(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.
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