(Bloomberg) — Emerging markets were hit hard by the return of the “Trump trade” on Wednesday as the dollar and U.S. yields rose after the election of Donald Trump.
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Eastern European currencies led the losses, making a gauge of emerging market currencies post its worst day since February 2023. However, the Mexican peso, often seen as the most vulnerable to Trump’s trade policies, reversed earlier losses of 3.5%. Gains of up to 0.5% during the American session.
Traders remain uncertain about the outlook for risk assets under the new Trump administration. His pledges to impose stronger restrictions on imports and immigration are fueling bets on higher US borrowing costs and a stronger dollar, weakening the appeal of the asset class.
“A Trump presidency will implement tougher and broader tariffs than during the last Trump administration,” with China being targeted more than other countries, said Rajeev de Mello, chief investment officer at Gamma Asset Management. “Expansionary fiscal policy will lead to higher bond yields, especially for bonds with longer maturities, which will result in a double blow to emerging markets through a stronger US dollar and higher US yields.”
MSCI’s index of emerging markets stocks fell 0.6%, dragged down by Asian stocks as traders priced in punitive tariffs for the world’s second-largest economy.
It was Trump’s trade war against China during his first term that halted the rise in emerging market stocks and sparked a weak performance against the United States that continues to this day. Chinese stock indices in Hong Kong fell by more than 2.5%.
Volatility
Traders have been bracing for a Trump victory in recent weeks, with currency volatility rising in the run-up to the vote, likely to soften the blow as the session wears on today.
Republican tariff proposals would hit Mexico – the United States’ largest trading partner – particularly hard. During his election campaign, Trump said that automakers building factories in Mexico pose a “dangerous threat” to the United States.
“There was a reduction in risk-off in some Latin American currencies in the days and weeks leading up to the election, so this may help explain the move,” said Brett Rosen, Latin America economist and strategist at EMSO Asset Management.
The Mexican peso rose 0.2%, while the Brazilian real erased its losses to lead gains among the currencies of developing countries. The MSCI EM FX Index remains lower on the day, less than 1% away from erasing its 2024 gains as Eastern European currencies retreat.
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