Donald Trump’s election as U.S. president is driving global markets to levels not seen in nearly two decades — but in completely different directions. And the “polarization'” of emerging and developed markets is all part of “Trump reflation,” argues Divya Devesh, a foreign-exchange strategist at Standard Chartered Plc in Singapore.
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In the post-Trump era, emerging markets have been feeling the heat. Malaysia’s ringgit plunged on Tuesday to be less than 1 percent from the 4.48 per dollar it reached in September of last year, the weakest level since the Asian financial crisis in the late 1990s. Sentiment is little different in the country’s equities market, where investors sold 1.1 billion ringgit ($248 million) of shares through Friday in the biggest weekly exodus since June.
However, things are looking better across the Pacific. All four major U.S. equity benchmarks — the S&P 500 Index, the Dow Jones Industrial Average, the Nasdaq Composite Index and the Russell 2000 Index — climbed together to record peaks this week. The surge, which was helped by rallies in commodities, has taken place simultaneously for the first time since 1999.
It’s all feeling a lot like the last time the Clintons were having to step away from power — oil is again struggling to climb from multi-year lows as OPEC seeks to corral crude producers inside and outside the organization to curb supply, the yen is again (for now) the best-performing G-10 currency for the year.
Not only that, the greenback recorded 10 days of gains that were its longest winning streak against the euro since the eurozone currency was first introduced back in 1999. And the dollar’s rally is being driven by the resuscitation of the bond vigilantes — the ones Bill Clinton adviser James Carville said could intimidate everybody — as surging Treasury yields threaten to cloud the outlook for ambitious presidential spending plans.
“Traditional correlations have broken down,” said Devesh. “Markets are operating under the assumption that fiscal spending in the U.S. is set to increase and these reflationary and supportive drivers for U.S. growth are sending U.S. assets — its currency, rates and equities — higher.”
Global bond yields surged the most on record over the past two weeks — 1 1/2 times faster than the previous all-time mark in 1994 (that decade again!) on expectations that the Federal Reserve will increase interest rates to curb inflation spurred by Trump cutting taxes and spending big on roads, railways and airports. The yield on the benchmark 10-year U.S. Treasury stood at 2.31 percent on Tuesay, around 50 basis points higher than before the U.S. election.
“With narrowing rate differentials, some of the currencies in Asia are under pressure and Malaysia’s ringgit is particularly vulnerable given the high foreign ownership of local-currency bonds in the country,” Devesh added.