The Mexican peso, the most vulnerable emerging market currency in the event of Donald Trump wining, strengthened against the dollar on Monday morning after the FBI’s agency chief said it would stand by its July decision not to recommend prosecution.
Trading activity was limited to those areas where Trump’s weakening chances of winning could be expressed in financial markets, according to one EM credit trader. He spotted Ukraine half a point tighter, and Saudi Arabia two to three basis points tighter, he said.
The Markit iTraxx cross-over index was 331bp at around midday on Monday, having ended the week at 340bp.
A Clinton win is favoured by the markets, and could boost EM asset prices and tighten spreads further which would outweigh the US dollar strength in the short term, according to Trieu Pham, CEEMEA credit strategist at MUFG Securities.
The resumption of the “status quo” in EM would cause the markets to refocus once again on the potential impact of US rate rises, and the future of monetary policy, as well as regional-specific concerns. A Clinton win pointed to a more hawkish Fed and improving dollar strength which would add “further pain to some EM economies,” according to Pham.
A Trump victory would trigger spread widening at first as investors return to safe haven assets — including, somewhat ironically, US Treasuries. EM experts agreed that markets would rebound whatever the outcome, though there was debate over how long this would take. They are looking at the Brexit vote and the immediate aftermath as a guide to what might happen in the event of a Trump victory.
“After Brexit the EMBI widened 30bp, although this is not completely comparable as the US election results will have more of a bearing on EM,” said MUFG’s Pham. “But if there is a pronounced selloff in EM assets, they could start to look attractive again after that.”
A DCM banker based in London said that EM would recover after two to three weeks “regardless of the outcome".
“Does the result really make a huge difference to EM?” he asked. “Mexico certainly because of Nafta (the North American Free Trade Agreement) which Trump has spoken against. Arguably for selective regions, a Trump victory could be a good one, especially as he is deemed to be pro-Putin. Could this bring forward the end to sanctions?”
What appears to be a major concern of market participants is two possible forms of paralysis following the elections. The first would be that following the lack of a clear winner, like the George Bush-Al Gore election in 2000.
“This is my biggest concern,” said Ray Zucaro, chief investment officer at RVX Asset Management in Miami. “That the result may not be immediately resolved [and] would be extremely disruptive and uncertainty of that scale would be problematic.”
The second paralysis may occur if the presidency goes to Clinton but the House of Representatives remains Republican. The long term uncertainty could far outweigh any initial market sell-off — although markets have seemingly coped with this situation well enough during the Obama presidency.