Emerging Markets Drop as Investors Weigh Trade Risk Under Trump

  • Mexican peso weakens most among all the world’s currencies
  • Stocks headed for worst day since post-Brexit selloff

Stock Futures Tumble as Election Results Narrow

Emerging-market stocks fell the most in five months and Mexico’s peso touched a record low as Donald Trump’s presidential election victory stoked concern that the U.S. may adopt protectionist policies, jeopardizing benefits to developing nations from trade deals and immigration.

The peso, the currency most vulnerable to Trump’s policies, was the worst performer in the world after the Republican candidate defied forecasts by winning the race for the White House. A gauge of developing-nation exchange rates ended a two-day gain. The MSCI Emerging Markets Index posted biggest one-day slump since the U.K. vote to leave the European Union in June. Technology and industrial stocks led declines as 10 of the benchmark gauge’s 11 industry groups slumped.

The retreat eroded what has so far been the best annual gain in developing-nation equities since 2012 and the best performance for currencies in six years as Trump’s campaign pledges to curb immigration and renegotiate trade deals sap risk appetite. Wednesday’s selloff was particularly pronounced in countries such as Mexico, South Korea and South Africa, which are seen as among the most vulnerable to such decisions.

“It is yet another reminder to the establishment that most electorates are unhappy,” said Simon Quijano-Evans, a strategist at Legal & General Group Plc in London. “The big question now is how protectionist the U.S. will become. The most exposed countries in emerging markets include those that are very open, those that send most of their exports to the U.S., and those that rely on net remittances.”

The MSCI Emerging Markets Index slid 2.5 percent to 880.15, the lowest closing level since June 24. The benchmark gauge pared a loss of as much as 3.3 percent after Trump, giving his victory speech, sought reconciliation and cooperation with his political opponents.

Traders increased wagers for a Federal Reserve interest-rate increase next month. The market-implied probability of a December move increased to 86 percent, based on U.S. overnight indexed swaps. That compares with 78 percent a week ago.

Price Swings

* One-month implied volatility in the Mexican peso jumped to as high as 32 percent, the highest level since January 2009, signaling that traders are betting on further declines.

* Historical volatility on the MSCI Emerging Markets Currency Index increased for a third day, after falling to a nine-month low last week.

* Price swings in the MSCI developing-nation stock benchmark increased to the widest level in two months.

The MSCI Emerging Markets Currency Index dropped for the first time in three days, falling 0.7 percent. The peso weakened as much as 12 percent to touch a record 20.7818 per dollar. South Africa’s rand retreated 1.7 percent. Colombia’s peso slid 1.6 percent. Turkey’s lira declined 1.7 percent. South Korea’s won lost 1.3 percent.

Stocks

Wednesday’s decline reduced the MSCI Emerging Markets Index’s 2016 gain to 11 percent. The gauge trades at 12.1 times the projected earnings of its members, above the five-year average of 10.8 times.

India’s S&P BSE Sensex slipped 1.2 percent after Prime Minister Narendra Modi’s government unexpectedly withdrew high-denomination banknotes. Russia’s dollar-denominated RTS Index advanced 1.8 percent, the most since Sept. 29, amid speculation that the country’s relationship with the U.S. will improve after Trump’s election.

The Hang Seng China Enterprises Index fell 2.9 percent. South Korea’s Kospi Index dropped 2.3 percent and Taiwan’s Taiex lost 3 percent.

Ukrainian bonds fell on speculation Trump will be less willing than his predecessor to protect the eastern European nation from Russian aggression. Yields on the country’s Eurobonds maturing in September 2019 surged 94 basis points to 8.73 percent. Trump has vowed to improve ties with Russia and review the U.S. position on Crimea.

The premium investors demand to own developing-nation sovereign debt over U.S. Treasuries narrowed four basis points to 328, according to JPMorgan Chase & Co. indexes.

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