(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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Currencies in Eastern Europe led losses, setting up the emerging-market currency gauge for its worst day since February 2023. Still, the Mexican peso, often seen as the most vulnerable to Trump’s trade policies, reversed earlier losses of as much as 3.5%, gaining up to 0.5% during the US session.
Traders are still uncertain over the outlook for risky assets under a new Trump administration. His pledges of stronger restrictions on imports and immigration are fueling bets on higher US borrowing costs and a stronger greenback, damping the appeal of the asset class.
“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 MSCI Emerging Market equity index fell 0.6%, dragged lower by Asian stocks as traders priced in punitive tariffs for the world’s second-biggest economy.
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. China’s stock indexes in Hong Kong slid more than 2.5%.
Volatility
Traders had been preparing for a Trump victory in recent weeks, with currency volatility soaring in the lead up to the vote, likely easing the blow as the session wore on today.
The Republican’s proposals to impose tariffs 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.
“There had been a de-risking of certain Latam currencies in the days and weeks prior to the election so this may help explain the move,” said Bret Rosen, economist and strategist for Latin America at EMSO Asset Management.
The Mexican peso rose 0.2%, while the Brazilian real erased losses to lead gains among developing nation currencies. The MSCI EM FX gauge was still down for the day, less than 1% away from erasing its 2024 gains as Eastern European currencies tumbled.
