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Bond Rout Deepens as Trump Bets Boost Dollar,Metals

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Routs in global bonds and emerging markets intensified, while the dollar climbed with European stocks and industrial metals as investors position for the wave of fiscal stimulus that Donald Trump pledged to unleash.

Sovereign bonds extended a record debt selloff, lifting the 30-year Treasury yield above 3 percent for the first time since January, amid speculation President-elect Trump’s pledge to boost infrastructure spending will trigger U.S. interest-rate hikes as economic growth and inflation pick up. Bloomberg’s dollar index advanced for a fourth day and U.S. equity index futures gained. European shares rose to a two-week high, while stocks in developing nations sank to a four-month low. Copper surged to a 16-month high and gold slumped.

Trump’s election victory continues to send shockwaves through global markets, having already led to $1.2 trillion being wiped off the value of bonds worldwide last week as equities added about $1 trillion and industrial metals soared by the most in four years. Emerging markets are being hit by an exodus of capital as speculation builds that the U.S. is heading into an era of rising interest rates and more protectionist trade policies.

“The markets are clearly pricing in a big fiscal stimulus plan which will cause debt to go higher,” said Tuan Huynh, Deutsche Bank Wealth Management’s Singapore-based chief investment officer for the Asia-Pacific region. “But we are still in the early stage and markets are pricing in a majority of this expectation already.”

Bonds

Ten-year U.S. Treasury yields increased by eight basis points to 2.23 percent as of 8:05 a.m. London time, set for the highest close since early January. They surged 37 basis points last week, the most in three years, amid speculation Trump’s plans to boost spending and cut taxes will widen the budget deficit and stoke inflation.

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 percent 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 U.S. There are some signs of higher inflation pressures. Trump is pushing this phenomenon. ”

Government debt extended losses across the Asia-Pacific region and Europe, pushing benchmark bond yields in Australia, France and Germany to their highest levels since at least April. Thailand’s 10-year yield jumped by the most since May after foreign investors pulled a record 27 billion baht ($763 million) 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.

Currencies

The Bloomberg Dollar Spot Index surged 0.7 percent. The euro fell versus the greenback for a sixth day, its longest run of declines in six months, and the yen sank as much as 1 percent to its weakest level since early June. Japan’s economy expanded by an annualized 2.2 percent in the last quarter, data showed Monday, exceeding the 0.8 percent 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 U.S. 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 percent growth can be used as a reason for the BOJ not lowering interest rates for a while.”

New Zealand’s dollar dropped to a one-month low after a massive earthquake rocked New Zealand early Monday, causing widespread damage. 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 fresh six-year low.

Mexico’s peso fluctuated after a Trump adviser hinted in a Financial Times opinion piece that the the president-elect is open to negotiations before imposing import barriers. It tumbled 12 percent 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 U.S. border.

Stocks

The Stoxx Europe 600 Index rose 1.1 percent, after rallying last week by the most since July. Novartis AG added 1 percent after the Swiss health-care company was said to be in talks to acquire U.S. generic-drugs maker Amneal Pharmaceuticals LLC. RWE AG gained 3 percent after posting its quarterly results.

S&P 500 Index futures rose 0.5 percent, pointing to further gains after the underlying benchmark had its biggest weekly jump in two years. Harman International Industries Inc. and Mentor Graphics Corp. may attract interest after the two companies agreed to be acquired by Samsung Electronics Co. and Siemens AG, respectively, in takeovers totaling some $12.5 billion.

Stocks in the developed world outperperformed 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.

Japan’s Topix index climbed 1.6 percent, while benchmarks in Hong Kong, Indonesia and Singapore slid to their lowest levels in more than three months. Markets in India were closed for a holiday.

“In the short-term the election of Donald Trump as president is causing a bit of uncertainty and markets tend to overreact to that,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which manages about $121 billion. “I suspect the dust will settle down in the next couple of months and this sort of market overreaction will provide opportunities.”

The Shanghai Composite Index rose to a 10-month high after a raft of Chinese data suggested the economy held ground last month following new measures to cool property markets in almost two dozen big cities. Industrial production rose 6.1 percent from a year earlier in October and retail sales climbed 10 percent.

Commodities

Copper rallied as much as 3.4 percent in London. It surged 11 percent last week as Trump, has pledged to spend more than $500 billion rebuilding U.S. infrastructure, pulled off his surprise win in the U.S. election and Chinese investors stepped up purchases. The metal soared by a record 19 percent last week on the Shanghai Futures Exchange and the bourse said late Friday that it will adjust transaction fees for commodity contracts including copper, zinc and steel from Nov. 15.

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 fell to a five-month low, after sliding last week by the most in three years as the prospect of Fed rate hikes strengthened the dollar.

Source: Bloomberg