The Daily Prophet: Dow Recedes as Slump Builds

Robert Burgess is editor of Bloomberg Prophets.
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Where have the animal spirits gone?

The inauguration of Donald Trump as the 45th president of the U.S. is less than two days away and the Dow Jones Industrial Average is moving further from the psychologically important 20,000 level rather than confidently leaping over that fundamentally meaningless mark that it has probed the last five weeks. The world's best-known index has fallen for four straight days, the longest slump since the week before the election. It's now negative for the year.

Yes, stocks had a remarkable run in November, but the malaise that has settled in since December is a bit alarming. Not even impressive earnings from Goldman Sachs Group Inc., Citigroup Inc. and the rest of the major banks were able to get stocks moving higher. Maybe the honeymoon is already over.  


'RECIPE FOR TROUBLE'
One area of the market where animal spirits remain alive and well is junk bonds. The Bloomberg Barclays U.S. Corporate High Yield Index soared 17.1 percent in 2016, and has gained an additional 1.25 percent this year. Bank of America Merrill Lynch said in a report Wednesday that a January survey of its clients showed investors took excess cash they had lying around and increased their exposure to bonds rated below investment grade. That didn't sit well with the fixed-income strategists, who called the actions by their clients "a recipe for trouble."

INFLATION STIRS ANEW
The reflation trade made a comeback in the Treasury market. Benchmark 10-year yields finished trading at 2.42 percent after the Labor Department said the consumer price index jumped for a fifth consecutive month in December, bringing the year-over-year gain to 2.1 percent. That's the most since June 2014. Inflation is bad for bonds because it erodes the value of their fixed payments over time. Bond yields now suggest traders expect inflation to average about 1.92 percent in coming years, up from 1.55 percent just before Trump was elected.

OIL TAKES HIT
At least some relief may be coming at the gas pump. Oil futures fell 2.7 percent after the International Energy Agency's executive director Fatih Birol said higher oil prices would trigger a "significant boost" in U.S. shale output as OPEC and other producers rein in supply. U.S. shale output next month is forecast to climb to the highest level since November.


TRADE WARS    
The biggest losers in the foreign-exchange market today were Mexico's peso, which tumbled 1.98 percent, and Canada's dollar, which fell 1.65 percent. Wilbur Ross, nominated by Trump to serve as commerce secretary, said during his confirmation hearing that renegotiating the North American Free Trade Agreement is "logically the first thing for us to deal with.” The peso has weakened 16.5 percent since the Nov. 8 election, and the loonie has managed to eke out a gain of 0.2 percent. "Trump risks to trade don't appear fully priced in," Citigroup Inc. analysts Dirk Willer and Kenneth Lam wrote in a note to clients.

TEA LEAVES
Which housing market will show up on Thursday? The one that showed new home starts tumbled 18.7 percent in November or the one that showed a 27.4 gain in October? The consensus is for a 9 percent jump in in housing starts in December, but the recent rise in mortgage rates brought on by the slump in bond markets makes this month tough to forecast. Shares of housing-related stocks have suffered: The S&P Supercomposite Homebuilding Index has slumped 5.62 percent since the end of August.

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U.S. Investor Optimism Highest Since Crisis as Trump Era Dawns
Dimon Says Euro Zone May Not Survive If Concerns Are Ignored 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Robert Burgess at bburgess@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net