Emerging markets are rattled by tariff war

Tariffs are fueling investor anxiety across emerging markets (EM), prompting a shift toward safer assets and adding pressure on currencies and riskier holdings, Bloomberg reports.

Wrecking ball: Societe Generale strategists expect most EM currencies to decline, with China’s CNY projected to see a “modest” depreciation, while South Africa’s ZAR and Latin American currencies could be in for sluggish performance. The “wrecking ball [is] still underway in EM FX, but will slow,” they said.

Optimism is waning: Despite the MSCI EM Currency Index reaching a five-month high last week, investor sentiment remains largely pessimistic due to the ongoing trade war. The Colombian COP and Indonesian IDR led declines among EM currencies last week, while last Monday saw China set its CNY fixing to the weakest level since September 2023 at CNY 7.2038 per USD.

Even a weaker USD wouldn’t help: Any unwinding of the USD will benefit developed market currencies more than EM, according to Goldman Sachs Group strategists, with investors using the selloff to seek out undervalued assets in the US.

The risk-off approach is hitting some more than others: Emerging markets with political instability — such as Turkey, Indonesia, and South Korea — are adding to investor risk-off sentiment. In Turkey, Morgan Stanley projects a weaker TRY by year-end, estimating a USD 10 bn drop in foreign reserves due to tariff-driven outflows. Local FX demand will be key to the country’s reserves outlook, Morgan Stanley analysts Hande Kucuk and Arnav Gupta told Bloomberg.

Oil woes are also inflicting pain: A steep drop in oil prices — triggered by the tariffs — is piling pressure on emerging market oil exporters. Brent crude dropped more than 20% in the week following the April 2 tariff announcement, briefly touching below USD 60 per barrel before rebounding. Oil-dependent economies, including Gulf countries, Nigeria, Angola, Venezuela, Brazil, Colombia, and Mexico, are expected to face a hit to hard-currency revenues, while oil-importing countries are set to see some benefits from the falling prices, according to investors cited by the newswire.

How will EM respond? Trump’s tactics may embolden political leaders to adopt more radical approaches, increasing the likelihood of extreme market swings, said Malin Rosengren, a fund manager at RBC BlueBay. “No doubt we will be seeing more instances across EM of strong man politics testing the limits of the new world order,” she said.

The panic won’t continue for long, though: Rosengren believes that after experiencing volatility for an extended period, investors are likely to fall back on economic fundamentals — like growth prospects, inflation, and interest rates — rather than being overly influenced by short-term political drama or instability.

MARKETS THIS MORNING-

Asian markets are mostly in the red this morning, with Hang Seng (Hong Kong) down 1.6%, Japan’s Nikkei down 0.7%, and Shanghai Composite down 0.6%. Meanwhile, Wall Street futures are inching down after Nvidia announced it will suffer a hefty USD 5.5 bn quarterly charge on its exports to China due to tariffs.

THE CLOSING BELL-

The EGX30 was essentially flat at yesterday’s close on turnover of EGP 4.0 bn (11.6% below the 90-day average). Local investors were the sole net buyers. The index is up 4.9% YTD.

In the green: E-finance (+4.3%), Orascom Development (+3.5%), and ADIB (+3.1%).

In the red: Credit Agricole (-14.5%), Juhayna (-2.0%), and Rameda (-1.8%).