Friday 19:30 GMT. US and European stocks gave back some of their post-US election gains, the dollar continued to rally and commodity prices were in retreat as participants looked back over a truly remarkable week for global markets.
A rapid flight to safety followed the shock news that Donald Trump would be the next president of the US, with S&P 500 futures and Asian stock market indices plunging as nervous investors dumped the dollar and emerging market assets and piled into “haven” assets such as government bonds, the yen and gold.
But these positions were quickly reversed — EM notwithstanding — as a “reflation trade frenzy” swept across global markets, according to analysts at UniCredit — driving equities and base metals higher and bond prices sharply lower, and fuelling a rebound for the US currency.
“Two factors help explain these wild swings; Mr Trump’s conciliatory tone in his first speech as president-elect, and expectations that proposed tax cuts and infrastructure investment could stimulate growth — at least in the short term — and inflation,” UniCredit said.
“Nevertheless, the lack of visibility regarding the new US economic policies makes it dangerous to extrapolate this week’s momentum. The main downside risks stem from tariff barriers to trade, which would undermine US growth and generate negative spillovers globally.”
The powerful rebound on Wall Street took the Dow Jones Industrial Average to record levels, while the broader S&P 500 equity index fell 0.2 per cent to 2,164 on Friday, but was still up 3.8 per cent over the five-day period.
Financial and healthcare stocks were among the best performers amid hopes that both sectors would benefit from lighter regulation than might have been the case had Democratic candidate Hillary Clinton won the election.
It was a similar tale for equities across the Atlantic, with the pan-European Stoxx 600 down 0.4 per cent on Friday but still up 2.6 per cent on the week. The Nikkei 225 in Tokyo edged up 0.2 per cent for a weekly gain of 2.8 per cent — the best such showing since September.
But emerging market equities came under heavy pressure. The MSCI EM index was down 2.8 per cent on Friday at its lowest since July, extending its decline since Tuesday’s close to nearly 6 per cent.
EM currencies were also under the cosh — most obviously the Mexican peso, which sank to a record low on Friday of 21.3952 per dollar although it later pared its decline. The currency finished last week at 19.018.
The dollar also recorded strong post-election gains against G10 currencies. Although the US unit slipped 0.1 per cent against the yen on Friday to ¥106.76, it was up about 3.5 per cent from a week ago. The euro, down 0.4 per cent on Friday at $1.0844, suffered a five-day drop of 2.6 per cent.
Those gains came as the sell-off in the US government bond market attracted plenty of attention. Although the Treasury market was shut on Friday for Veterans Day, the yield on the 10-year note — which moves inversely to its price — ended on Thursday at a 10-month high of 2.14 per cent, up 36 basis points on the week.
John Higgins at Capital Economics said the possibility of a big fiscal expansion in the US added to the downside risks for bonds for two main reasons.
“First, it would increase their supply. Second, we think it would mainly boost inflation rather than growth,” he said.
“Our existing bearish view of Treasuries has been based on an assumption that the Federal Reserve will tighten monetary policy by much more than investors are anticipating.
“Since fiscal stimulus would spur inflation, it would provide the Fed with even more reason to act.”
The more policy-sensitive two-year Treasury yield rose 12bp over the week to 0.92 per cent. Fed fund futures continued to price in the probability of the US central bank raising rates next month at around 80 per cent.
The 10-year German Bund yield rose 3bp on Friday to 0.31 per cent, for a weekly jump of 18bp.
Industrial commodity prices came into focus on Friday, perhaps most notably a sharp reversal for copper. The metal jumped nearly 8 per cent in London to a 17-month high in early trade before giving back its advance and ending 0.9 per cent lower — although it still secured its biggest weekly rise in five years.
“On Thursday the US bond market took down EM assets, today we are seeing commodities starting to turn sharply, that will add to EM pain,” said Alan Ruskin at Deutsche Bank.
“There are signs that higher bond yields and the knock of a stronger dollar are having a domino impact, taking down the weakest risky assets first, before moving on to the next ‘weakest’ risky asset from a positioning and liquidity standpoint.”
Brent oil’s 2.4 per cent slide on Friday to $44.75 a barrel left the crude benchmark 1.8 per cent lower over the week while gold had an even worse time. The metal sank another $35 to $1,224 an ounce, for a weekly slide of $80, or 6.1 per cent. It rose as high as $1,337 following the election result.
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