US Election Result Sparked Global Reflation Trades

2 December 2016

Rates & FX Markets Monthly Review

US Election Result Sparked Global Reflation Trades

Highlights

¨   US & UK: Trump effects boosted the US Dollar and led to a global bond rout. In the US, the election of Donald Trump spurred an (exaggerated) euphoria based on sensational policies. Strong expectations of fiscal stimulus via tax cuts and infrastructure spending revived the inflation outlook: Metal prices soared and 10y US Breakeven climbed by c.24bps. In the meantime, the Fed continued to guide towards a December rate hike with a market probability reaching 100%: as result 10y yield rose by 55.5bps and the USD strengthen by 3.10% in November. In the UK, 10y Gilt yields tracked global rates higher, although gains appeared subdued despite BoE’s relatively hawkish rhetoric and projected deterioration in UK’s fiscal health. Surprisingly, GBP was the best performing currency among DM and major EM peers as bearish speculators capitulated, despite softer economic data and further uncertainties associated with the impending Brexit process; President-elect Trump’s preference for bilateral trade deals may also benefit a post-exit UK.

¨   Eurozone: The election of Donald Trump confirmed the rise of populism, heightening fears ahead of 2017 European elections. The core Bund and OAT curves bull steepened over the course of November translating expectations of an extended QE while long-end bonds participated to the global sell-off. The spread between France and Germany widened strongly as the likely opposition in the final round of the election between fascist Le Pen and Thatcherite Fillon cast a cloud over the EU second economy’s outlook. On another hand, Italian BTPs were hammered as the ‘No’ maintained a strong lead in opinions polls for the upcoming December 4^th referendum, which if such result is confirmed could destabilize an already fragile banking and political system. 

¨   Japan & Australia: JPY and AUD movements were dollar-driven over the month of November. The BoJ has found in Donald Trump its best monetary policy tool as the US election result helped the USDJPY to climb by 9.20%; the JPY was the weakest currency in November. Japanese yields rose but in a lesser amplitude than their global peers as the yield curve control implemented by the BoJ has stabilised the curve and anchored as desired the 10y JGB around 0%.   In Australia, higher ACGB yields m-o-m were largely attributed to DM yield movements. RBA maintained its policy rate at 1.50% alongside a slightly more upbeat tone, as terms of trade improved due to recovering commodity prices. AUDUSD declined m-o-m, impacted by the dollar’s strength, and exacerbated by mixed labour data, poor building approvals and waning consumer and business confidence. In Australia, higher ACGB yields m-o-m were largely attributed to DM yield movements. RBA maintained its policy rate at 1.50% alongside a slightly more upbeat tone, as terms of trade improved due to recovering commodity prices. AUDUSD declined m-o-m, impacted by the dollar’s strength, and exacerbated by mixed labour data, poor building approvals and waning consumer and business confidence.

¨   Developed AxJ: AxJ FX depreciated sharply against USD; political woes in South Korea exacerbated capital outflows. Yields on SGS surged by 22-49bps m-o-m, mirroring global market post US elections bond selloff; SGS-UST spreads continued to tighten m-o-m amid 3Q GDP upward revision alongside speculations of higher inflationary pressures which dimmed the likelihood of further MAS easing. USDSGD broke the 1.40 barrier, climbing by 3.04% m-o-m to 1.4334, driven largely by USD strength, with weak economic outlook providing little support for the depreciating SGD. Meanwhile, strong capital outflows were seen from South Korea, exacerbated by weakening political sentiment as a result of President Park’s scandal and resignation offer thereafter spurring yields on KTB to surge by 25-47bps while USDKRW edged higher by 2.20% m-o-m to 1169. Likelihood of an opposition led impeachment for President Park remains, which could further dull the allure of KRW assets. Elsewhere, the gradually heightening political tension in Hong Kong continues to have a marginal impact, with HKD outperforming its regional peers while HKGB yields rose alongside USTs.

¨   Emerging AxJ: EM assets mostly bore the brunt of the selloff; domestic catalysts bolstered Gsecs. China’s central government’s pledge to refrain from bailing out the regional governments fuelled risk aversion benefitting CGBs m-o-m, with yields edging higher by 0-28bps, faring better than most AxJ bond markets. While USDCNY climbed past the 6.80 barrier to 6.8894 (+1.68% m-o-m), earlier concerns of a disorderly breakout were quickly negated, underscored by PBoC’s active management. Over in Thailand, ThaiGB curve bear steepened as yields on short dated ThaiGBs were anchored by favourable issuance skew alongside lingering expectations for another BoT rate cut. The Thai Parliament has invited the crown prince to ascend the throne while the Prime Minister’s pledge to follow through elections planned for 2017 underpinned THB’s relative strength, with the USDTHB edging higher by 1.94%, outperforming most Asian peers. Malaysian assets have a less-than-stellar November, as MGS yields ticked significantly higher on suspected foreign outflows, while the ringgit was the worst performer after the yen within our coverage. Stronger 3Q16 GDP (4.3% y-o-y) amid increasingly volatile financial conditions post US elections pushed BNM to hold rates at 3% in its November meeting, although inflation remains at disappointing levels (Oct: 1.4% y-o-y). Indonesian assets were not spared from the turmoil that roiled global EM markets, after relative calm over the previous months. BI drew praise from the IMF after it kept policy rates unchanged at 4.75% amid mounting uncertainties, despite disappointing GDP and CPI prints. Over in India, the surprise demonetisation efforts by PM Modi have bolstered India’s banking system liquidity amid the influx of deposits, with Gsec yields tightening c.54bps m-o-m even as global yields have surged on the reflation theme; however, the measure is likely to come with short-term economic costs over the rest of FY16/17.