Investors curb their
enthusiasm ahead of Trump era
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[January 20, 2017]
By Richard Leong
YORK (Reuters) - A month ago, the dollar and stock markets were riding
high as investors bet that the Trump administration, together with the
Republican-controlled Congress, would usher in an era of lower taxes,
more government spending and looser regulations.
But as questions mount about how the new administration would carry out
such an ambitious agenda and Trump himself sends mixed signals,
investors are wondering whether Trump will end up actually being a game
changer once he takes office as the U.S. president on Friday.
In the weeks after the Nov. 8 election, Wall Street's major indexes were
on a tear. The benchmark S&P 500 gained around 6 percent in that period
and posted a series of record highs.
Longer-dated Treasury yields, which move inversely to the price of
bonds, jumped to their highest levels in more than two years on fears
about a spike in federal borrowing and inflation stemming from Trump's
policies. The dollar hit a 14-year high against other major currencies
on bets that Trump would adopt expansionary fiscal policies that would
lead to higher interest rates, and gold, a traditional safe haven, fell
to its lowest level in a decade.
Investors are now coming back to earth - and bringing market valuations
"Now we are nearing the inauguration, how much of this can really get
done?" BMO Private Bank's chief investment officer, Jack Ablin, said. He
estimated the S&P 500 <.SPX> is about 20 percent over-valued.
Valuations for equities and the dollar now appear stretched, and some
investors have scaled back their bullish bets. In turn, they have piled
back into bonds and gold as they reassess how many of Trump's perceived
pro-growth policies would likely be enacted.
“We made modifications to our portfolios based on potential changes to
the fundamentals from Trump policies by analyzing their near- and
long-term impact on growth and inflation," said Amit Chopra, portfolio
manager at Western Asset Management Co in Pasadena, California, with
$444.5 billion under management.
Chopra said his firm saw value in Treasuries following a selloff that
knocked nearly $2 trillion in bond market value across the globe. "Our
clients are fairly neutral now," he said.
PERHAPS IT'S ONLY A PAUSE
Not everyone thinks the bull market is over.
Investors who made "Trumpflation" trades - a term coined by traders for
market bets that would benefit from both faster economic growth and
inflation - are sticking with them in the belief that even a modicum of
fiscal change by Trump would benefit their bets.
"It's more of a pause than a big reversal in the reflation trade," said
Ed Campbell, portfolio manager at QMA, a $116 billion multi-asset
manager wholly-owned by Prudential Financial, in Newark, New Jersey.
[to top of second column]
U.S. President-elect Donald Trump delivers remarks at a luncheon
with his cabinet members and congressional leaders at Trump
International Hotel in Washington, U.S. January 19, 2017.
Speculators including hedge funds built record net short positions in Treasury
bond and interest rates futures last week, signaling their confidence that
inflation will rise and the Federal Reserve will raise rates further to keep the
economy in check, according to data from the Commodity Futures Trading
massive bet against bonds suggests that "rising U.S. bond yields remains among
hedge funds' major convictions," Societe Generale analysts wrote in a note this
WAIT FOR DETAILS
Still, the Dow's <.DJI> struggle to advance above the historic 20,000 milestone
and the dollar's pullback, some analysts say, reflect frustration among
investors over the lack of details on tax reform, infrastructure spending and
deregulations from Trump.
"The market has priced in a lot of good news. Now there are increasing concerns
that Trump can't pass his entire agenda," said Paresh Upadhyaya, director of
currency strategy at Pioneer Investments in Boston.
Instead of forging his economic message into a legislative agenda, Trump has
fired off comments on a scattershot of subjects that at times have contradicted
his own policy goals and confused investors.
The latest example was Trump's critical comment about a strong dollar "killing
us" in a Wall Street Journal interview last weekend. It walloped the dollar
index <.DXY> to a six-week low on Tuesday, when markets reopened after a long
"There's a little less confidence that if you try to change everything that
anything specific will change," said Rick Meckler, president of LibertyView
Capital Management in Jersey City, New Jersey.
Until clarity from the incoming administration emerges, investors are taking
some chips off the table as they see some choppy times ahead.
"I think volatility will rise. I think this is a lull before his ability to
actually take actions," Meckler said.
(Additional reporting by Chuck Mikolajczak, Sinead Carew in New York, Jamie
McGeever in London; Editing by Dan Burns and Leslie Adler)
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