Dow Average Rallies to Record High as Bonds Tumble on Trump BetsBy , , and
Treasury 30-year auction shows weakened demand post-election
Dollar climbs as Republican’s win boosts inflation outlook
Donald Trump’s unlikely rise to power is providing a shot in the arm for global financial markets, with stocks and metals rallying on optimism that his fiscal-stimulus plans will boost the economy. Bonds tumbled.
The MSCI All Country World Index erased its monthly decline and the Dow Jones Industrial Average climbed to a record high. Copper posted its biggest back-to-back surge in three years, gaining alongside lead, zinc, tin and aluminum. The dollar rose against most major peers, while government bonds extended their selloff as Trump’s win bolstered bets on faster inflation. Latin American equities, debt and currencies plunged on speculation that higher U.S. interest rates would damp the appeal of riskier emerging-market securities.
Traders are betting Trump will lower taxes, ease corporate regulation and ramp up spending to spur the world’s largest economy. He’s pledged to at least double the $275 billion five-year building plans of Democratic rival Hillary Clinton, while saying infrastructure will become “second to none” with millions working on projects. A statement posted on the president elect’s official transition website said the new administration will replace the Dodd-Frank Act financial-sector law with pro-growth policies.
“People are going through the possibilities about what Washington looks like today and what Washington can do or not do for them,” said John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York. “Corporations feel there’s a less restrictive hand. People may take that as a positive.”
Meanwhile, Federal Reserve Bank of St. Louis President James Bullard and his San Francisco counterpart John Williams stressed the importance of the central bank’s independence from political influence. Questions remain over Trump’s attitude toward Chair Janet Yellen, whom he accused of holding rates low to aid Democratic President Barack Obama. Traders see an 82 percent chance of rate hike next month, according to federal funds futures pricing.
“I am not seeing enough volatility here to change my basic projection for the economy,” Bullard said Thursday. “I think we are basically on track, the same way we were before the election. Our view has called for a single rate increase and I think December would be a reasonable time to implement that increase.”
MSCI’s global gauge rose 0.2 percent at 4 p.m. in New York. The S&P 500 Index added 0.2 percent to 2,167.48, and the Dow Average jumped 218.19 points. Some of the biggest technology companies from Apple Inc. to Microsoft Corp. sent the Nasdaq Composite Index down. Meanwhile, the small-cap Russell 2000 Index extended a five-day rally to 8.2 percent.
Banks and health-care shares surged on bets a Trump administration will roll back regulatory scrutiny of the industries. Industrial shares rallied as the Republican plans to boost infrastructure spending. Utility and real-estate stocks tumbled as a rout in bonds pushed yields higher, damping demand for the shares’ relatively high dividend payouts.
“Yields are moving their way higher, that’s good for banks,” said Art Hogan, chief market strategist and director of research for Wunderlich Securities in Boston. “If there’s going to be a friendlier regulatory environment that’s going to be good for banks. That’s the tailwind behind financials we haven’t seen for a long time.”
The Stoxx Europe 600 Index erased gains as a slide in utility and real-estate shares outweighed a rally in banks. The MSCI Emerging Markets Index dropped to the lowest since August, with benchmarks in Argentina, Mexico and Brazil slumping more than 3.2 percent. Russian shares rallied on bets Trump will mend ties with Moscow.
Benchmark 10-year note yields rose eight basis points, or 0.08 percentage point, to 2.14 percent, according to Bloomberg Bond Trader data. They were on course for the highest level since January. The yield on 30-year bonds increased 10 basis points to 2.95 percent, after jumping the most since October 2011 Wednesday.
Treasury’s $15 billion 30-year debt auction Thursday again showed waning investor appetite for U.S. debt as Trump is seen ramping up spending to boost the economy, potentially widening the budget deficit and stoking inflation.
Investors from Pacific Investment Management Co. to TIAA Global Asset Management see the surge in long-term U.S. Treasury yields as a sign inflation will in fact be on the rise. That means the long-dormant part of the Fed’s dual mandate could force policy makers to act more swiftly to raise borrowing costs than they have in 2016.
“We see a higher and more balanced inflation forecast and more rapid normalization of policy,” Scott Mather, chief investment officer for core strategies at Pimco, wrote in a note. “This means the Fed will move faster on rate increases than the market had been pricing for in the year ahead,” he said, adding that he expects “two to three rate hikes before the end of 2017.”
In Europe, Italian 10-year yields climbed to their highest in almost 14 months amid concern December’s constitutional referendum may be the next vehicle for a growing anti-establishment mood. In France, where elections are due in 2017, yields also surged.
The biggest exchange-traded fund invested in emerging-market bonds tumbled the most since 2010. The cost to hedge against losses in debt from Argentina and Brazil rose the most among major economies.
The Bloomberg Dollar Spot Index advanced 0.9 percent to the highest level since March. The greenback rose 1.1 percent to 106.87 yen, and added 0.2 percent to $1.0890 per euro.
“The dollar will do very well” on a broad trade-weighted basis in the next 12 months, Bilal Hafeez, global head of foreign-exchange research at Nomura Holdings Inc. in London, said in an interview on Bloomberg Television. “The Fed will be increasing interest rates, the U.S. will be engaging in fiscal stimulus of some kind, which is much-needed by economies around the world, so we’ll have faster growth and more inflationary pressures.”
Meanwhile, Latin American currencies tumbled on concern that Trump’s administration could usher in a host of protectionist measures after he campaigned on a pledge to protect American workers and companies from unfair trade deals. A trade war would be a blow to economies such as Mexico, which gets 80 percent of its overseas sales from the U.S., and others in the region that depend on exports.
Brazil’s real plunged the most since 2008, while Colombia’s and Mexico’s currencies each fell at least 3.7 percent.
Most industrial metals rallied on speculation that commodities used to build everything from airports to bridges will benefit under Trump’s presidency.
“The clearest message delivered by Donald Trump in his election victory speech was a focus on greater infrastructure spending in the U.S.,” Goldman Sachs Group Inc. analysts including Damien Courvalin and Jeffrey Currie said in a Nov. 9 report. “Without specific details it is hard to quantify the impact on commodity demand, however such policies would support steel, iron ore, zinc, nickel, diesel and cement.”
Copper for delivery in three months jumped 3.5 percent to $5,601 a metric ton ($2.54 a pound) on the London Metal Exchange, after hitting a 16-month high. That’s pushed up the relative strength index to 90, the highest since data began in 1986. A reading over 70 suggests an asset is overbought.
As optimism mounts that Trump’s plans will boost global growth, investors are unwinding options that give holders the right to buy December gold futures at higher prices, with the most-active call slumping for a fourth straight day. Contracts for December delivery fell 0.6 percent to settle at $1,266.40 an ounce on the Comex in New York.
Oil fell after the International Energy Agency said prices may retreat amid “relentless global supply growth” unless OPEC enacts significant output cuts. West Texas Intermediate for December delivery fell 1.4 percent to $44.66 a barrel on the New York Mercantile Exchange. Brent for January settlement slipped 1.1 percent to $45.84 a barrel on the London-based ICE Futures Europe exchange.
— With assistance by Stephen Kirkland, Narayanan Somasundaram, Lananh Nguyen, Eliza Ronalds-Hannon, Lukanyo Mnyanda, Alan Soughley, Paul Dobson, Sharon Cho, Thomas Biesheuvel, Jesse Riseborough, Joe Deaux, Phil Kuntz, Anooja Debnath, Brian Chappatta, Liz McCormick, Sebastian Boyd, Jesse Hamilton, Michelle Davis, Eduardo Thomson, Luzi-Ann Javier, and Ye Xie