By Jon Sindreu
Global stocks drifted into slight losses Wednesday and bond prices fell, as investors continue to look at what Donald Trump's victory in last week's U.S. election means for markets.
The Stoxx Europe 600 was 0.24% lower in early afternoon trading in Europe, reversing slight gains as banks retraced some of their gains from the previous week Asian stock markets were mixed, with some boosted by a rally in their listed banks.
In the U.S. on Tuesday, the Dow Jones Industrial Average closed at an all-time high for the fourth day in a row. The S&P 500 is also close to a record high, even though futures on the index suggested during early European trade that it could open at a small loss.
Meanwhile, bond prices continued to fall after a brief respite on Tuesday. Yields on German and U.K. 10-year debt, which move opposite to prices, rose to 0.333% and 1.425%, respectively. The 10-year Treasury yield edged up to around 2.276%.
Although most investors are gloomy about the impact Mr. Trump's protectionist policies may have on the global economy, his pledges to slash taxes and ramp up infrastructure spending, as well as scrapping President Barack Obama's health-care reform, have provided a boost to the market. Sectors that stand to gain from these plans, such as engineering and pharmaceutical companies, have been key beneficiaries.
"Markets are currently optimistic about Trump's fiscal expansion in the U.S. next year, and downplaying risks of a more deflationary protectionist policy mix. This might be right," said Rob Carnell, London-based analyst at Dutch bank ING. "That said, it places most of the risk onthe downside, should expansion take longer to materialize than expected, or protectionism rear up more strongly than anticipated."
Media outlets have also reported a surge in subscriptions after the U.S. election, giving a bump to their share prices.
Still, investors expect markets to be volatile.
Copper and aluminum prices, which are regarded as gauges of global demand, edged down slightly Wednesday after reaching one-year highs last week. Oil prices also retreated, with global benchmark Brent crude trading 1.06% lower at $46.45 a barrel.
The expectation that inflation will pick up under a Trump administration has dented the price of bonds, which have benefited from years of ultraloose policies by central banks.
This has provided a helping hand to banks, whose business model is based on borrowing short term and lending long term, meaning that they suffer whenever officials try to flatten the yield curve. Stocks considered as safer bond proxies for their steady income, such as utilities, are also down since the election.
The question for investors now is how long the bond selloff can continue before more concrete details about Mr. Trump's policies emerge.
"Our view is that rates have room to go higher," said Annika Eiremo, a fund manager at Janus Capital Group Inc., a company with $195 billion under management. But "it's still early stages of a very uncertain time period in terms of what policy will be," she said.
According to Markus Allenspach, head of fixed-income research at Swiss private bank Julius Baer, Mr. Trump's concessions to the Republican Party's establishment--like the selection of Republican National Committee Chairman Reince Priebus as his chief of staff--and stimulatory policies by central banks in Europe and Japan are likely to limit how low bonds can go.
"I wouldn't rule out that we now have a period of consolidation," he said.
Financial markets' optimistic reaction to the outcome of the election seems to pave the way for the U.S. Federal Reserve to nudge up interest rates in its long-awaited December policy meeting. Derivatives now point to a 91% chance this will happen, compared with 86% Tuesday. A positive earnings season during the third quarter reinforces the case for tighter monetary policy, investors say.
"I think markets are putting the Fed in a place where it has to raise," said Jamie Cox, managing director for Virginia-based Harris Financial Group. "The Fed would probably prefer not to, but it has no choice with fiscal policy in the horizon."
Expectations of higher interest rates have pushed up the U.S. dollar against other currencies. On Wednesday, it was up roughly 0.38% against the euro and 0.5% against the Japanese yen. In contrast, the Turkish lira reached for fresh record lows, with other emerging-market currencies like the Russian ruble and the South African rand sinking as well.
Higher yields in advanced economies usually drive investors away for assets in developing nations, which have enjoyed a powerful rally during the market turmoil of the last few months.
Write to Jon Sindreu at email@example.com
(END) Dow Jones Newswires
November 16, 2016 08:16 ET (13:16 GMT)
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