The morning of 9 November 2016 was one of the strangest in my career. As Donald Trump’s lead over Hillary Clinton was confirmed, the Asian markets plummeted. Hong Kong’s HSI lost more than 4%. Within hours of opening, the Nikkei had tumbled by 6%.
As Trump’s victory in the swing states was steadily declared, the markets seemed to be preparing for the worst. However, Trump’s first utterances turned out to be more pragmatic than his campaign rhetoric. The president-elect calmed the markets from the outset. The Asian markets instantly backtracked.
The bond markets also change direction: at the start of trading, in the first half hour, the yield on Germany’s 10-year bond dropped by 10 basis points, reflecting the markets’ fears and a search for safe havens. But following Trump’s words, yields climbed back up to close a few basis points up on the day. In emerging markets, one of the leading indices for dollar-denominated debt  lost 4.51% between 8 and 30 November. Mexico, in the firing line of Donald Trump’s campaign rhetoric, saw its currency plummet by 7.64% in a single day on 9 November 2016.
Implications for US economic policy
The markets were clearly surprised by Donald Trump’s first utterances, which were a good deal more conciliatory in tone than those adopted during the campaign.
Two critical factors had to be taken into account: i) the prospects for the stimulus plan based on tax reforms and ii) America’s protectionism with the overhaul of US trade policy, specifically the North America Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP).
In the first few months after Trump’s victory, it was difficult for us to properly assess the repercussions on emerging markets. Clearly, one risk concerned a rise in inflation, which was already 2% higher than America’s. The materialisation of this risk led to an adjustment of US monetary policy which eventually had an impact on the financial markets. In December, Janet Yellen confirmed that interest rates would start to be raised due to the good health of the US economy. In March, she upwardly revised the outlook for growth in 2018 from 2% to 2.1%. Following a second rate hike, the US overnight interbank rate is now in the range of 0.75% to 1%.
Consequences for emerging markets
On the bond markets, the yield on the benchmark 10-year Treasury note had already started to rise in July 2016 from its year-low of 1.35%. It is currently fluctuating around 2.4%. In emerging markets, the situation is more complex. Having risen to 6% in November, the average yield on emerging markets’ external debt as reflected in the JPMorgan EMBI Global Diversified index has steadily declined and now stands at around 5.4%. Over the same period, the spread over US Treasury yields narrowed from 380 basis points in November to around 290 basis points recently.
On the economic front, emerging markets finally turned out to be little influenced by the expected direction of US economic policy, all the more so since that policy is dependent on approval from Congress. In fact, a hundred days on from his swearing-in, the new occupant of The White House has proved less brutal than we feared (conflict with the hard right of the Republican Party over the repeal of Obamacare, lack of agreement on financing the Mexican border wall, overhaul rather than abolition of NAFTA, etc.). At the same time, overall, economic growth in the emerging markets is improving, and specifically, Brazil and Russia have come out of recession. The IMF has just upwardly revised its World Economic Outlook forecast and now expects growth to reach 3.5% for 2017. For all that, local economic and political dynamics will have a greater influence on the direction of individual countries’ economies, such as the referendum in Turkey, disputes in South Africa, etc.
Jean-Philippe Donge is head of Fixed Income at BLI Banque de Luxembourg Investments