Emerging currencies tumble as United States vote goes down to wire
The benchmark MSCI gauge declined as much as 0.8%, with the Mexican peso tumbling 3% and South Africa’s rand down 2%. The offshore yuan, a key barometer of US-China relations, weakened 0.7% after gaining earlier amid speculation Democratic nominee Joe Biden would emerge victorious.Updated: Nov 04, 2020, 14:54 IST
An index of emerging-market currencies fell the most since March after President Donald Trump claimed victory in the US election and said he would petition the Supreme Court to intervene, raising the stakes in a vote that was already too close to call.
The benchmark MSCI gauge declined as much as 0.8%, with the Mexican peso tumbling 3% and South Africa’s rand down 2%. The offshore yuan, a key barometer of US-China relations, weakened 0.7% after gaining earlier amid speculation Democratic nominee Joe Biden would emerge victorious. The ruble bucked the trend, strengthening as much as 0.6%, though it pared the advance as oil prices reversed gains in the wake of Trump’s statement.
MSCI’s index of emerging-market equities was little changed after dropping as much as 0.6% and rising as much as 0.4%.
“While it may not come as a complete surprise to the markets, delays and/or lack of a clear result prolongs uncertainty, and raises the possibility the result will be legally disputed,” Barclays Plc strategists led by London-based Emmanuel Cau said in a client note. “Volatility is thus likely to remain elevated.”
Stocks have rallied this week amid speculation a Biden victory, and potential Democratic sweep of the Senate and House of Representatives, would allow lawmakers to pass a US stimulus plan and reduce geopolitical uncertainty. But as odds shifted toward a Trump victory or at least a contested result, investors headed for the safety of the dollar and bonds.
Most major stock markets in emerging Asia advanced earlier on Wednesday, with the Philippines benchmark index climbing more than 2%. Share trading in South Korea, Taiwan and Indonesia was at least 20% higher than the 30-day average. Volumes on India’s Sensex index were about 60% higher.
Below are some views from emerging-market investors and analysts on the vote outcome so far:
Investors are starting to price in the prospect of a drawn-out legal contest over the outcome, said Witold Bahrke, a Copenhagen-based strategist at Nordea Investment Management. That would hit currencies with high exposure to the US, such as the Mexican peso, he said.
“Markets are moving from pricing a blue sweep as the most likely scenario to pricing political paralysis amid risks of a contested election,” Bahrke said. “It is difficult to talk about any winner across EM if Biden doesn’t win the White House race or if we get a contested election, but we think EM duration in the higher-rated segment should at least initially feel the gravity from falling DM yields.”
Piotr Matys, a London-based strategist at Rabobank, said the dollar would continue to strengthen as Trump’s chance of winning the election improves.
“It is too close to call at this stage, but the results available so far are definitely not what the markets expected in terms of a blue wave,” Matys said. “We could be heading towards a similar scenario as in 2000, which means prolonged uncertainty and that’s what markets do not like. We’re in for a volatile session.”
The market has been caught on the wrong side of the risk equation as events unfolded, said Saed Abukarsh, chief investment officer at Ark Capital Management in Dubai.
“Its not a surprise that we are seeing risk sell-off into the prospects for a contested elections,” Abukarsh said. “The market is caught long the wrong way on risk as they expected a clear win. I expect the lack of clarity to continue.”
While odds have shifted somewhat toward a win by President Donald Trump, it’s not time yet to revise portfolios, according to Rob Mumford, a money manager for emerging-market equities at GAM Investments in Hong Kong.
“It’s too early to tell which of these outcomes will prevail and we are not short-term traders, so too early to trigger any adjustments in positioning,” he said, adding that a contested election was always the worst-case scenario and could lead to short-term volatility as both the stimulus package and approach to the virus become less in focus.
Unwinding bullish bets
The offshore yuan and Korean won are likely to see more unwinding of bullish positioning as the US election unfolds, Citigroup said, even as the North Asian countries have a better control over the pandemic.
Trump’s support was underestimated in pre-election polls, though the outcome will likely become clear by the end of the week if it comes down to just Pennsylvania, strategists Gaurav Garg and Sun Lu wrote in a note. Concerns over the risk of “persistent unpredictability” under a second Trump presidencywould weigh on the yuan and won.
Asia’s got quality
For Dhiraj Bajaj, head of Asia fixed income at Lombard Odier, growing expectations of a Trump victory, or a Biden win without a Democratic sweep, mean the upside for emerging markets will be capped.
“We’ll go back to what was happening in the last few quarters and three years where a lot of capital flows will favor the US in this environment,” he said. “But within emerging markets, Asia should continue to do OK because it’s better quality and has domestic growth.”
“Ultimately we’re still quite optimistic on emerging markets, especially emerging-market debt,” said M&G Investments’ Singapore-based fixed-income director Pierre Chartres. “A Trump re-election might be detrimental in the short term, in some specific countries especially in Asia, but the long-term outlook for emerging-market debt seems extremely strong.”
A Biden victory would be a catalyst for flows to come back in to the local-currency space, he said. If Trump wins, there may be less positive flows into emerging markets in the short term, but over the longer term, “we still think valuations are relatively attractive in favor for a lot of emerging-market currencies.”