Morning Commentary: Trump’s win sends markets reeling, keeps EM investors guessing

By Christine Van Dusen

Atlanta, Nov. 9 – Emerging markets assets widened and some currencies – particularly the Mexican peso – suffered on Wednesday morning as investors and issuers absorbed the news of Donald Trump’s win in the United States presidential election.

“While the S&P initially plunged by 5%, the Mexican peso has unsurprisingly taken the brunt and sold off overnight to trade as much as 11% weaker,” a London-based analyst said. “Both, however, recovered somewhat throughout the morning, with S&P futures still down circa 2.4% while the peso remains the underperformer, circa 8% versus the dollar. European stock markets also see a more measured start into the day.”

Investors could see “emergency rate hikes and currency interventions in the short term,” according to a report from Commerzbank Corporates & Markets. “In the longer term it’s clear that the process of globalization is under severe threat.”

Asian currencies lost ground, the report said.

But many emerging markets currencies held in “relatively well,” the analyst said. “But this also comes on the back of the dollar weakness.”

Middle Eastern bonds opened between 7 basis points and 15 bps wider, though Abu Dhabi and Qatar managed to outperform, widening about 3 bps.

“In Turkey, sovereign credit default swaps widened by circa 12 bps to 277 bps while cash trades were also 10 bps to 15 bps wider,” he said. “We see similar moves in the corporates and financials.”

As the European session went on, the long end of Turkey’s curve was unable to keep up with the steepening of rates and buying from locals.

“The belly seems cheap here, relative to the curve, for those looking to strap on risk,” a trader said. “Banks and corporates still feel offered, but there is small two-way, with bank valuations cheapening a lot. But buyers are few and far between, at the moment.”

Poland widens

From elsewhere in emerging Europe, Poland’s curve widened 10 bps to 13 bps, the analyst said.

“Much of this resembles the shock after the United Kingdom referendum to leave the European Union,” the analyst said. “With regard to EM, we however think that the U.S. elections have potentially much wider ramifications than Brexit, notably in trade, geopolitics and not least on a potential Fed rate hike that was expected for December.”

Russia, as expected, “is seen as the big winner, given Trump’s soft stance during his election campaign,” he said. “This could also imply a turnaround in the ongoing conflicts in Syria and Ukraine.”

Ukraine well-offered

Ukraine’s bonds on Wednesday morning were well-offered, with the sovereign’s 7¾% 2027s down by about 2 points.

“Investors will remain cautious on EM, but there are silver linings,” the analyst said. “While uncertainty creeps up, this will certainly also set the path for further dollar weakness. Not least, this is driven by a now-more-than-ever uncertain Fed rate hike that markets had already anticipated on a Clinton win, with the further trajectory now also further in doubt. In the end, this could bode well for EM and absorb the shock, to some extent.”

The macro environment remains “supportive for EM as an asset class,” he said. “While markets are trying to find a new balance, we think that a more pronounced widening could provide attractive buying opportunities.”

© 2015 Prospect News.
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