Emerging stocks firmed 0.6% yesterday and Mexico’s peso, a bellwether of emerging market sentiment on US elections, led currency gains with a 2% jump as investors cheered the outcome of the first presidential debate.
While opinion polls show the two candidates neck-and-neck, a CNN viewer poll after the debate showed 62% thought Democrat Hillary Clinton had defeated Republican Donald Trump. The latter is feared by markets for his controversial views on immigration and global trade.
The peso, seen as most vulnerable to a Trump win, steadily firmed off record lows as the debate progressed to post its biggest one-day gain since February as investors unwound short peso positions that have more than doubled since August, according to CFTC data.
“After its recent underperformance the Mexican peso was probably the most undervalued EM currency around and market positioning compared to historical terms is the most stretched short it can be,” said Danske Bank analyst Jakob Christensen.
“If there is any indication that Trump won’t win, or Clinton is gaining momentum, or she wins the debate like last night, the market is extremely sensitive and you could have a strong downward move in the dollar/Mexican peso cross.” Trump has vowed to slap tariffs on Mexican imports, renegotiate trade deals and build a border wall to keep out Mexican immigrants.
All that has pushed the peso around 12% lower this year, forcing interest rate rises.
The central bank is expected to raise rates by 50 basis points (bps) this Thursday to 4.25%.
Mexican credit default swaps (CDS) traded flat at 174 bps, a touch off recent three-month highs. Other emerging currencies also gained, with the lira up 0.4% from six-week lows hit on Monday after Turkey’s sovereign rating was cut to junk by Moody’s, potentially forcing many funds to exit. While there are estimates of potentially $10bn in outflows from Turkish bonds as a result of forced selling by conservative funds, there is little sign of this so far as yields fell at Monday’s debt auction.
“This may indicate that external factors (dominate) as the negative G3 real rates and hunt for yield overrules potential outflows,” BNP Paribas told clients.
Turkish stocks which closed Monday 4% lower, rebounded 0.7%.
Dollar bonds steadied after falling about 2 cents across the curve.
South Africa’s rand jumped 1.3%, while in Asia, the Korean won rose 1% and the Philippine peso rose off seven-year lows.
Many Asian countries could suffer if Trump scraps trade deals such as the Trans-Pacific Partnership once elected.
The Chinese yuan was flat, with state-run banks seen selling dollars.
“The general fear that Trump would try to restrict bilateral trade agreements vis-à-vis a host of countries. It could set off a global race for protectionism,” Christensen said.
Emerging stocks bounced 0.6% led by Hong Kong, which gained 1%.
One outlier was the Saudi equity index, which fell almost 3% to seven-month lows after the government announced austerity measures on Monday, including cutting ministers’ salaries and civil servants’ perks
However, emerging equities are 3% off 13-month highs hit this month, while dollar bond spreads over Treasuries are 15 bps above recent one-year lows as the US election jitters come on top of unease that central banks are reluctant to extend unorthodox monetary policies. Bond issuance is starting to re-emerge, with Oman opening a tap of its 2021 and 2026 bonds and Bahrain hoping to issue next week after its planned deal earlier in the year was more or less wrecked by an S&P ratings downgrade.