(Bloomberg) — From Mexico City to Shanghai, traders, battered by a volatile year, are bracing for a new political shock: a U.S. presidential election that threatens to upend global trade and potentially sour the economic outlook across the developing world.
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While the race remains close in the lead-up to Tuesday’s vote, investors are bracing for the fallout from a victory by Donald Trump, whose tariff and tax plans are likely to curb imports and put upward pressure on US interest rates.
As a result, hedge funds ramped up their bets against the Mexican peso, sending it to its lowest levels this year. The Chinese yuan also fell, with the dollar making its biggest rise in more than two years. Investors pulled money out of funds focused on developing country bonds and around the world, emerging market stocks posted their worst monthly loss since January.
Price action shows the high risks in emerging markets, leaving them poised for another round of selling or a quick rebound if Vice President Kamala Harris wins at the polls.
“An election that is a complete failure, it is very difficult to make active bets on the currency,” said Arif Joshi, co-head of emerging markets debt at Lazard Asset Management, adding that markets are pricing in some currency risks. Voters return Trump to the White House. This suggests that a Harris win would be a “structural upward move for emerging markets.”
In the United States, Trump is likely to change the status quo in a far more significant way than Harris, the former US senator who served as President Joe Biden’s vice president for the past four years. In emerging markets, the main risk stems from Trump’s plan to implement tariffs, which would weaken their exports and demand for their currencies.
Trump also cast doubt on the US commitment to alliances such as NATO and Ukraine’s efforts to defeat the Russian invasion. This affected the local bonds of some Eastern European countries and pushed Ukraine’s dollar debt higher amid bets that Trump’s election could push it to conclude a ceasefire agreement with Russia.
“I wouldn’t be surprised to see a knee-jerk reaction if Trump is elected, where everyone panics, and then starts to see if the approach is more realistic,” said Robert Koenigsberger, founder and chief investment officer of the company. Gramercy Money Management.
The outcome may not be clear on election night or even soon after if the results are close enough to trigger a recount or legal challenges. The power of the next president will depend largely on whether his party controls Congress.
What Bloomberg strategists say…
Export-reliant emerging markets – with the exception of China – were relatively unscathed during Donald Trump’s first term in the White House, while countries with larger external debt were hurt by higher interest rates. A potential second Trump administration could be similar for emerging markets, depending largely on whether Trump imposes the global tariffs he has threatened and the direction of US dollar prices.
—Adriana Dobita, Bloomberg Economist. For more, click here
Currencies
The Mexican peso, which trades 24 hours a day and in high volumes, is likely to be one of the first indicators of how the results will impact emerging markets. Indeed, a measure of currency volatility has risen to the highest level since the start of the pandemic.
Gisela Brandt and Tanya Escobedo Jacob, strategists at JPMorgan Chase & Co., forecast that the peso — which was above 20 to the dollar on Friday — could rise beyond 19 if Harris wins. On the flip side, Jefferies’ Brad Bechtel says the price could fall near the 22-per-dollar mark if Trump is elected.
Asian currencies, including the Chinese yuan and South Korean won, could also come under pressure if tariff increases appear likely. The yuan fell 1.6% in October, and its one-month implied volatility rose to its highest levels in two years.
Bonds
The impact is likely to extend to global bond markets as well.
El Salvador’s government debt could rise if Trump’s victory is seen as giving President Nayib Bukele the ability to use his relationship with the Republican to help secure an International Monetary Fund loan. Ukraine’s bonds also rose ahead of the election thanks to growing bets that Trump’s return would hasten the end of the war.
At the same time, this could be a “negative scenario for Poland and other NATO members,” according to Piotr Mathis, chief currency strategist at In Touch Capital Markets.
Local currency-denominated bonds from Poland, the Czech Republic and Hungary have lagged their counterparts since the end of September, data compiled by Bloomberg showed.
Stocks
Trump’s tariff plans carry special risks for China, which he has singled out tariffs of 60% or more as its government struggles to revive its faltering economy.
Developing countries with significant exposure to the United States and high dependence on Chinese inputs could face headwinds from the escalating trade war, according to Goldman Sachs Group. Shares of companies in countries such as South Korea and Taiwan may be affected by increased costs and supply. The bank said that the serial disruptions.
In Latin America, strategists at Morgan Stanley, including Nikolaj Lippmann, expect a “comfortable rally” in Brazilian and Mexican stocks – supported by currency gains – under Harris’ win. They said that weakness is expected if Trump wins.
What to watch
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Traders await interest rate decisions in Brazil, Poland, Malaysia, Pakistan, Peru, the United Kingdom and the United States
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Consumer price data in Mexico is scheduled to be released on Thursday, while Colombia and Chile will release inflation data on Friday
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India and China will release PMI data
–With assistance from Wojciech Moskwa and Katherine Bosley.
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