Bonds plunge by $1 trillion this week amid inflation wagers
Dollar Trump-inspired surge sets off intervention across Asia
Stocks joined declines in bonds and commodities as a selloff in emerging markets deepened with traders parsing the implications of a Donald Trump presidency for the world’s largest economy.
The MSCI All Country World Index pared its biggest weekly rally since September, the Dow Jones Industrial Average fell from an all-time high and developing-nation shares were set for the lowest in for months. The dollar rose against most major currencies, while Mexico’s peso fell toward a record low. European bonds extended their rout as Treasury trading was closed for a holiday. Copper pared its biggest gain in seven years and gold plunged with oil.
Global stocks gained $1.3 trillion this week as traders bet Trump will lower taxes, ease corporate regulations and ramp up spending to spur growth. Meanwhile, more than $1 trillion was wiped off the value of bonds as the policies are seen boosting inflation and interest rates. Federal Reserve Vice Chairman Stanley Fischer said the central bank has almost reached its goals for maximum employment and price stability, strengthening the case for a hike.
“Let’s face it, we still have to see what Trump’s policies are going to be and who’s going to be in his cabinet,” said Matt Maley, an equity strategist at Miller Tabak & Co. LLC in New York. “People want to take a breather and digest what’s gone on this week heading into the weekend.”
MSCI’s global gauge of stocks dropped 0.8 percent at 11:14 a.m. in New York, trimming its weekly advance to 1.3 percent.
“We’re taking a breather and beginning to think about the wider repercussions of” Trump’s win, said Witold Bahrke, a macro strategist at Nordea Investment Funds in Luxembourg. “You can say this is pro-growth and pro-equity, but it depends hugely on the concrete type of measures he takes. We are moving away from the hope phase to the delivery phase.”
The S&P 500 Index fell 0.6 percent to 2,155.57, while still set for its best week in almost two years. The Dow Average fell after posting its first record close in three months. The Russell 2000 Index of smaller companies extended weekly rally on speculation Trump’s homeward-looking policies will favor the more domestic-focused index.
Investors are also considering what a Trump presidency means for the trajectory of interest rates. Odds for a December increase in borrowing costs have risen to 80 percent from 78 percent a week ago. Utilities, real-estate investment trusts and consumer staples — stocks that have been coveted for their high dividend payout as a source of income amid record-low bond yields — have all retreated over the past five days.
The MSCI Emerging Markets Index declined 3.2 percent, set for the lowest level since July 11. Stock gauges in Argentina, Indonesia and Brazil slumped at least 2.9 percent.
The Stoxx Europe 600 Index dropped for a second day amid a slide in construction firms, miners and drugmakers.
European government bonds extended their selloff, with the yield on Italian 10-year securities climbing above 2 percent for the first time since September 2015. German 10-year bunds declined for a fifth day.
“We do view the election of Donald Trump as a game changer,” said Adam Donaldson, head of debt research at Sydney-based Commonwealth Bank of Australia. “The strong bias toward fiscal expansion and inflationary policy represents a stark change to the malaise of recent years. This opens the door for the Fed to hike in December, but also more quickly in 2017 and 2018 than previously expected.”
The market value of Bank of America’s Global Broad Market Index, which tracks more than 24,000 bonds around the world, has slumped by $1.14 trillion this week to $48.1 trillion. The only previous week it fell by more than $1 trillion was in June 2013, when the Fed under Chairman Ben Bernanke was threatening to reduce debt purchases, leading to a bond selloff that became known as the “Taper Tantrum.”
The benchmark U.S. 10-year note yield has jumped 37 basis points this week through Thursday. Treasuries are closed worldwide Friday for U.S. Veterans Day holiday.
The dollar headed for its biggest weekly gain since 2008, spurring central banks from India to Indonesia to step in to stabilize their currencies on concern Trump will pursue policies that spur capital outflows from developing economies.
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, rose 0.4 percent, extending its weekly rally to 3 percent. The greenback fell 0.2 percent to 106.64 yen, and gained 0.4 percent to $1.0854 per euro.
Emerging-market currencies headed for their worst three-day rout since 2008. Latin American currencies tumbled on concern that Trump could usher in a host of protectionist measures after he campaigned on a pledge to protect American workers and companies from unfair trade deals. Mexico’s peso and Brazil’s real sank at least 2.5 percent.
Copper broke one record even as it looked set to give up another. Volume on the biggest metals bourse hit an all-time high, with more than 530,000 contracts changing hands on the London Metal Exchange this week. Prices had also been set for a record weekly move, after soaring as much as 21 percent, before losing it to a selloff Friday afternoon.
“Copper had a pretty good rally going into the Trump election and people got overly excited about this infrastructure spending and what it meant for raw materials demand including copper,” Mike Dragosits, a senior commodity strategist at TD Securities in Toronto, said in a telephone interview. “It’s a reversal of the momentum that we’ve seen the last couple weeks, and that was characterized by touching the $6,000 resistance level.”
Gold futures for December delivery slipped 2.5 percent to $1,234.50 an ounce at 10:22 a.m. on the Comex in New York. A close at that level would mark the biggest loss for a most-active contract since Oct. 4.
Oil dropped on rising OPEC output after a volatile week driven by speculation over the producer group’s intentions and the surprise election of Trump. West Texas Intermediate for December delivery sank 2.3 percent to $43.63 a barrel on the New York Mercantile Exchange. Brent for January settlement fell 2.2 percent to $44.85 a barrel on the London-based ICE Futures Europe exchange.