The election of Donald Trump as US president has led to a lot of bloodletting in emerging markets and the MSCI Emerging Markets Index is down 6.7% month to date in dollar terms. MSCI India Index has lost 9.9%.

But it’s not just emerging markets that have been affected. In dollar terms, MSCI Europe is down 5.9%, MSCI UK 6.2% and MSCI Germany fell 5.1% in November. The big exception is MSCI US, which has gained 2.6% so far this month. We do not know whether Trump will make America great again, but he is certainly making American equities great again.

The reasons for the fall in the stock markets are seen from the accompanying two charts.

Chart 1 shows US bond yields rising sharply on fears of rising inflation as Trump is expected to spend on infrastructure and raise the US fiscal deficit. On the other hand, Indian bond yields have fallen as the demonetisation leads to a deflationary shock, lowers inflation and may result in rate cuts by the Reserve Bank of India.

The rise in bond yields has led to money going back to the US. Net foreign portfolio flows in the Indian equity and debt markets have turned negative.

The rush of money going back to the US has strengthened the dollar. The Dollar Index has broken out above the 100 level and is at its highest point since 2003.

Chart 2 shows that as the dollar-rupee rate has strengthened, the benchmark Sensex has fallen. The demonetisation experiment has come at a bad time for the Indian markets, which have already been rocked by the Trump effect.