The Most Momentous Event of 2016 Happened In Between Brexit and Trump

The biggest number of the year was 2.0882%.
Photographer: Andrew Harrer/Bloomberg

For financial markets, the most momentous day of 2016 wasn't Nov. 8, when President-elect Donald Trump prevailed in the U.S. elections, nor June 23, when the U.K. voted to leave the European Union.

It was July 11, according to Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett.

"That day was the day that the greatest bull market ever in the bond market ended," he said during the bank's year-ahead outlook presentation on Wednesday. "And since then, yields have been rising, and that without a doubt is the biggest event of 2016."

On that day, the 30-year Treasury yield hit a record intraday low of 2.0882 percent.

USGG30YR Index (US Generic Govt  2016-12-08 09-16-13
Source: Bloomberg

Across the Atlantic, the entire Swiss sovereign yield curve was negative out to 50 years.

Swiss 50 Neg
Source: Bloomberg

Everyone was positioned for interest rates to sink lower and lower after Brexit, said Harnett, but firming economic data and the move towards fiscal over monetary stimulus — buoyed by proof of populism at the polls — closed the book on the bond bull market.

Violent rotations will follow in its wake, he warned, highlighting the shifting dynamics now driving markets — from monetarism to Keynesianism, globalization to protectionism, growth to value stocks, and so on.

"You have, much as you did in 1980/81, a massive inflection point taking place in the price of money, the most important thing in our financial markets," explained the strategist. "And inevitably, as was the case in 1980/81, a lot of volatility, a lot of overshooting, a lot of undershooting, happens at that particular time."

The United States was the "great deflation winner," said Hartnett, and amid an environment of rising inflation and bond yields, other regions are poised to outperform.

"The big fun will be in Japan, will be in Europe, it'll be in oil, it'll be in value stocks, it'll be in small cap," he said. "There I think you will get double-digit gains next year, all because those are very, very tied to something that has changed, which is the direction of inflation and the direction of interest rates."

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