Global Bonds Plunge As "Trumpflation" Rally Returns, Dollar Jumps

www.zerohedge.com

After taking a one day breather, the "Trumpflation" Rally returned with a vengeance as global government bonds tumbled and the dollar rose on renewed speculation the economic outlook is strong enough to allow the Federal Reserve to hike in December (odds are now 94%). Asian shares rose, industrial metals and crude oil fell, European shares and US equity futures were pressured.

As reported last night, the latest bond selloff started in Japan where JGB futures slid after a BOJ buying operation was poorly received, and yields on both the 2Y and 5Y rose to or above the BOJ's -0.1% interest rate. 10 year Japanese yields have edged back above zero intra-day for the first time since September 21st and the market will at some stage focus on whether the BoJ will defend the zero level, especially if the global yield sell-off gathers pace over the coming weeks and months. It would be a strange decision to abandon the new policy so soon after announcing it so assuming global yields remain elevated they may be forced to buy more JGBs than they thought when the new scheme was announced.

As DB's Jim Reid observes, if the BoJ sticks to defending zero in a world where the US is likely to increase fiscal spending then you could make an argument that there is full blown helicopter money except that the BoJ is flying the copter over the US and may be about to become the new US government’s best friend. Without them, and without the ECB, it might be that Trump would be less able to spend freely on the fiscal side as yields would be less supported globally. Certainly one way to think of in our opinion.

The selling shifted over to Portuguese and Italian debt which led declines in Europe, while Treasuries also fell. Russia’s ruble lost the most among emerging-market currencies as the dollar rallied. Crude oil reversed an earlier gain with U.S. stockpiles forecast to increase and optimism waning that OPEC’s latest push for a production-cutting deal will pay off. Zinc fell from a six-year high as industrial metals sank. European shares advanced for a third day, helped by technology and telecommunications companies.rate. 

As even Bloomberg notes, the "Trumpflation" move has "defied expectations" and forced Wall Street to make a complete U-turn on its forecasts. While analysts spent early November warning a Trump administration would hurt economic outlook and slow the pace of rate increases, his election has instead made Fed action a near certainty. The odds of an increase in interest rates by December have risen to about a 94 percent probability, the highest level this year, from 68 percent at the start of November, on speculation the Republican’s policies will boost inflation.

"The narrative on the dollar is strong," said Simon Smith, chief economist at FXPro. "A move higher in interest rates next month is now a near dead cert, with the implied path for rates next year also moving higher and providing further support for the dollar."

“The inflation story is still in play,” said Birgit Figge, a fixed-income strategist at DZ Bank AG in Frankfurt. “The market is expecting an interest-rate hike in December, and there is no fundamental reason for the Fed” to disappoint, she said.

St. Louis Fed President James Bullard said there’s a chance the U.S. economy could get a medium-term boost if Trump increases infrastructure spending and tax reforms.

The overnight session in stocks has been mostly subdued, with the Stoxx Europe 600 Index added 0.2 percent, paring gains of as much as 0.6 percent. Nokia Oyj rebounded from a three-day losing streak, pacing technology stocks higher. Bayer AG sank 1.6 percent, dragging chemical companies to the worst performance on the Stoxx 600, after issuing 4 billion euros ($4.3 billion) of convertible bonds. Among stocks moving on corporate news, Wirecard AG, a German payments provider, gained 6.1 percent as the top end of its 2017 profit forecast exceeded some analysts’ estimates. Hugo Boss AG slipped 6.9 percent after saying it will eliminate two brands and slow down expansion of its store network.

S&P 500 Index futures slipped 0.1 percent, after the equity gauge rose 0.8 percent Tuesday. As earnings season winds up, Lowe’s Cos. and Target Corp. will be in focus for indications of the health of the U.S. consumer. About 76 percent of S&P 500 members that have reported so far beat profit projections and 56 percent topped sales estimates.

The MSCI Asia Pacific Index added 0.3 percent. Japan’s Topix index rallied to a nine-month high, driven by gains in banking stocks as investors bet earnings at financial companies will benefit from the recent pickup in bond yields. The Topix Banks Index has jumped more than 20 percent in five days, the steepest surge since 2008. The MSCI Emerging Markets Index rose for a second day, adding 0.3 percent.

But the big move was again in bond yields and currencies, which resumed their levitation higher, further pressuring financial conditions, which as reported yesterday tightened to the highest level since Marc.

The yield on 10Y Treasuries rose six basis points to 2.28 percent as of 10:41 a.m. London time, after retreating from its highest level of the year in the last session. It’s up more than 40 basis points since Trump’s election, having surged amid growing speculation the Fed will boost interest rates next month and beyond. The bond-market rout pushed Bank of America Corp.’s Global Broad Market Index down 1.5 percent in November, heading for the biggest monthly decline since May 2013. The renewed selloff spread to Europe, with the yield on Portugal’s 10-year bonds adding 19 basis points to 3.68 percent. Italy’s 10-year yield increased nine basis points to 2.05 percent, while that on similar-maturity German bunds climbed three basis points to 0.34 percent. Japan’s 10-year government bonds fell for a fifth day, lifting their yield to 0.035 percent.

Tuesday marked the end of almost eight weeks of negative rates, the first time the bond market has tested the Bank of Japan’s resolve to contain 10-year yields since it shifted its focus to controlling the benchmark yield around zero. The BOJ said after its September meeting that it could carry out unlimited bond-buying operations at a set rate, if needed, in order to control yield levels.

After that meeting, the bond market rallied in search of a floor for the 10-year note yield, eventually settling just above the minus 0.1 percent policy rate.
the Bloomberg Dollar Spot Index reversed Tuesday's losses and rose 0.3%. It slipped on Tuesday after surging more than 3 percent in the four trading days following the Nov. 8 U.S. election. A bout of USD buying was observed just around the time of the European open, which send the USDJPY to new highs, rising just why of 110, down some 9% since last election's lows, and last trading at 109.70. Currencies of commodity-producing nations, including the Australian dollar and South African rand, were among the biggest losers. The MSCI Emerging Markets Currency Index declined 0.3 percent and Russia’s ruble dropped 1.9 percent, after jumping 2.9 percent on Tuesday, the most since February. Turkey’s lira, Poland’s zloty and Mexico’s peso all dropped at least 0.7 percent as higher U.S. yields boosted the dollar. The yuan fell to 6.8729 against the dollar, the weakest since December 2008.

Fed Presidents Neel Kashkari and Patrick Harker are both scheduled to speak Wednesday and may shed more light on the likely trajectory of borrowing costs in the world’s biggest economy. Fed Chair Janet Yellen is scheduled to testify to the Joint Economic Committee of Congress on Thursday.

Bulletin Market Summary from RanSquawk

• European equities enter the North American crossover relatively mixed while fixed income markets have centred around JGB's which slipped overnight following a poor bank buying operation
• FX trade continues the strong USD theme, led by USD/JPY pressing higher in the quest to test (through) 110.00.
• Looking ahead, highlights include UK jobs data, US PPI, DoE's, Fed's Bullard, Harker, Kashkari and BoE's Cunliffe

Market Snapshot

• S&P 500 futures down 0.1% to 2176
• Stoxx 600 up less than 0.1% to 339
• FTSE 100 down 0.3% to 6775
• DAX down 0.4% to 10692
• German 10Yr yield up 2bps to 0.33%
• Italian 10Yr yield up 9bps to 2.05%
• Spanish 10Yr yield up 8bps to 1.53%
• S&P GSCI Index down 0.2% to 358.5
• MSCI Asia Pacific up 0.4% to 135
• Nikkei 225 up 1.1% to 17862
• Hang Seng down 0.2% to 22281
• Shanghai Composite down less than 0.1% to 3205
• S&P/ASX 200 up less than 0.1% to 5328
• US 10-yr yield up 4bps to 2.26%
• Dollar Index up 0.09% to 100.32
• WTI Crude futures down 0.7% to $45.50
• Brent Futures down 0.4% to $46.78
• Gold spot down 0.1% to $1,227
• Silver spot down 0.2% to $17.03