Financial markets in emerging countries have mostly reacted as expected to the victory of Donald Trump and a likely Republican win. As the U.S. dollar strengthened, most emerging market currencies weakened, with the Mexican peso and currencies of Asian manufacturers being the most affected. Once details about the scale and timeline of tariffs become clearer, we expect emerging market currencies, particularly the Chinese yuan and Mexican peso, to weaken further.
Chinese equities fell as anticipated, but the market is also awaiting details of fiscal measures expected to be announced on Friday. The rise in U.S. interest rates has dominated the yields on emerging market credit. We continue to expect emerging market credit spreads to widen in the short term.
Currencies
Emerging markets began reacting as more clarity emerged about the result. Overall, initial reactions were as expected: by midday Central European Time, most emerging market currencies had weakened against the U.S. dollar. Yesterday, the Chinese yuan fell by 1.3%, settling at 7.18, while the Mexican peso dropped 2.8%, reaching 20.66.
Asian currencies experienced widespread declines, especially those most exposed to trade with the United States: 1.2% for the South Korean won, 1.3% for the Malaysian ringgit, and 1.7% for the Thai baht. As expected, the effects were more moderate for the Indian rupee (0.2%) and the Indonesian rupiah (0.6%). Since Brazil is one of the few emerging markets that could potentially benefit from possible trade wars due to China’s retaliations, the Brazilian real gained 0.65%.
Equities and Credit
Chinese and Mexican stocks fell as expected due to the prospect of a potential trade war. The Hang Seng Chinese Enterprises Index dropped 2.6%, while the MSCI Mexico Index fell 1.6% this morning. A stronger U.S. dollar in the coming weeks would continue to exert downward pressure on emerging market currencies and equities.
U.S. interest rates rose nearly 20 basis points to 4.44%, affecting emerging market credit behavior yesterday morning. Emerging market corporate credit spreads appeared to move very little, suggesting that the market has not yet fully priced in potential tariffs. However, some of this may reflect a delay in spot bond pricing, so a complete market reaction might take another day. Since China represents about 25% of the asset class and Asia excluding China accounts for another 25%, we expect further widening in the short term.
Awaiting China
The market is also awaiting details on China’s fiscal measures, expected at the conclusion of the Standing Committee of the National People’s Congress on Friday. A broad issuance quota with flexible issuance timing would be seen as positive for the Chinese market. Nevertheless, a 60% tariff could likely reduce Chinese growth by one percentage point from our baseline 2025 forecast of 4.5%. The Chinese government would need to take bolder measures to support the economy to offset the headwinds posed by tariffs.
