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Bonds Bloodied as Trump Spending Plans Spur Dollar, Copper Gains
· record $1.2 trillion was wiped off global bonds last week
· Gold touches 5-month low on speculation U.S. rates to rise
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Routs in global bonds and emerging markets intensified, while the dollar climbed as investors positioned for the wave of U.S. fiscal stimulus that President-elect Donald Trump has pledged to unleash.
The yield on 30-year Treasuries rose to the highest since January, with last week’s record debt selloff bleeding into Monday trading and weighing on credit markets. The Bloomberg Dollar Spot Index advanced to a nine-month high as the U.S. currency strengthened against all its major counterparts. American stocks retreated and shares in developing nations sank to a four-month low. Copper climbed and oil fell with gold.
Trump’s election as U.S. President is sending shock waves through global markets on speculation his pledge to ramp up infrastructure spending will boost growth and inflation and trigger faster hikes in U.S. interest-rates. About $1.2 trillion was wiped off the value of bonds worldwide last week as equities added about $1 trillion and base metals soared by the most in four years. Emerging markets are being hit by an exodus of capital amid concern Trump will also 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, an interest-rate strategist at Standard Chartered Plc in London, which adjusted its forecast for 10-year Treasuries yields to 3 percent in the end of 2017 from below 2 percent previously. “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 increased seven basis points, or 0.07 percentage point, to 2.22 percent as of 12:29 p.m. New York time, the highest since early January. They surged 37 basis points last week, the most in three years, amid speculation Trump’s plans to boost spending and cut taxes will widen the budget deficit and stoke inflation. The 30-year yield increased as much as 13 basis points to 3.06 percent.
Federal Reserve 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 an interest-rate increase. Pacific Investment Management Co. says long-term yields may have bottomed out and predicts three rate hikes by the end of next year. Futures prices indicate a 92 percent chance of a tightening at the 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 German 10-year bonds headed for their longest losing streak since May, and those on similar-maturity Italian debt climbed to the highest since July 2015. U.K. 10-year gilts extended their slide to a sixth day.
Government bonds also extended losses across the Asia-Pacific region. Thailand’s 10-year yield jumped by the most since May after foreign investors pulled a record 27 billion baht ($763 million) from the nation’s bond market on Friday, while similar-maturity debt in China dropped for a seventh day, the longest losing streak in three years.
The cost to protect against defaults of U.S. high-yield debt jumped 10.8 basis points to 427.9 basis points at 9:02 a.m. in New York on Monday, according to prices compiled by Bloomberg. Yields on investment-grade debt ended last week at the highest level since June, according to Bloomberg Barclays index data.
Currencies
The Bloomberg Dollar Spot Index jumped 1 percent, rising for a fourth-straight day.
The euro fell versus the greenback for a sixth day, its longest run of declines in six months, dropping 1.2 percent to $1.0730. The yen sank 1.6 percent and touched its weakest level since early June. Japan’s economy expanded by an annualized 2.2 percent in the last quarter, data showed Monday, exceeding the 0.8 percent expansion forecast in a Bloomberg survey and easing pressure on the Bank of Japan to add 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.”
The British pound fell 1.1 percent to $1.2463. New Zealand’s dollar dropped to a one-month low after an earthquake rocked the country early Monday. South Korea’s won dropped to its weakest level since June amid growing calls for President Park Geun-hye to be impeached over an influence-peddling scandal, while China’s yuan slid to a six-year low.
The MSCI Emerging Markets Currency Index extended last week’s losses. Mexico’s peso fluctuated after a Trump adviser hinted in a Financial Times opinion piece that the president-elect is open to negotiations before imposing import barriers. The lira and the Brazilian real tumbled at least 1.2 percent.
Commodities
Copper rallied as much as 3.4 percent in London. It surged 11 percent last week as Trump pledged to spend more than $500 billion rebuilding U.S. infrastructure and Chinese investors stepped up 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 strengthened the dollar.
Oil slipped 2.7 percent in New York as Iran boosted output and as U.S. explorers raised the number of active rigs to the most since February, signaling the persistence of a global supply glut.
Stocks
The S&P 500 Index fell 0.3 percent to 2,157.31, after rising 3.8 percent last week. Some of the world’s biggest technology companies including Apple Inc. and Microsoft Corp. dragged down the Nasdaq Composite Index. Meanwhile, the Russell 2000 Index of smaller companies rallied toward a record.
Stocks have outperformed bonds since Trump’s presidential election win, on speculation his pledge to spend more on infrastructure 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,” a London-based analyst at CMC Markets Plc. “We are starting to see a reallocation according to the fiscal policy.”
mrkt cap ytd 1mo 3mo 6 mo 12 mo
S&P 500Market $18.7T +5.9% +1.3%-1.0% +4.8% +4.3%
1285 companies, 402 rated Marketperform
$2.6T +2.4% +1.3% -2.6% +1.6% -0.6%
504 companies, 115 ratedMarketperform
$1.8T +0.2%- 3.1% -7.9% -5.4% +3.2%
1054 companies, 144 ratedMarketperform
$1.4T +13.6% -2.4% +1.2% +4.4% +1.7%
Financials1439 companies, 480
ratedOutperform
$3.1T +12.8% +10.8% +11.3% +15.6% +10.1%
Health Care1370 companies, 435
ratedMarketperform
$2.9T -2.1% -0.4% -6.1% +1.2% -0.5%
Industrials1218 companies, 381 ratedMarketperform
$2.3T +14.9% +7.3% +4.2% +9.7% +11.8%
1494 companies, 406 ratedOutperform
$4.3T +10.0% -0.6% +1.2% +12.8% +7.9%
Materials1524 companies, 127
ratedMarketperform
$686.9B +14.6% +4.3% -0.2% +6.3% +11.4%
Real Estate369 companies, 185
ratedMarketperform
$725.6B ---4.2%------
166 companies, 29 ratedUnderperform
$456.8B +2.9% -6.0% -14.3% -7.9% +5.7%
Utilities235 companies, 78 ratedUnderperform
$676.4B +7.4% -1.5% -8.5% -5.9% +8.2%
In the interim, always feel free to call the advisory to discuss your managed account.
Sincerely,
Michael D. Green, Principal
TGA Capital Management.Com
25 Braintree Hill Office Park
Braintree, MA 02184
A Registered Investment Advisory, RIA
Mgreen@tgacapitalmanagement.com
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