Routs in global bonds and emerging markets intensified, while the dollar climbed with base metals as investors positioned for the wave of fiscal stimulus that 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 the highest since February as the US currency strengthened versus almost all its major counterparts. European shares pared earlier gains and stocks in developing nations sank to a four-month low. Copper headed for the highest close in 16-months and oil fell with gold. US equity-index futures advanced.
Mr Trump’s election as US president is sending shock waves through global markets on speculation his pledge to boost infrastructure spending will boost growth and inflation and trigger faster hikes in US interest-rate.
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 Mr 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% in the end of 2017 from below 2% 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 US Treasury yields increased five basis points to 2.205% as of 8.44am New York time, the highest since early January. They surged 37 basis points last week, the most in three years, amid speculation Mr 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%.
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 an 84% 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 US. 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. UK 10-year gilts extended their slide to a sixth day, pushing yields to a five-month high. Portuguese yields rose to 3.58%, the highest since June.
Since the Nov 8 election, developing-nation local-currency bonds tumbled 7.3% through Nov 11, the biggest three-day slump since October 2008. The decline cut the bonds’ return this year to 8.5%.
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 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 of insuring corporate debt against default climbed to the highest since July 7. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies rose two basis points to 80 basis points. A gauge of swaps on junk-rated businesses rose four basis points to 354 basis points.
Yields on investment-grade corporate bonds in euros rose to 0.91% on Friday, the highest since June 30, according to Bloomberg Barclays index data.
Currencies
The Bloomberg Dollar Spot Index jumped 0.6%, rising for a fourth-straight day, and set for the largest gain over such a period since 2009.
The euro fell versus the greenback for a sixth day, its longest run of declines in six months, dropping 0.8% to $1.0774, a level last seen in January. The yen sank 1.1% and touched its weakest level since early June. Japan’s economy expanded by an annualised 2.2% in the last quarter, data showed Monday, exceeding the 0.8% 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 US 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% growth can be used as a reason for the BoJ not lowering interest rates for a while.”
The pound fell 0.5% to $1.2536, almost wiping out last week’s 0.6% gain.
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.
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. It tumbled 12% in the three days following the election of Trump, who had campaigned on promises to tear up the North American Free Trade Agreement, crack down on illegal immigration, and build a wall along the southern US border.
The MSCI Emerging Markets Currency Index slid 0.2%, extending last week’s 2.27% drop, the deepest five-day loss since June 2013. The lira and the Brazilian real tumbled more than 1%.
Commodities
Copper rallied as much as 3.4% in London. It surged 11% last week as Trump pledged to spend more than $500 billion rebuilding US infrastructure and Chinese investors stepped up purchases. All base metals except tin advanced on the London Metal Exchange.
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 1.5% as Iran boosted output and as US explorers raised the number of active rigs to the most since February, signaling the persistence of a global supply glut.
Stocks
The Stoxx Europe 600 Index pared earlier gains after rising as much as 0.9%. The Index was supported by advances in miners and banks, seen as beneficiaries of Trump’s policies, with merger-and-acquisition activity also providing a fillip. S&P 500 Index futures added 0.2%.
Stocks in the developed world outperformed bonds last week by the most since 2011, based on the MSCI World Index of equities in developed nations and the Bloomberg Barclays Global Aggregate Index.
The MSCI Emerging Markets Index fell 0.9%, headed for its lowest close since July 8.
Bulgarian Prime Minister Boyko Borissov submitted his resignation and the government withdrew it’s 2017 budget draft after former Air Force Chief Rumen Radev defeated the ruling party’s candidate in a presidential election. The yield on Bulgaria’s euro-denominated bonds maturing in September 2024 rose 16 basis points to 2.09%, the highest since July.
Mr Radev is a political novice who campaigned on fighting corruption, strengthening the borders against immigrants, upgrading the military and lifting sanctions against Russia.