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Stocks and the dollar rise as investors dump debt

Monday 10.50 GMT. A conviction that a Donald Trump presidency will deliver higher inflation is dominating market sentiment, lifting world equity markets, energising the dollar and drawing investors out of government bond markets.

Yields on Treasuries shot higher in Asian trading, a move that has been sustained in early London trading on Monday and rippled out across the eurozone bond market. In Europe, yields on Germany’s 10-year debt are back at levels not seen since the summer, with those on Spanish, Portuguese and Italian bonds also higher. Yields move in the opposite direction to prices.

With Mr Trump pledging a big infrastructure programme, tax cuts and protectionist policies, investors have rapidly concluded that will mean higher growth — and inflation — for the US economy over the next couple of years. The absence of inflation in the US since the financial crisis has helped fuel the great rally in bonds, allowing the Federal Reserve to keep interest rates near record lows.

“The prospect of US fiscal stimulus under the new government has increased our conviction that the US 10-year yield will reach 2.5 per cent in 2017, possibly faster than we earlier assumed,” said Francesco Garzarelli, co-head of European macro research at Goldman Sachs. “Whether Mr Trump’s presidency brings fiscal spending or protectionism, we think either scenario would boost inflation.”

In early London trading on Monday, the yield on the benchmark 10-year Treasury bond rose 12 basis points to 2.24 per cent, its highest level since January. The yield on 30-year government paper also jumped 12 basis points to 3.03 per cent, while five-year notes were yielding 1.66 per cent, up 13 basis points.

That, in turn, sent the dollar back over the 100-point mark it last hit in December, up 1 per cent on the day. The dollar is also strongly higher against its major rivals on an individual basis, with the euro down 0.9 per cent at $1.0749 and the yen 1.2 per cent weaker at ¥107.94 per dollar. The pound is down 1.1 per cent at $1.2464.

European bond yields also rose, with the yield on 10-year Bunds up 5 basis points to 0.35 per cent, the highest since early May. Spain’s 10-year debt yield is up 6 basis points at 1.55 per cent, with Portugal’s up 3 basis points at 3.53 per cent. In the UK, 10-year gilt yields are up 7 basis points at 1.44 per cent.

The post-US election equities rally is holding in Europe, even after a mixed showing in Asia. London’s FTSE 100 is up 1 per cent, with the Xetra Dax 30 up 0.8 per cent. The region-wide Euro Stoxx 600 is up 1 per cent.

Futures trade suggests that the S&P 500 — the broad US benchmark that sets much of the tone for world equities trade — will open up 0.4 per cent, setting back on course toward the record high it touched last week. Wall Street finished a strong week on a mixed note on Friday, as the S&P 500 slipped but the Dow Jones Industrial Average closed at a record high.

Gold is down 0.4 per cent at $1,220.47 and oil prices are also softening, with Brent crude down 0.1 per cent at $44.70 and West Texas Intermediate down 0.4 per cent at $43.25.

The main equities action in Asia came in Japan. Data showed that the economy expanded 0.5 per cent quarter-on-quarter in the three months to the end of September — more than twice the pace of the previous period and of economists’ expectations.

That potentially relieves pressure from the Bank of Japan to ease monetary policy further. Some initial stability in the yen did not last, and the currency is among the worst performers in Asia on Monday, down 0.7 per cent at ¥‎107.39 to its weakest level since early June. Propelled by the weaker yen, Japan’s broad Topix benchmark was up 1.4 per cent and the price-focused Nikkei 225 gained 1.5 per cent.

Hong Kong’s Hang Seng is down 1.4 per cent, while China’s Shanghai Composite ticked up 0.4 per cent.

China’s renminbi was also in the spotlight. The People’s Bank of China fixed the midpoint around which the currency is allowed to trade softer on Monday to Rmb6.8291 — its weakest since September 2009.

Investors were also watching Chinese economic data for October that have come in slightly weaker than economists had forecast. Industrial production held steady on the previous month, while retail sales moderated, but both data points were slightly less than the average of market expectations.

Chinese fixed asset investment was a slightly brighter spot, growing from September and also coming in above forecasts.

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Via FT