First thoughts post US elections on the EM complex

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T: +44(4)387 5031
E: soojin.kim@ae.mufg.jp

 

LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp

 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Macro focus

The potential Republican sweep that is now priced in prediction markets points to significant changes across trade, fiscal, foreign and energy policies. The reaction in core markets – stronger equities, higher rates and a stronger US dollar – has largely been rational and directionally in line with expectations. From an EM perspective, the US election news was met with a sharp broad-based sell-off in rates and FX, as tariff risks and higher US rates signal a negative macro backdrop for EM assets. Yet, by the end of last week, we witnessed the market pull back from the initial acute weakness in EM, with EM FX retracing some losses versus the US dollar, while EM local rates are shrugging off the move higher in US rates. Our first reaction is that part of this resilience reflect that we had already seen some premium priced in EM in the lead-up to the elections, especially in EM Asia FX, CEE regional rates as well as both FX and rates in LatAm (which underperformed the macro repricing we saw in October). We also believe the resilience reflects the experience from the Trump 1.0 (2017-20) term, where the market struggled to price tariff-related risks until they were already announced – with EM currencies appreciating markedly in 2017 before tariffs were implemented in 2018. Whilst expectations are that tariffs against China could be implemented early in the administration, there is a risk that the market once again struggles to price this risk ahead of time – suggesting that the market could still maintain the latest price action despite post-election risks.

FX views

Emerging market currencies have on the whole weakened over the past week although they have held up better than some feared after the US election. It has still resulted in emerging market currencies falling to fresh year to date lows on average against the USD. Trump election victory and likely Red Sweep is most bullish outcome for USD. He is a well-known trade hawk which fits with Trump’s policy agenda to significantly raise tariffs on imports from China and other major trading partners. A development that should encourage further emerging market currency weakness. At the same time, China fiscal stimulus falling sort of expectations leaving EM FX vulnerable to further near-term weakness.

Week in review

To maintain monetary discipline imposed by the US dollar peg and limit any arbitrage conditions, most GCC central banks followed the US Fed’s 25bp rate cut on 6 November. Inflation in Egypt rose for the third consecutive month from 26.4% y/y in September to 26.5% y/y in October, with the start of the easing cycle now expected in 2025. In line with its signalling and our expectation, the Central Bank of Turkey raised the mid-point of its year-end forecast range for 2024 by 6pp to 44% y/y, by 7pp to 21% y/y for 2025, and by 3pp to 12% y/y for 2026. Finally, rates decisions were announced in the CEE region – on hold in Poland (5.75%) and Romania (6.50%) but lower in the Czech Republic (-25bps to 4.00%).

Week ahead

A host of inflation readings for October are set to be released across Czech Republic, Romania, Hungary, Russia, and Israel.

Forecasts at a glance

Growth across the EM universe is set to stabilise as domestic fundamentals offset external drags, with some rotation from the largest to smaller EMs. Inflation and interest rates are both “over the hump” – disinflation is progressing, and the decline in rates will continue and broaden for the remainder of 2024.

Core indicators

The latest weekly IIF flow data signalled that EM securities witnessed inflows of USD0.3bn in the week ending 1 November. The breakdown suggests that equities drove the inflows (USD0.4bn) whilst debt (USD-0.1bn) fell over the week.