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Trump victory weighs on Asian trading

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A money changer handles a thick wad of Indonesian rupiah in Jakarta on Nov. 11.   © Reuters

It has only been a week since Donald Trump's stunning victory in the U.S. presidential election, and the financial landscape has already shifted significantly.

The start of a "reflation trade," to reposition investors' portfolios based on expectations of a post-election surge in growth and inflation, has been brutal for emerging market assets as chances of a sharper rise in U.S. interest rates have been factored in.

The election of Trump has thus turned what were already fragile market conditions into a sharp deterioration in sentiment toward Asian emerging market assets. The Bloomberg JPMorgan Asia Dollar Index, a measure of the performance of regional currencies against the greenback that excludes the yen, has plunged nearly 2% since Trump's victory and has fallen to a fresh record low.

The Indonesian rupiah, which had risen nearly 3% against the dollar since the start of the year, fell as much as 3% on Nov. 11, its sharpest intraday decline since the September 2013 "taper tantrum" sell off sparked by the U. S. Federal Reserve's unexpected decision to start scaling back its quantitative easing program. Bank Indonesia, the central bank, even had to intervene at one point last week to prop up the rupiah.

Other Asian currencies have also suffered from the "Trump slump." The Malaysian ringgit has fallen 3.6% against the dollar since the election. The South Korean won has lost 3%, compounding a decline since late September driven by a high-profile political scandal involving President Park Geun-hye.

The sharp fall in currencies and the prospect of capital outflows as U.S. interest rates rise faster than anticipated has hit local government bonds. According to Bloomberg, emerging market domestic debt last week suffered its sharpest losses since 2008. Yields on benchmark 10-year Indonesian, Malaysian and Thai local bonds have risen 60, 43 and 41 basis points respectively since Trump's triumph.

JPMorgan has noted that Indonesia's domestic debt market, where foreign investors hold nearly 40% of the bonds, is particularly vulnerable. Not only was the country's debt market already suffering outflows last month, the fierceness of the sell-off in global bond markets following Trump's victory suggests yields could rise further, particularly with real interest rates having fallen to just 1.4% and scant prospect of further rate cuts if the rout in debt markets persists.

The flight from Asian emerging market assets has coincided with a split in the U.S. market. The Dow Jones Industrial Average has surged nearly 3% since Trump's election while the yield on the benchmark U.S. 10-year Treasury bond has shot up 37 basis points to 2.22%, its highest level since early January.

In what many investment strategists are calling a regime shift in markets, Trump's pledge to launch an aggressive stimulus package of infrastructure spending and tax cuts, with the help of the Republican Party's full control of the U.S. Congress, is being treated as the catalyst for a "great rotation" out of bonds as ultra-loose monetary policy is expected to give way to fiscal expansion as the main driver of markets.

The dollar index, a gauge of the greenback's performance against a basket of its peers, has risen a further 2.5% since Trump's victory and is now just above 100, its highest level since the end of January.

Trade weight

Yet it is not just Trump's reflationary economic agenda that is putting emerging Asia's currencies and bonds under strain. His pledge during the campaign to tear up trade agreements, including the pending Trans-Pacific Partnership with 11 Asia-Pacific nations, and to impose punitive tariffs on Chinese imports is now weighing on sentiment toward the region.

The very uncertainty about what sort of president Trump will be -- a protectionist and nationalist one or a tax-cutting one committed to investing heavily in U.S. infrastructure -- is fueling volatility in markets.

Still, while parallels are being drawn between the taper tantrum and the current sell-off, emerging Asia's economies are in better shape to withstand the financial dislocations stemming from Trump's victory.

The International Monetary Fund noted in a report earlier this year that even in Indonesia -- which along with India was a focal point of market anxiety during the taper tantrum -- significant steps have been taken to "strengthen the policy framework, including through sound monetary management and a prudent fiscal stance, underpinned by historic fuel subsidy reforms in 2015."

Just as importantly, the jury is out on "Trumponomics." On Nov. 15, emerging market currencies were rising as the post-election bond sell-off and the surge in the dollar appeared to be abating.

During the taper tantrum, it was the policy regimes of emerging markets that were under intense scrutiny. This time round, it is the direction and credibility of U.S. economic policy that is under the microscope.

Nicholas Spiro is a partner at Lauressa Advisory, a specialist macroeconomic and property consultancy in London.

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