(Bloomberg) — Mexico led a currency crisis while China fueled a stock sell-off as emerging markets trembled at Donald Trump’s likely return to the White House.
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The peso, often seen as the currency most vulnerable to Trump’s trade policies, fell the most in three months, sending the emerging market currency gauge to its worst day since February 2023. Hong Kong’s Chinese stock indexes fell more than 2.5%. as traders rushed to price in punitive tariffs and deeper growth challenges for the world’s second-largest economy.
Emerging markets were hit hard early Wednesday by the so-called Trump trade as they stand to lose out on his “America first” economic priorities, including curbs on imports and immigration. It was Trump’s trade war against China in 2018, during his first term, that halted a nascent stock market rally and led to an underperformance against the US that continues to this day. This time there is an additional threat: Trump’s campaign promises have pointed to an expansionary fiscal policy, seen as inflationary, that would also undermine developing countries’ ability to reduce borrowing costs.
“A Trump presidency will impose heavier and broader tariffs than during the last Trump administration,” with China more likely to be targeted than other countries, said Rajeev De Mello, chief investment officer at Gama Asset Management. “Expansionary fiscal policy will lead to higher bond yields, especially for bonds with longer maturities, resulting in a double whammy for emerging markets via a stronger US dollar and higher US yields.”
The Mexican peso (MXN/USD) fell as much as 3.3% to 20.8072 per dollar, the biggest drop since August 5. Traders had been preparing for a Trump victory in recent weeks and volatility in the peso soared. Trump’s proposals would hit Mexico – the US’s largest trading partner – particularly hard. During his campaign, Trump said automakers building factories in Mexico pose a “serious threat” to the US.
The currency sell-off was widespread as Trump appeared to be on his way to victory. Eastern European currencies posted some of the biggest losses on concerns that European growth and monetary policy could be constrained while the continent’s defense spending could rise. Trump has repeatedly stated that if re-elected he would quickly end the war between Russia and Ukraine, forcing Europe to shoulder a greater share of the costs of that conflict.
Trump’s trade policy “would have particularly negative consequences for Mexico, but also for the eurozone and would therefore be closely correlated for the Central and Eastern European region,” said Piotr Matys, senior FX analyst at In Touch Capital Markets.
While the MSCI EM Currency Index (MME=F) fell as much as 0.8% and was less than 1% away from erasing its 2024 gains, emerging market stocks also fell. The MSCI Inc. equity benchmark. halted a three-day gain as Trump’s potential return would likely herald deeper economic challenges for China and other Asian giants, in addition to those of Mexico and South Africa.
The emerging markets asset class already faces a host of macro challenges, many of which will be exacerbated by Trump’s policy proposals. China’s economy remains mired in a deflationary spiral despite hundreds of billions of dollars in monetary stimulus, while conflicts in Ukraine and the Middle East raise geopolitical risks for investors. The long-awaited Federal Reserve rate cut ultimately proved to be a non-starter for those hoping it would spur an emerging market recovery.
Now the U.S. election outcome “opens the door to a stronger U.S. dollar, higher U.S. real interest rates and tariff policies that disproportionately hurt emerging market exporters,” said Ed Al-Hussainy, a New York-based strategist at Columbia Threadneedle. “We are likely to see more weakness in the asset class, both in terms of local interest rates, currencies and high beta credits,” he said.
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