By Matthew Burgess, Colleen Goko and Kerim Karakaya.
Mexico led a currency meltdown, while China spurred an equity selloff, as emerging markets trembled at Donald Trump’s likely return to White House.
The peso, often seen as the currency most vulnerable to Trump’s trade policies, fell the most in three months, helping to send the emerging-market currency gauge toward its worst day since February 2023. China’s stock indexes in Hong Kong slid more than 2.5% as traders rushed to price in punitive tariffs and deeper growth challenges for the world’s second-biggest economy.
Emerging markets were hit hard early Wednesday by the so-called Trump trade as they stand to lose from his “America first” economic priorities, including restrictions on imports and immigration. It was Trump’s trade war against China in 2018, during his first term, that halted an EM equity rally and sparked an underperformance relative to the US that continues to this day. This time around, there’s an added threat: Trump’s campaign pledges have pointed to an expansive fiscal policy, seen as inflationary, which would also undermine developing nations’ capacity to cut borrowing costs.
“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 the emerging markets through a stronger US dollar and higher US yields.”
The Mexican peso fell as much as 3.3% to 20.8072 per dollar, its biggest slide since Aug. 5. Traders had been preparing for a Trump victory in recent weeks and volatility in the peso soared. Trump’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.
The currency selloff was widespread as Trump appeared set to cruise to victory. Eastern European currencies posted some of the biggest losses on concern that Europe’s growth and monetary policy may be constrained, while the continent’s defense expenditure may go up. 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.
Trump’s “trade policies would have particularly negative consequences for Mexico, but also for the euro zone and closely correlated with it the Central and Eastern European region,” said Piotr Matys, a senior FX analyst at In Touch Capital Markets.
While the MSCI EM Currency Index dropped as much as 0.8% and was trading less than 1% away from erasing its 2024 gains, EM stocks also fell. MSCI Inc.’s benchmark for equities halted a three-day gain as Trump’s potential return would likely portend deeper economic challenges for China and other Asian giants, in addition to the likes of Mexico and South Africa.
The emerging-market asset class already faces 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. The Federal Reserve’s long-awaited interest-rate cut ulimately proved a non-starter for those hoping it would kick-start an EM recovery.
Now, 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,” he said.