Market Volatility Spikes as Trade Tensions Escalate
Tariff Threats Send Currencies into a Tailspin
The Mexican peso plummeted on Monday, sparking concerns that trade disputes could once again wreak havoc on markets. The sudden downturn came after U.S. President Donald Trump threatened to impose steep tariffs on Colombia, citing the country’s refusal to accept deportees.
A Late-Night Reprieve
In a dramatic turn of events, Colombian and U.S. diplomats reached a last-minute agreement, averting the tariffs. However, the damage was already done, and the Colombian peso still fell by as much as 1.8% before recovering some of its losses.
Emerging Markets on High Alert
According to Arif Joshi, co-head of emerging markets debt at Lazard Asset Management, the recent events have shattered the market’s complacency regarding tariffs. “The Trump Administration’s ability to swiftly impose trade threats has increased volatility, risk, and decreased currency valuations versus the U.S. dollar,” he warned.
Mexican Peso Takes a Hit
The Mexican peso bore the brunt of the impact, falling as much as 2.3% and giving back almost all its year-to-date gains. With a February 1 deadline looming for Mexico and Canada to meet Trump’s demands on border security and other issues, investors are increasingly nervous about the prospects of tariffs being imposed.
A Game of Cat and Mouse
Graham Stock, senior sovereign strategist for emerging markets at RBC Global Asset Management, believes that the risk of tariffs has increased, and Mexico’s failure to address Trump’s demands has made it a prime target. “The Mexican peso was hit hardest because the country has a lot of work to do to address Trump’s demands, which concern not just immigration but drug cartel violence, a trade deal, and illegal fentanyl shipments to the U.S.,” he explained.
Colombia in the Crosshairs
Trump’s unexpected targeting of Colombia has raised eyebrows, given the country’s relatively small economy and long-standing relationship with the U.S. Some analysts believe that President Gustavo Petro’s leftist ideology may have played a role in the spat, which escalated into a social media feud with Trump.
A Guessing Game for Investors
As investors scramble to navigate the treacherous landscape of trade tensions, Aaron Gifford, senior EM sovereign analyst at T. Rowe Price, warns that the market is now trying to anticipate the next area of conflict. “There will be a bit of a guessing game going on as investors try to steer clear of any countries directly or indirectly in the line of fire,” he cautioned.
Cautious Optimism
Despite the turmoil, some investors remain optimistic about emerging market debt, as long as threatened tariffs do not materialize. Shamaila Khan, head of fixed income for Emerging Markets and Asia Pacific at UBS Asset Management, believes that EM hard currency debt will be resilient in the face of headline risk around tariffs. “The base case is that they are a means to an end rather than a desired outcome,” she emphasized.
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