Trump Resurgence Sinks Emerging Markets As Dollar Surges

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.

The Mexican peso, often seen as the most vulnerable to Trump’s trade policies, tumbled as much as 3.5% as results came in, though the move faded during the US session. Currencies in Eastern Europe led losses, setting up the emerging-market currency gauge for its worst day since February 2023.

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, dampening 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 0.8%, 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%.

Traders had been preparing for a Trump victory in recent weeks, with currency volatility soaring in the lead up to the vote, and likely easing the blow as the session wore on.

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.

“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 was down 0.8%, while the Brazilian real erased losses to lead gains among developing nation currencies. The MSCI EM FX gauge was still down for the day, about 0.8% away from erasing its 2024 gains as Eastern European currencies tumbled.

Trump has repeatedly stated that he would quickly end the war between Russia and Ukraine if reelected, and force Europe to take on more of the cost of paying for that conflict.

Ukraine bonds, meanwhile, rose across the curve Wednesday, leading EM gains. Other high-yielding credits which are seen as benefiting from a Trump administration, such as Argentina and Venezuela, also rallied.

Emerging markets already face a host of macro challenges, many of which would be compounded by Trump’s policy proposals. China’s economy remains mired in a deflationary spiral despite hundreds of billions of dollars in monetary stimulus, while the conflicts in Ukraine and the Middle East have geopolitical risks top of mind for investors.

Even the Fed’s long-awaited interest-rate cut ultimately proved a non-starter for those hoping it would kick-start an EM recovery. Now, Trump’s pledges on tariffs, immigration and tax cuts could put pressure on inflation. US Treasury yields surged — with the 30-year rising the most since March 2020 — as his win revived inflation risk.

The US election result “opens the door to a stronger US dollar, higher US real rates, and tariff policies that disproportionately damage EM exporters,” said Ed Al-Hussainy, a New York-based strategist at Columbia Threadneedle. “We’re likely to see more weakness in the asset class, across local rates, FX, and high beta credit.”