(Bloomberg) — Emerging markets were hit hard by the resurgence of the “Trump trade” on Wednesday, as the dollar and U.S. yields soared following the election of Donald Trump.
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Eastern European currencies led the losses, setting up the emerging market currency indicator for its worst day since February 2023. Still, the Mexican peso, often seen as the most vulnerable to Trump’s trade policies, reversed previous losses of up to 3.5%. gaining up to 0.5% during the US session.
Traders are still unsure about the outlook for risk assets under a new Trump administration. His promises of stronger restrictions on imports and immigration are fueling bets on higher U.S. borrowing costs and a stronger dollar, reducing the appeal of the asset class.
“A Trump presidency will implement tougher and broader tariffs than during the last Trump administration,” and China will be 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 stock index fell 0.6%, dragged down by Asian shares, as traders discounted punitive tariffs for the world’s second-largest economy.
It was Trump’s trade war against China during his first term that halted the rally in emerging market stocks and led to poor performance against the United States that continues to this day. Chinese stock indices in Hong Kong fell more than 2.5%.
Volatility
Traders had been preparing for a Trump victory in recent weeks, with currency volatility increasing in the run-up to the vote, likely softening the blow as today’s session progressed.
Republican proposals to impose tariffs would particularly hit Mexico, the United States’ largest trading partner. During the election campaign, Trump said that automakers building plants in Mexico are a “serious threat” to the United States.
“There was a de-risking of certain Latin American currencies in the days and weeks leading up to the election, so this may help explain the move,” said Bret Rosen, economist and Latin America strategist at EMSO Asset Management.
The Mexican peso rose 0.2%, while the Brazilian real erased losses to lead gains among developing country currencies. The MSCI EM FX indicator remained low on the day, less than 1% away from erasing its 2024 gains as Eastern European currencies tumbled.