Emerging-market stocks rallied and an index of currencies erased its biggest drop since March as traders rode the ebb and flow of a U.S. presidential election that’s still too close to call.
MSCI Inc.’s key foreign-exchange and equity gauges rebounded from a selloff that accelerated when President Donald Trump claimed victory and said he would petition the Supreme Court to intervene. Going into the election, challenger Joe Biden had a solid lead in the polls, and many investors expected a Democratic sweep of the presidency, Senate and House. But results so far suggest that’s unlikely, while Trump’s statements increased the probability of a drawn-out legal battle to decide the winner.
“The U.S. could be facing not days, but perhaps even weeks, of uncertainty dominated by bitter and toxic political bickering over who won,” Piotr Matys, a London-based strategist at Rabobank, said in a note. “When the dust settles, what will be crucial for the markets is how efficiently the U.S. administration will be able to support the economy using fiscal measures.”
The benchmark MSCI currency gauge gained 0.2% after losing as much as 0.8% earlier, with Brazil’s real and Poland’s zloty leading the advance. The Turkish lira and Indian rupee were the biggest decliners, while the offshore yuan, a key barometer of U.S.-China relations, also fell. MSCI’s index of emerging-market equities was up 0.5%. The risk premium on developing-nation sovereign bonds widened five basis points.
Stocks have rallied this week amid speculation a Biden victory would allow lawmakers to pass a U.S. stimulus plan and reduce geopolitical uncertainty. But as odds shifted toward a Trump victory or at least a contested result, investors headed for the safety of the dollar and bonds.
“Markets are moving from pricing a blue sweep as the most likely scenario to pricing political paralysis amid risks of a contested election,” said Witold Bahrke, a Copenhagen-based strategist at Nordea Investment Management. “It’s difficult to talk about any winner across emerging markets if Biden doesn’t win the White House race or if we get a contested election.”
Russia’s ruble strengthened in the offshore market along with the price of crude oil. South Africa’s rand reversed a drop of as much as 2.2%, breaching 16 per dollar for the first time since March, with favorable local economic data supporting the currency. Mexico’s peso was little changed after retreating as much as 4% in Asian hours.
Below are some views from emerging-market investors and analysts on the vote outcome so far:
Prolonged Uncertainty
Yerlan Syzdykov, London-based head of global emerging markets at Amundi Asset Management, said a divided-power scenario or a contested outcome would fuel volatility and push appetite for the dollar higher in the short term.
“The worst-case scenario is one of persistent dollar strengthening, putting EM central banks with a dilemma of responding to economic impact of the Covid-19 and stabilizing FX and capital markets, leading to higher volatility in EM currencies,” he said.
Some EM currencies, however, like the Russian ruble, will show resilience and are likely to outperform in this environment, he said.
Wrong Way
The market has been caught on the wrong side of the risk equation as events unfolded, said Saed Abukarsh, chief investment officer at Ark Capital Management in Dubai.
“Its not a surprise that we are seeing risk sell-off into the prospects for a contested elections,” Abukarsh said. “The market is caught long the wrong way on risk as they expected a clear win. I expect the lack of clarity to continue.”