Dow Average Rallies to Record as Treasuries Slide on Trump Bets

Washington (Nov 10)  Donald Trump’s unlikely rise to power is providing a shot in the arm for global financial markets, with stocks and metals rallying on optimism that his fiscal-stimulus plans will boost the economy. Bonds tumbled.

The MSCI All Country World Index erased its monthly drop and the Dow Jones Industrial Average climbed to a record high. Copper posted its biggest back-to-back surge in three years, gaining alongside lead, zinc and aluminum. The dollar rose against most peers, while government bonds extended their selloff as Trump’s win bolstered bets on faster inflation. Latin American assets from stocks to debt and currencies plunged on speculation that higher U.S. interest rates would damp the appeal of riskier emerging-market securities.

Traders are on the lookout for details on Trump’s strategy as the Republican is seen lowering taxes, easing corporate regulation and ramping up spending to spur economic growth. Ray Dalio’s $150 billion Bridgewater Associates said in a letter to investors that it won’t change its investment processes until policies become clearer. Trump has pledged to at least double the $275 billion five-year building plans of rival Hillary Clinton, while saying infrastructure will become “second to none” with millions working on projects.

“People are going through the possibilities about what Washington looks like today and what Washington can do or not do for them,” said John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York. “Corporations feel there’s a less restrictive hand. People may take that as a positive.”

A statement on Trump’s official transition website said he will replace Dodd-Frank Act financial-sector law with pro-growth policies. Big banks got bigger after the regulation and “taxpayers remain on the hook for bailing out financial firms,” it said.

Meanwhile, Federal Reserve officials stressed the central bank is apolitical, bolstering bets on a rate hike next month. Trump criticized the Fed during his campaign, saying Chair Janet Yellen held borrowing costs low to aid Democratic President Barack Obama.

“I am not seeing enough volatility here to change my basic projection for the economy,” said Federal Reserve Bank of St. Louis President James Bullard on Thursday. “I think we are basically on track, the same way we were before the election,” he said in St. Louis. “Our view has called for a single rate increase and I think December would be a reasonable time to implement that increase.”

Stocks

MSCI’s global gauge rose 0.5 percent at 2:02 p.m. in New York. The S&P 500 added 0.6 percent to 2,175.17. The Dow Average jumped 257 points. Some of the biggest technology companies from Apple Inc. to Microsoft Corp. sent the Nasdaq Composite Index down.

Banks and health-care shares surged on bets a Trump administration will roll back regulatory scrutiny of the industries. Industrial shares rallied as the Republican plans to boost infrastructure spending. Utility and real-estate stocks tumbled as a rout in bonds pushed yields higher, damping demand for the shares’ relatively high dividend payouts.

“Yields are moving their way higher, that’s good for banks,” said Art Hogan, chief market strategist and director of research for Wunderlich Securities in Boston. “If there’s going to be a friendlier regulatory environment that’s going to be good for banks. That’s the tailwind behind financials we haven’t seen for a long time.”

Elsewhere, the Stoxx Europe 600 Index erased gains as a slide in utility and real-estate shares outweighed a rally in financial companies. The MSCI Emerging Markets Index dropped toward the lowest level since August, with benchmarks in Argentina, Mexico and Brazil slumping at least 2 percent. Russian shares rallied for a third day on speculation that a new U.S. government will mend its ties with Moscow.

Bonds

Benchmark 10-year note yields rose four basis points, or 0.04 percentage point, to 2.10 percent, according to Bloomberg Bond Trader data. The yield on 30-year bonds increased five basis points to 2.90 percent, after jumping the most since October 2011 Wednesday.

Investors from Pacific Investment Management Co. to TIAA Global Asset Management see the surge in long-term U.S. Treasury yields as a sign inflation will be on the rise. That means the long-dormant part of the Federal Reserve’s dual mandate could force policy makers to act more swiftly to raise borrowing costs than they have in 2016.
“We see a higher and more balanced inflation forecast and more rapid normalization of policy,” Mather, chief investment officer for core strategies at the Newport Beach, California-based company, wrote in a note. “This means the Fed will move faster on rate increases than the market had been pricing for in the year ahead,” he said, adding that he expects “two to three rate hikes before the end of 2017.”

Thursday’s $15 billion 30-year U.S. bond sale drew a yield of 2.9 percent, the highest for an auction of the securities since January. A gauge of demand known as the bid-to-cover ratio was 2.11, the lowest level since February.

In Europe, Italian 10-year yields climbed to their highest in almost 14 months, coming under particular pressure amid concern December’s constitutional referendum may be the next vehicle for a growing anti-establishment mood. In France, where elections are due in 2017, yields climbed the most this year.

The cost to hedge against losses in bonds from Argentina and Brazil rose the most among major economies.

Currencies

The dollar surged to the strongest level since March as Trump’s proposals are seen by economists as inflationary and leading to higher U.S. interest rates. The odds that the Federal Reserve will tighten policy in December have risen to 84 percent from 76 percent at the end of last week, based on futures.

“The dollar will do very well” on a broad trade-weighted basis in the next 12 months, Bilal Hafeez, global head of foreign-exchange research at Nomura Holdings Inc. in London, said in an interview on Bloomberg Television. “The Fed will be increasing interest rates, the U.S. will be engaging in fiscal stimulus of some kind, which is much-needed by economies around the world, so we’ll have faster growth and more inflationary pressures.”

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, advanced 0.6 percent. The greenback rose 1 percent to 106.68 yen, touching the highest since July, and added 0.1 percent to $1.0900 per euro.

Brazil’s real plunged the most in five years, while Colombia’s and Mexico’s currencies each fell more than 3 percent. While Trump’s conciliatory tone in his speech eased the worst of investors concerns, there’s still plenty to fret about. Chief among them is whether President Trump will be as harsh as Candidate Trump when it comes to renegotiating free-trade deals and cracking down on illegal immigration.

Commodities

Most industrial metals rallied on speculation that commodities used to build everything from airports to bridges will benefit under Trump’s presidency.

“You get speculation of potentially improved demand, given the new administration and its stance toward infrastructure,” said Tim Evans, the chief market strategist at Long Leaf Trading Group Inc. in Chicago. “That’s a good formula for higher prices.”

Still, U.S. infrastructure spending is unlikely to kick in until the third quarter of 2017, at the same time as the impact of Chinese stimulus is likely to fade, “so rather than be outright bullish it may simply smooth the path of slowing Chinese demand growth for base metals in the second half of 2017 and 2018,” according to Goldman Sachs Group Inc.

Oil fell after the International Energy Agency said prices may retreat amid “relentless global supply growth” unless the Organization of Petroleum Exporting Countries enacts significant output cuts.

West Texas Intermediate for December delivery dropped 1.4 percent to $44.64 a barrel on the New York Mercantile Exchange. Brent for January settlement slipped 1.3 percent to $45.78 a barrel on the London-based ICE Futures Europe exchange.

Source: Bloomberg