.”
