Trump Bump Jolts Bonds And Getting Ready For 2017

 

 

 

 

With about a month left in what has turned out to be a very eventful 2016, the world seems to be undergoing a profound change.  In the United States, the electorate has elected a brash billionaire to restore growth to a sputtering economy and, at the very least, reestablish our presence in the rest of the world. In sum, to make America Great Again.  Financial markets have responded by imagining a profound move towards deregulation and potentially significant fiscal stimulus in the form of every possible tax cut imaginable, as well as a bipartisan infrastructure spending package. Bond investors looking at this have said, ‘whoa Nellie’, it is time to sell, which they have done in a big way. With the yield of the 10 year treasury now exceeding 2.35% and rising nearly every day, equity investors have been the beneficiaries of the credit exodus, especially in the bank and small cap area. Those two sectors have dramatically outperformed the advancing broader indexes, and with the traditional race to improve results as the year draws to a close, it is hard to see the move out of bonds letting up.  The markets have experienced a big move, so what could change the equation?

Looking across the Atlantic, the biggest issue seems to be a looming referendum in Italy which has the potential to trigger European sovereign nations to question the benefits of the Euro currency.  Italy is first in the line of domino nations which could want out in 2017, including France. Other big nations like Germany, face elections which could change the leadership and attitudes all across the old continent.

Keep your eye on Italy as it seems with Brexit, and now Mr. Trump in the U.S, the move towards nationalistic type sentiment is gaining steam in a big way.  Polls indicate the Italians will move to reject the referendum, leading to political uncertainty.  

In India, a government effort to improve currency collection resulted in the unique move to eliminate the 500 and 1000 note rupee. The rupee now trades at a five year low as the black market for currency affects the Indian economy in a big way.  Many analysts see it as a lasting drain on India through next year.