It has been less than two weeks since the U.S. presidential election. So far markets have reacted generally positively to the results, although with unsustainable volatility.
The most eye-popping numbers come from the bond market.
The Financial Times reported that global bond values have been reduced by more than $1.5 trillion since the election. The 10-year Treasury note surged by 60 basis points in just three trading days – touching the year’s high of 2.3 percent. Equity markets have rallied sharply and the dollar has surged higher.
The trend has spread outside the U.S. as well, with Japanese 10-year government bonds getting above zero for the first time in two months and hitting levels not seen since February.
Monetary policy is pretty much over and fiscal stimulus seems like the natural next step. Analysts are expecting yields to keep increasing, with some forecasts that call for the 10-year note to get as high as 6 percent in five years, based on the President-elect’s business agenda.
Clearly, markets are responding to the parts of the Trump economic plan that they like best: Increased U.S. infrastructure spending and higher growth, lower taxes, deregulation and, potentially, more inflation. Among market winners are certain commodities that could be used in a grand infrastructure rebuilding plan.
But it goes without saying that markets should not trust that everything going forward will be to their liking.
In a separate development, bond yields have been rising in Italy as markets are already looking forward to the next big political event – the Dec. 4 referendum on constitutional changes in that country.
In that market we are seeing a sell-off due to concerns that the same wave of populism that brought in Brexit and Trump will prevail there. Italy actually has a 50-year bond that has lost 14 percent of its value over the past month.
This particular sell-off is based on – you guessed it – public opinion polls that show the populist side winning. Of course with polls having been completely wrong on the last three major political events – last year’s U.K. election, Brexit and the U.S. election – you have to wonder why markets put any credence in them at all.
My View: We are still early in the game and a lot can change over the coming months. There is no doubt we will see setbacks, but if a positive, pro-growth agenda prevails, we should expect higher growth, higher inflation and, potentially, a higher U.S. dollar.
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