Bond Rout Ends As Trump “Reflation Rally” Fizzles Sending Dollar Lower; Iron Ore Plunges

As we suggested yesterday when we posted the first in what is likely to be many contrarian reports on the “Trump Reflation Rally”, one in which Goldman predicted that no matter what policy mix is adopted by president Trump, the global outcome will be one of slowing economic growth, overnight the Bloomberg Dollar Spot Index finally ended its torried 3.2% rally from the past 4 days – the steepest since January 2009 – and retreated 0.3% from a nine-month high. After a historic pounding, benchmark Treasuries and emerging-market assets also rebounding as the dollar rally ended, while Iron ore plunged alongside other industrial metals.

Expectations Trump’s administration will cut taxes, increase spending and accelerate inflation have lifted assets, including the dollar, bank stocks, and industrial metals, and driven bond yields higher. But concern the new administration could take a more protectionist stance on trade has hit Asian stocks and currencies.

“The market is getting a little bit cautious,” said Commerzbank currency strategist Esther Reichelt in Frankfurt. “There might be some concern that the Fed gets more cautious due to the strong dollar (or) this might just be … a pause to see how other market participants are reacting to dollar strength.”

After getting massively oversold, with the US 10Y RSI hitting a level not seen since 1990 as the Bloomberg chart below shows, Treasury 10-year note yields fell from this year’s high and Italy’s bonds led gains in the euro area, outperforming German bunds. Trump’s election victory, which was seen as the catalyst for a massive fiscal stimulus including a pledges to cut taxes, spend more than $500 billion on infrastructure and restrict imports, triggered a record selloff in global bonds. Some, including Fidelity Investments’ Ford O’Neil, have already expressed skepticism that Trump’s proposals will be fully backed by Congress, while Goldman last week said the rally in iron and copper was “too much, too fast.”

“We’ve had a such a sharp move over a small period of time, and it can only extend so far without further information to fuel it,” said Richard Kelly, head of global strategy at Toronto Dominion Bank in London. “The market is going to have to see some sort of actual facts to drive this extension further. If we actually see a sizable shift of U.S. fiscal policy, it changes a number of the dynamics on growth and inflation.”

The yield US 10% TSYs dropped six basis points to 2.21% as of 10:24 a.m. London time. The 41 basis-point jump over the last three trading sessions marked the steepest climb in more than seven years and the 14-day relative strength index for the securities indicated they were the most oversold since 1990, a potential signal that they may be set for a reversal.Richmond Federal President Jeffrey Lacker warned Monday that easier fiscal policy may require higher rates, but it’s too early for the central bank to react to potential policy changes by the incoming administration.

Euro zone government bond yields fell during a hiatus in a sell-off that has lasted six weeks.Italy’s 10-year yield slid 11 basis points to 1.97 percent, after rising for five consecutive days, and that on Spanish securities with a similar due date dropped to 1.41 percent, from as high as 1.66 percent on Monday. German bund yields fell two basis points to 0.30 percent, as a report showed growth in Europe’s biggest economy slowed to the weakest pace in a year last quarter. Indian bonds rallied on expectations liquidity will improve in the wake of Prime Minister Narendra Modi’s surprise Nov. 8 crackdown on unaccounted wealth through the withdrawal of high denomination bills. The yield on government notes due Sept. 2026 plunged 10 basis points to 6.63 percent in Mumbai, according to prices from the RBI’s trading system. The rupee led losses in Asia as Indian markets opened after Monday’s public holiday.The premium investors demand to own developing-nation government bonds over U.S. Treasuries narrowed three basis points to 380, according to JPMorgan Chase & Co. indexes.

Japan’s 10-year bond yield increased to zero, having been negative for almost eight weeks, as a gauge of demand weakened at a sale of five-year securities on Tuesday.

The yen rose 0.2 percent to 108.23 per dollar. It slipped to a five-month low of 108.54 on Monday, having climbed as high as 101.20 as the U.S. election results came out on Nov. 9. “The dollar’s surge from around 101 to 108, just in a few business days, is like going over the speed limit, so a bit of a correction is natural,” said Takuya Kanda, a senior researcher at Gaitame.com Research Institute Ltd. “The dollar is currently rallying on expectations only. But the policies Trump has called for are all dollar-positive. After pausing around 107 to 108, the dollar will resume its uptrend toward 110 yen by year-end.”

The end of the reflation rally also meant weakness across industrial metals, and sure enough iron ore plunged 9% in Singapore, extending the last session’s retreat from a two-year high. The price soared by a record 27 percent last week, driven by speculative interest in China and optimism Trump’s policies will boost steel demand. Goldman Sachs said Friday that iron ore’s reaction to the Trump win was excessive, while Capital Economics Ltd. warned prices will face growing pressure from rising supply. Zinc fell 1.9 percent in London, reversing earlier gains and retreating from the highest level in almost seven years. Copper dropped 2.5 percent, pulling back from near a one-year high.

Gold added 0.3 percent, rebounding from a five-month low. It slid 4.4 percent over the last three days as the dollar strengthened.

A weaker dollar was good news for oil, with crude rising as much as 2.6% to $44.43 a barrel in New York as OPEC nations were said to be making a final diplomatic effort toward securing a deal to curb production. Qatar, Algeria and Venezuela are leading the push for a deal, while Saudi Arabia, Iraq and Iran are at odds over how to share output cuts agreed at a September meeting in Algiers.

Equities have yet to process the decide if the end, if only for the time being, of the Trump surge is good or bad: the MSCI gauge of shares in developing nations rose with U.S. stock-index futures. Iron ore tumbled as much as 11 percent in Singapore and gold pulled out of its steepest slide in more than a year. S&P 500 Index futures rose 0.2% to 2,165 after shares ended a volatile session Monday little changed. 

The Stoxx Europe 600 Index was little changed. Bond-proxy sectors including utilities and real estate shares advanced as the global debt selloff abated. Among stocks active on corporate news:

• Merck KGaA advanced 1.3 percent after reporting a jump in third-quarter profit and boosting its earnings forecast for the year on lower-than-expected research costs.
• Deutsche Wohnen AG climbed 4.1 percent after posting an increase in nine-month profit and giving an upbeat outlook.
• Vodafone Group Plc rose 1.6 percent after the carrier reported better-than-estimated second-quarter service revenue.
• EasyJet Plc climbed 1.7 percent after saying it’s working to streamline operations as the slump in the pound following the Brexit vote weighs on earnings.
• Hennes & Mauritz AB added 2.5 percent after the retailer posted a higher-than-expected increase in October sales.
• British American Tobacco Plc gained 0.6 percent after Reynolds American Inc. was said to be seeking a higher price after dismissing the U.K. company’s $47 billion takeover offer as too low.
• Nokia Oyj slipped 3.9 percent after predicting revenue will fall in line with the market trend.