Selloff in Bonds, Emerging-Market Assets Deepens as Dollar Gains

  • Record $1.2 trillion was wiped off world debt values last week
  • Japanese index futures rise as other Asian contracts retreat

Should Investors Buy the Trump Rally?

Routs in bonds and emerging-market assets intensified, while the dollar continued to strengthen as investors positioned for the wave of U.S. fiscal stimulus that President-elect Donald Trump has pledged to unleash.

Yields on 30-year Treasuries rose to the highest level since January, with last week’s record debt selloff bleeding into Monday amid losses from Asia to Europe. The Bloomberg Dollar Spot Index climbed to a nine-month high, with the greenback gaining against most major peers. U.S. stocks took a breather as a gauge of shares in developing nations sank to a four-month low. Copper climbed with nickel, while crude oil fell with gold.

Trump’s election as leader of the world’s biggest economy is sending shock waves through global markets amid speculation his promise to bolster infrastructure spending will fuel growth and spur inflation, triggering a faster pace of U.S. policy tightening. More than $1 trillion was erased from the value of bonds last week, while equities added that amount and industrial metals soared by the most in four years. Emerging markets are being hit by an exodus of capital amid concern Trump will implement more protectionist trade policies.

“Trump has introduced so much uncertainty, around the fiscal outlook, the outlook for foreign demand for Treasuries given his protectionism and his views on China, uncertainty around the outlook for the Fed,” said John Davies, a rates strategist at Standard Chartered Plc in London, which lifted its forecast for Treasury yields on the election. “There’s an uncertainty premium, rather than just expectations of much more Fed tightening,” being priced into Treasuries, he said. “We think there’s room for this to continue.”

Bonds

Ten-year U.S. Treasury yields jumped 11 basis points, or 0.11 percentage point, to 2.26 percent as of 5 p.m. New York time, their highest close since early January. Yields surged by 37 basis points last week, the most in three years, amid speculation Trump’s plans to boost spending and cut U.S. taxes will swell the budget deficit and fuel price growth. The 30-year yield increased as much as 13 basis points Monday, to 3.06 percent.

Fed Vice Chairman Stanley Fischer said Friday that the central bank was close to achieving its goals of maximum employment and price stability, strengthening the case for a rate hike. Pacific Investment Management Co. says long-term yields may have bottomed out and is predicting three rate hikes by the end of next year. Futures prices indicate a 92 percent chance of a rate hike at the Fed’s December policy meeting.

“Yields will continue to rise over the next year,” said Hiroki Shimazu, an economist and strategist at the Japanese unit of MCP Asset Management in Tokyo. “The fundamentals are very strong, particularly in the U.S. There are some signs of higher inflation pressures. Trump is pushing this phenomenon.”

Benchmark 10-year German bunds capped their longest losing streak since May, while yields on similar-maturity Italian debt climbed to the highest level since July 2015. U.K. 10-year gilts extended their slide to a sixth day.

The selloff in Asia-Pacific bonds looked set to extend into Tuesday, with yields on 10-year Australian and New Zealand government debt up at least six basis points in early trading in their fourth rising day.

Currencies

Bloomberg’s dollar index, which tracks the greenback against 10 major peers, rose 0.7 percent Monday, rising for a fourth-straight day. The euro fell versus the greenback for a sixth session, its longest run of declines in six months, dropping 1.1 percent to $1.0737.

The yen sank 1.7 percent to its weakest level since early June. Japan’s economy expanded by an annualized 2.2 percent in the last quarter, data Monday showed, exceeding the forecast for 0.8 percent growth in a Bloomberg survey of economists and easing pressure on the Bank of Japan to further boost stimulus.

“The dollar is strengthening along with the rise in U.S. yields, reflecting expectations for economic expansion from fiscal spending,” said Yunosuke Ikeda, Nomura Holdings Inc.’s head of Japan foreign-exchange research in Tokyo. “Japan’s 2 percent growth can be used as a reason for the BOJ not lowering interest rates for a while.”

New Zealand’s dollar dropped to a one-month low after an earthquake rocked the country early Monday. South Korea’s won slipped to its weakest level since June amid growing calls for President Park Geun-hye to be impeached over an influence-peddling scandal. China’s yuan slid to a more than six-year low in onshore trading, beyond a level at which it was pegged by regulators following the 2008 financial crisis.

The MSCI Emerging Markets Currency Index extended last week’s losses, falling 0.2 percent. Mexico’s peso attempted a rebound after a Trump adviser hinted in a Financial Times opinion piece that the president-elect is open to negotiations before imposing import barriers. Trump also pledged during the campaign to make Mexico pay for a wall between the two countries to deter illegal immigration.

Commodities

Copper rallied as much as 3.4 percent in London before ending the day up 0.2 percent. The metal surged 11 percent last week as Trump vowed to spend more than $500 billion rebuilding American infrastructure, and as Chinese investors stepped up their purchases.

Iron ore climbed to a two-year high on the Dalian Commodity Exchange as data showed rising steel output in China, the world’s largest steelmaker. Goldman Sachs Group Inc. said the initial reaction of iron ore and copper prices to the infrastructure spending proposed by Trump has been excessive and analysts reiterated their view for sequentially lower prices.

Gold touched a five-month low, after sliding last week by the most in three years as the prospect of Fed rate increases under Trump strengthened the dollar.

Oil closed at an eight-week low in New York, slipping 0.2 percent to $43.32 a barrel, as Iranian output rose and the dollar surged.

Stocks

The S&P 500 Index was little changed at 2,164.20, after slipping 0.1 percent on Friday, snapping a four-day gain that left it up 3.8 percent in the week.

Some of the world’s biggest technology companies including Apple Inc. and Microsoft Corp. dragged the Nasdaq Composite Index down 1.1 percent amid concern over what Trump has said about international trade. Meanwhile, the Russell 2000 Index of smaller companies rallied to a record.

Stocks have outperformed bonds since Trump’s presidential election win, on speculation his pledge to spend more will trigger interest-rate hikes amid a pickup in growth and inflation. Equities had their biggest inflows in 17 weeks as bonds saw redemptions, for their largest gap in 12 months, a Bank of America Corp. report on Thursday showed.

“There’s a lot of re-positioning going on in the market rather than the whole market rolling over, with the sectors expected to do well under Trump outshining those which should fare worse,” said Jasper Lawler, a London-based analyst at CMC Markets Plc. “We are starting to see a reallocation according to the fiscal policy.”

Banks and miners again provided the main support to European shares amid continued investor optimism about the benefits of a Trump presidency. The Stoxx Europe 600 Index rose 0.2 percent, paring earlier gains. The MSCI Emerging Markets Index fell 1.1 percent

In Asia, index futures diverged, with the yen’s selloff buoying contracts on Japan’s Nikkei 225 Stock Average, while futures on other equity benchmarks retreated. New Zealand’s S&P/NZX 50 Index, the first major gauge to start trading each day, fell 0.1 percent at the start of Tuesday trade.

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