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Politics Trumps Markets, Equities, Dollar Fall, Bonds, Gold Soar

Posted by Joseph Trevisani on May 17, 2017 7:30:32 PM

In the six months since the U.S. presidential election markets have taken the optimistic view of a Trump administration. Equities have soared to record highs, the Dollar Index added more than 6 percent, Treasury yields jumped to an almost three year top and gold plunged as traders decided that a unified national government under the Republicans would, all things considered, be good for business and the economy.

 That positive belief was tested today as markets reversed sharply in the wake of a series of damaging political leaks that put the Trump administration on the defensive and brought its ability to enact its agenda into serious question.  

The Dow Jones Industrial Average plunged 372.82 points, 1.78 percent  from yesterday's close ending at  20.606.93, its lowest finish since April 21st and its  largest one day loss since the Brexit vote last year. The S&P 500 lost 1.82 percent, 43.64 points closing at 2,357.03.  The Nasdaq shed 182.96 points, 2.57 percent, concluding at 6,011.23.

The dollar lost ground against all of its major competitors falling for the sixth day in row. It closed at 1.1157 versus the euro down three quarters of a figure. The four negative session in a row have cost the dollar 2.7 percent. Against the yen the greenback skidded 231 points opening at 113.11 and finishing at 110.80 for a loss of 2 percent. In the last five session the U.S. currency has given back 3.1 percent versus the yen.

The Dollar index lost 0.61 percent to 97.505.

Treasury prices surged on Wednesday driving the yield on the 10-year down 10 basis points to 2.2243, the 2-year yield down 5 points to 1.2458, in the strongest credit rally since the British vote to leave the European Union last June.  The spread between the 2 and 10 year yields was the flattest at today's close  it has been since before the election. 

Gold charged ahead 2.01 percent gaining $24.80 to 1,261.20, it highest finish since April 28th.

The CBOE Volatility Index jumped 44.04 percent from 10.65 at Tuesday's close to 15.34 today. It was the largest one day gain since the Brexit result and was a conclusive break of the month long complacency that had seen the so-called fear gauge sink to its lowest level in over a decade and second lowest in over 20 years.

The surprise election of Donald Trump to the Presidency last year initiated major market changes. Equities, the dollar and Treasury yields charged higher, gold dropped and market volatility subsided to near record lows.

In the volatile political landscape since the inauguration of President Trump on January 20th and particularly after the revelations of the past two weeks, market responses have been split. The equity and credit market have retained the bulk of their post-election gains, the dollar has surrendered most of its increase, while gold has regained the bulk of its losses.

From its close on November 4th at 17,888.28 the Dow executed an 18.0 percent surge closing at 21,115.55 on January 3rd.  At Wednesday's termination it retained the majority of that gain, remaining 15.2 percent above that early November level.  The S&P 500 Index reached its all-time record high on Monday at 2,402.32, 15.2 percent above its pre-election level. At today’s 2,357.03 finish it is still 12.8 percent above the November low.

The yields on the 10-year and 2-year Treasuries have also retained most of their post-election improvement.

The 10-year commercial credit benchmark finished at 1.7830 percent on November 4th the Friday before the election. To its March 13th high at 2.6070 percent, the yield had added 46.2 percent. At today's close of 2.2260 percent, it retains about half that gain, remaining 24.8 percent above that November close.

The 2-year Treasury bond at today's finish of 1.2459 percent has kept 56.1 percent of its 71.9 percent yield run from 0.7980 on November 4th to 1.3720 percent on March 13th.  

The dollar is a different story. Against the euro and the Dollar Index basket it has lost all of its post-election gains, against the yen, half.  

From the euro’s November 4th finish versus dollar at 1.1135 the united currency went into a swoon for the next two months to close at 1.0404 on January 3rd  a loss of 6.6 percent.  At Wednesday’s finish of 1.1158 the European currency has cut above it pre-election limit. In the last four session the euro has gained 2.7 percent against the dollar.  

Against the yen the dollar had gained 14.6 percent from November 4th to December 15.  It has since given back about half of that improvement to 110.80

Lastly the Dollar Index (DXY). Over the November 4th to January 3rd period it climbed 6.3 percent (97.065-103.21). At Wednesday’s close of 97.575 it is essentially where it was on that pre-election Friday.

Gold likewise has regained most of its post-election range. On November 4th the precious metal closed at $1,303.75.  At the bottom on December 15th it had had fallen to $1,128.34, a 13.4 percent decline. At Wednesday's finish $1,260.50 it is just 3.3 percent below that November level. 

Markets that live by politics, die by politics. The question is which market is right?

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Thomson/Reuters

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