Trump’s win keeps EM investors guessing; Mexico faces uncertainty; Middle East, Turkey widen

By Christine Van Dusen

Atlanta, Nov. 9 – Emerging markets assets widened and some currencies – particularly the Mexican peso – suffered on Wednesday as investors and issuers absorbed the news of Donald Trump’s shocking win in the U.S. 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 form 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 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 two points, the analyst said.

“Investors will remain cautious on EM, but there are silver linings,” he 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.”

Lat-Am in focus

Clearly Latin American assets – and those from Mexico, in particular – will be impacted significantly under Trump’s leadership, market sources said.

“During the election campaign, Donald Trump has pointed [out] many times that if he becomes president of the U.S. he will implement a lot of changes in the country’s foreign policy. Especially, he commented, that the North American Free Trade Agreement is harmful for the U.S. domestic producers and the labor market, and he will review this agreement as president of the country,” according to a report from Schildershoven Finance BV. “Mexico, with its emerging economy and strong trade relations with the U.S., [faces] the highest risks from the possible consequences.”

If Trump implements some trade restrictions, and reduces workforce migration from Mexico while starting to deport illegal immigrants, “this scenario will substantially influence Mexico’s fundamentals,” Schildershoven said, pointing to the currency, the country’s revenues, the unemployment rate and the reserves.

“Holders of un-hedged dollar-denominated debt will face the strongest consequences,” the report said.

If Trump terminates NAFTA, “it is the terrible scenario for the country,” Schildershoven said. “Government dollar-denominated revenue will dramatically decline. The drop in revenue will lead to the debt growth that may trigger multiple sovereign downgrades.”

Strong Mexican companies with sound balance sheets “may withstand such a blow,” the report said.

© 2015 Prospect News.
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