Biden Win Would Ease Early Morning Angst in Emerging Markets

(Bloomberg) -- A Joe Biden presidential victory could reduce stress levels among emerging-market traders as a reboot of U.S.-China trade relations eases the volatility that has whipsawed asset prices.

“Investors are less likely to wake up in the morning with tweets saying that tariffs are on and then off, and then on again,” said David Loevinger, an analyst at TCW Group Inc. in Los Angeles. “There will be less policy volatility, and more certainty.”

Donald Trump’s presidency hasn’t in itself fueled volatility in emerging markets, but the eternal back and forth over talks with China has. Implied volatility for developing-world currencies soared in July 2018 as the U.S. imposed its first tariffs on goods from the world’s No. 2 economy. After that, it fluctuated with every twist and turn in the dispute, before dipping to a five-year low in January with the phase-one trade deal.

Then came the coronavirus pandemic.

Volatility may rise again as the market heads toward the election and the pandemic claims ever more lives.

Gaining Ground

A new wave of opinion polls released Sunday showed voters leaning toward the Democrat in Michigan, Florida and Arizona, three key states won by Trump in 2016.

Assets from China -- and Asia more broadly -- have been positively correlated with polls favoring the former vice president, according to Goldman Sachs strategists Caesar Maasry and Ron Gray. By contrast, Russian equity and currency markets stand out as underperformers as Biden’s polling has risen, they wrote in a note. The analysis doesn’t take Covid data into account.

While markets may turn against risk in the month or two leading to the U.S. election, a Biden victory and “a more systematic and diplomatic approach to relations” could benefit China, according to Citigroup Global Markets strategists including Dirk Willer. To give investors more investment options, Biden would need to remove tariffs on China, according to Citi.

“This may lower asset-price volatility, and not just for China,” they wrote.

Investment Slump

U.S. direct investment into various emerging nations slumped to an annual average of $94 billion between 2017 and 2019, from $280 billion in the previous three years, in line with the Trump administration’s U.S.-first policy. A Biden election could reverse that trend, Citi said. India and Singapore may be among the top winners, while Brazil and Mexico could face more critical relationships with Biden, the strategists wrote.

A Biden administration would probably aim to build political alliances with Europe and present a more united front with China, said Win Thin, Brown Brothers Harriman & Co’s New York-based global head of currency strategy.

“Barring some bad choice for treasury secretary or vice president, I think markets are positioned for November already,” Thin said.

©2020 Bloomberg L.P.