Emerging Markets Hit by Trump Victory With Widespread Currency Selloff
TLDR
- Emerging markets face pressure due to "Trump Trade" revival, leading to currency and equity declines.
- MSCI EM Currency Index down by 0.8%, Mexico's peso drops by 3.5%, Chinese equities in Hong Kong slide.
- Trump's trade policies impact EM vulnerabilities, with expected challenges in strengthening the dollar and raising borrowing costs.
Emerging markets faced significant pressure as Donald Trump’s reelection spurred a “Trump Trade” revival, causing widespread currency and equity declines. The MSCI EM Currency Index declined by 0.8%, nearing a loss of its 2024 gains.
Mexico’s peso, viewed as highly sensitive to Trump’s trade policies, dropped as much as 3.5%, pushing the emerging-market currency index toward its worst day since February 2023. Chinese equities in Hong Kong slid over 2.5%, as investors anticipated heightened tariffs.
Trump’s “America First” approach, including trade restrictions, has left emerging markets vulnerable. During his first term, Trump’s trade war with China triggered EM underperformance, a trend that persists. This time, his proposed expansionary fiscal policy is expected to drive up US bond yields, exacerbating EM challenges by strengthening the dollar and raising borrowing costs.
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Key Takeaways
Trump’s re-election introduces renewed headwinds for emerging markets, amplifying existing macroeconomic challenges. Higher US bond yields and a strengthened dollar would make it tougher for EM countries to reduce borrowing costs, particularly as Trump’s trade policies target major economies like Mexico and China. Trump’s stance on the Russia-Ukraine conflict and proposed fiscal policies indicate potential geopolitical and economic shifts, which could heighten volatility in EM currencies and equities. Asian markets remain especially vulnerable due to China’s economic slowdown, compounded by deflationary pressures and waning consumer demand despite heavy monetary stimulus.
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