The Daily Prophet: Trade Jitters and Frexit Fears

Robert Burgess is editor of Bloomberg Prophets.
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The honeymoon may already be over for Donald Trump, at least judging by some of the signals sent by markets today.

In their first opportunity to react to Trump's initial acts as president -- including an executive order that withdraws America from the Trans-Pacific Partnerhip -- U.S. investors dumped riskier assets such as stocks and corporate bonds. Instead, they migrated to Treasuries, gold, Japan's yen and other traditional havens. The selloff in equities occurred even as the dollar retreated, a reminder that international trade spats have traditionally weighed on growth and the greenback.


Much "of the improvement in confidence over the past two months was certainly the Trump effect, as could be expected, but as seen with some consumer confidence indices lately, the confidence flattened out in January from the initial euphoria in December," Peter Boockvar, chief market analyst at Lindsey Group LLC, wrote in a note last week. "The same can be said for the stock market."

ROLE REVERSAL
Latin American currencies were big losers in the first two days after the U.S. election, led lower by Mexico's peso amid Trump's tough protectionist talk. Since then, it's been the Asian currencies that have been hit hardest. That may suggest investors expect that Trump's decision to withdraw from TPP will have a bigger impact on those economies than a renegotiation of the North American Free Trade Agreement would have on Mexico and Canada. Trump said Sunday that he’d meet with the Canadian prime minister, Justin Trudeau, and President Enrique Pena Nieto of Mexico to begin discussing Nafta, which he has routinely blamed for the loss of U.S. jobs. 


FREXIT FEARS
Politics are also roiling Europe, where bond investors are getting more concerned about National Front leader Marine Le Pen's lead in a poll on the first round of France’s presidential election. A victory for Le Pen on April 23 would set up a run-off vote in May, raising the prospect that an open critic of the euro could become the next president of the region’s second-biggest economy. That's causing investors to demand more in yield to own French bonds relative to German bunds in case of a ``Frexit.''

 

GOLD REGAINS MOJO
Given all the uncertainties, it's no wonder that gold is getting back its groove. Futures rose today to their highest level since November, with the precious metal now having risen more than 5 percent this year. While a weaker dollar has a lot to do with the rebound, traders are increasingly talking about headwinds to growth given the turbulent first few days of the Trump administration. “It’s becoming increasingly apparent that economic activity in the U.S. under this new president may not be as stellar as many have thought,” said Bart Melek, the head of commodity strategy at Toronto-Dominion Bank in Toronto.


GOOD SURPRISES
The bulls can take comfort that U.S. economic data has been coming in a bit better than forecast. The Bloomberg U.S. Economic Surprise Index is at its highest levels since 2014. Although the consensus is for the Commerce Department to say Friday that economic growth slowed to an annual rate of 2.2 percent in the fourth quarter from 3.5 percent in the prior three-month period, that's till better than the average of 1.9 percent since the turn of the century.


TEA LEAVES
One of the big stories this year in markets has been the pullback from U.S. bonds by foreign investors. That's important because the U.S. relies on foreign nations to buy its debt and finance its deficits, which helps keep borrowing costs low. Trump has talked about debt and deficit spending as key to spurring the economy. We'll see if foreigners are buying into that, as the U.S. Treasury begins a series of bond auctions that will raise $103 billion.

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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