WASHINGTON: As fresh US tariffs loom, set to take effect on Apr 2, traders in emerging markets (EM) are bracing for turbulence, poised to react at the slightest hint of risk. According to the latest report from The Star, the impending levies, combined with a deteriorating outlook for the US economy and signs of an economic revival in China and Europe, have investors hedging their bets, seeking new opportunities while guarding against unexpected losses.
The volatility risk is palpable, with demand surging for hedges to protect against potential declines in EM currencies, particularly in relation to the US dollar. Recent data reveal a significant uptick in demand for such protections, with the gap between three-month call and put options for EM currencies and the dollar hitting its highest level since October 2023, according to a JPMorgan index.
This rising uncertainty has triggered sharp market reactions across EMs, with equities, currencies, and bonds plummeting as foreign investors quickly exited. The MSCI indices, tracking EM assets, posted losses for the third consecutive day last Friday, underscoring the growing caution among investors.
“The magnitude of these moves suggests that investor caution, particularly towards EMs, is intensifying,” said Prashant Newnaha, senior rates strategist at TD Securities. “Investors are likely to trim risk positions ahead of the tariff announcements.”
At the core of the market unease are questions surrounding the impact of President Donald Trump’s proposed tariffs. Will they stoke inflation and strengthen the dollar, or will they push the US economy into a recession, dragging others down with it? This uncertainty has led to a four-month high in the extra yield investors demand to hold EM bonds over US Treasuries, according to Bloomberg data.
Compounding the anxiety is the lack of clarity on the specifics of the tariffs. While Trump has promised “reciprocal levies” in response to tariffs imposed by other nations, including on autos, semiconductors, and pharmaceuticals, his administration has yet to reveal the exact targets or rates. This uncertainty is taking a toll on market sentiment, as highlighted by Manik Narain, head of UBS’s EM strategy team in London. “There’s a real lack of conviction in EM,” he noted, referring to the growing hesitation among investors.
The impact of this uncertainty was felt most acutely in countries like Brazil, Thailand, and Mexico, where currencies saw sharp declines last Friday following Trump’s provocative comments on social media. As the US prepares for what Trump has termed “Liberation Day,” these EM currencies are under pressure.
With Europe and China emerging as alternative investment hubs, even high-yielding EM assets like the Turkish lira are now facing increased scrutiny as the appeal of US assets wanes. In Indonesia, a major commodity exporter to China, concerns about fiscal health and political stability sparked a stock market rout, exacerbated by recent political turmoil. Similarly, in Turkey, a dramatic sell-off in stocks and the lira followed the detention of the country’s top political rival.
These localized events underscore the broader trend of heightened market volatility in the face of global uncertainties. “The uncertainty surrounding tariffs and rising volatility are contributing to quicker exits from riskier markets,” said Guillaume Tresca, global EM strategist at Generali Investments.
In Colombia, the unexpected resignation of Finance Minister Diego Guevara fueled fears about the country’s fiscal future, sending the currency into a downward spiral. Meanwhile, in South Africa, escalating tensions between the US and the government have prompted investors to rapidly reduce their exposure to local debt, fearing further market disruptions.
“The consequences of Trump’s tariff discussions extend far beyond trade, deeply influencing global capital flows,” said Kristof Kruger, a fixed-income trader at Prescient Securities. “Increased market volatility makes currencies like the rand and local bonds particularly vulnerable to sudden outflows.”
The ripple effects of these tariff threats have even been felt in seemingly unaffected regions. In Poland, for instance, the zloty suffered its sharpest decline against the euro in three months following Trump’s announcements, while the Hungarian forint also exhibited volatile swings in response to his comments on trade policy.
As Southeast Asia, India, and frontier markets are increasingly seen as safe havens amidst US trade policy uncertainty, this week’s market turmoil serves as a stark reminder that the ripple effects of tariff threats are far-reaching. It’s clear that navigating the global economic landscape is becoming ever more complex, and the risks tied to the US’s trade policies are being felt in markets far beyond its borders.
Will these affect Singapore’s cost of living?
The looming US tariffs and the associated market volatility are likely to impact the cost of living in Singapore in three big ways, primarily due to its position as a global trade hub and its ties to EMs and international capital flows:
Increased Inflation Pressure: Hinted in a February story of the Straits Times, the tariffs and the resulting volatility in global markets could lead to higher costs for goods, particularly those imported from the US or countries affected by the tariffs. Singapore, as an import-dependent economy, may face rising prices for consumer goods, raw materials, and industrial components. This could translate into inflationary pressure on everyday goods and services, pushing the cost of living up.
Currency Fluctuations: The uncertainty in global markets, particularly the weakening of EM currencies, could affect the Singapore dollar (SGD) as well. This was hinted at in a January report of the Straits Times. If the SGD strengthens against certain EM currencies, imported goods from those regions could become cheaper. However, a stronger SGD could also make Singaporean exports less competitive, impacting local businesses and potentially leading to job cuts or reduced wages. On the flip side, if the SGD weakens, imported goods could become more expensive, further inflating the cost of living.
Changes in Global Investment Patterns: The economic uncertainty from US tariffs could cause global investors to reallocate their funds, with some seeking safer assets in developed markets like Singapore. This could lead to increased demand for properties, financial assets, and luxury goods, potentially driving up prices in these areas. If investors flock to Singapore for its perceived stability, it could exacerbate the rising cost of living, especially in the housing and rental markets, as explained in a recent Forbes report.
Singapore can mitigate external shocks
While the exact impact on Singapore’s cost of living will depend on the specific measures implemented by the US and the reactions of other economies, the combination of potential inflation, currency fluctuations, market instability, and higher borrowing costs suggests that living expenses in Singapore may increase. However, Singapore’s robust economy and policies to mitigate external shocks may help cushion some of these effects.