EMs stay calm as US tariff speculation swirls
EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp
SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T: +44(4)387 5031
E: soojin.kim@ae.mufg.jp
LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp
MUFG Bank, Ltd.
A member of MUFG, a global financial group
Macro focus
Trump 2.0 commenced with no tariffs imposed on day 1 (20 January). However, from President Trump’s remarks to executive actions, investors need to mark their calendars for many important dates ahead: (1) 25% tariffs on Mexico and Canada and 10% tariffs on China are being considered for 1 February; (2) a series of reviews and recommendations on trade and economic relations with China are due by 1 April; (3) the TikTok ban got a pause by 75 days (5 April); (4) a possible visit by President Trump to China in his first 100 days (before late April). On balance, although EM momentum is strong and financial conditions remain supportive, the risk of a trade war casts a shadow over EM growth prospects in 2025. Our conviction is that the likelihood of future tariffs remains firmly on the table. We expect EMs to continue growing at a 4% pace in 2025, but the uncertainties around this forecast created by the prospect of tariff increases are unusually high. From a positioning perspective, higher US yields, US dollar strength and tariff pressure creates a challenging backdrop for EM assets – we lean on US dollar-neutral carry strategies to continue performing well.
FX views
EM FX staged a strong rebound against the USD over the past week, mainly reflecting initial relief amongst investors that President Trump refrained from implementing tariff hikes at the start of his second term. Having said that he has still threatened to implement tariff hikes on Canada, China and Mexico from 1st February. The threat continues to pose downside risks for the CNY and MXN.
Week in review
The Central Bank of Turkey (CBRT) maintained its data dependent stance and cut rates by 250bps to 45.00%. Headline inflation in Saudi Arabia edged lower by 0.1ppt to 1.9% y/y in December (averaging 1.7% in 2024). Headline inflation in South Africa edged higher from 2.9% y/y in November to 3.0% y/y in December on declining transport prices. Egypt’s current account deficit widened to USD5.9bn (~6% of GDP) in Q3 2024, though remittance flows rose robustly. Finally, Oman is on the cusp of re-entering the EMBI IG index.
Week ahead
This week there will be interest rate meetings in Hungary (MUFG and consensus: on hold at 6.50%) and South Africa (MUFG and consensus: -25bps cut to 7.50%). There will also be a host of Q4 2024 GDP prints released for Hungary (MUFG and consensus: 0.2% y/y), Czech Republic (MUFG and consensus: 1.6% y/y) and Poland (MUFG and consensus: 2.8% y/y).
Forecasts at a glance
The external backdrop for EM has shifted abruptly – the soft-landing pro-risk environment and pricing of non-recessionary Fed cuts has given way to concerns around tariff risks (and likely retaliatory action), higher-for-longer US rates and a strong US dollar. This sets the stage for a challenging EM backdrop in 2025. There are dimensions that could make Trump 2.0 less disruptive. Given the reduced direct trade exposure of the Chinese economy to the US and expectations that there will be a monetary and fiscal response by Chinese policymakers to offset the tariff growth shock, the economic and financial market disruptions will, on aggregate, be less severe than Trump 1.0.
Core indicators
The latest weekly IIF flow data signalled that EM securities attracted USD14.4bn in December 2024 driven by USD17.6bn into debt markets, while equities faced USD3.1bn in outflows.
