(Bloomberg) — From Mexico City to Shanghai, traders hit by a volatile year are bracing for another political shock: a U.S. presidential election that threatens to disrupt global trade and potentially upend economic prospects in developing countries.
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As the race remains neck-and-neck ahead of Tuesday’s vote, investors have positioned themselves for the fallout from a victory by Donald Trump, whose tariff and tax plans would likely curb imports and put upward pressure on the U.S. interest rates.
As a result, hedge funds have increased their bets against the Mexican peso, sending it to its lowest level this year. The Chinese yuan has also fallen as the dollar has made its biggest advance in more than two years. Investors have been pulling money from funds that focus on developing-world bonds, and around the world, emerging market stocks just suffered their biggest monthly loss since January.
The price movements show that emerging markets have a lot at stake, setting them up for another round of selling or a quick rebound if Vice President Kamala Harris wins an election victory.
In “an election that is a complete toss-up, it is very difficult to actively bet on currencies,” said Arif Joshi, co-head of emerging markets bonds at Lazard Asset Management, who said markets are seeing some of the risks of emerging pricing economies. voters sending Trump back to the White House. That suggests a Harris victory would be “a structural bullish move for emerging markets.”
In the US, Trump would likely change the status quo much more dramatically than Harris, a former US senator who served as President Joe Biden’s vice president for the past four years. In emerging markets, the biggest risk comes from Trump’s plan to impose tariffs, which would weaken their exports and demand for their currencies.
Trump has also cast doubt on US commitment to alliances such as the North Atlantic Treaty Organization and Ukraine’s efforts to defeat the Russian invasion. That has weighed on the local bonds of some Eastern European countries and pushed up Ukraine’s dollar debt on bets that Trump’s election could push the country to abandon a ceasefire deal with Russia.
“I wouldn’t be surprised if there was a knee-jerk negative reaction if Trump were elected, with everyone panicking, and then starting to see if the approach was more pragmatic,” said Robert Koenigsberger, founder and Chief Investment Officer of Beheer of Gramercy Funds.