Bets on Trump loosening purse strings spark global reflation trades

From construction companies in Spain to copper traders in London's financial district, Donald Trump's victory in the U.S. presidential election is being felt around the world as investors bet on a lasting rise in global inflation.

If Trump delivers on his pledge to give the U.S. economy a growth and inflationary shot in the arm from a multi-trillion-dollar package of tax cuts and infrastructure spending, the impact will likely be felt far beyond American borders.

Analysts at M&G Investments this week went as far to ponder whether his election victory had triggered "the end of global austerity".

Inflation has slumped to historic lows since the financial crisis, and much of the developed world has been battling deflation. A significant rise in inflation, or reflation - if it comes - would mark a sea change for markets.

The U.S. economy is the world's largest, so inflationary moves there will be felt elsewhere. Investors are also betting that American fiscal stimulus will be replicated to varying degrees in Europe and Asia, thereby magnifying the effect.

They are now trying to pick out the biggest winners from rising prices, across geographical regions, asset classes and industries.

Much of their focus is centering on government bonds, base metals like copper and steel, and companies related to resources and construction - areas most sensitive to sharp moves in inflation and infrastructure spending.

"At its core Mr Trump's offering is reflation," Nomura's asset allocation and foreign exchange strategy teams said on Thursday, adding that rising prices and market interest rates in the United States needed to be accompanied by a rise in real economic growth.

"That price discovery process on domestic reflation will take a long time to determine," they said.

In the meantime though, they recommend buying the dollar against the euro, Japanese yen and Canadian dollar because the anticipated inflationary impulse could force the U.S. Federal Reserve to raise interest rates next year faster than currently expected.

DOLLAR, BONDS

Nomura expects the dollar to rise to 110 yen within three months from 106.75 currently, to climb to C$1.40 from $1.34 and the euro to fall to $1.05 from $1.09 .

A similar view is held by Michael Hasenstab, chief investment officer of the Templeton Global Macro fund who made his name with bets on Irish and Hungarian bonds among others.

"We continue to expect rising inflation in the United States, rising U.S. Treasury yields, depreciations of the Japanese yen and euro, and currency appreciations across a select set of emerging markets," he said.

U.S. inflation expectations as measured by five-year inflation swap contracts jumped in the wake of Trump's victory to 2.38 percent on Wednesday - the highest level since July last year - from 2.24 percent the day before.

Long-dated Treasury yields have leapt too in anticipation that tighter monetary policy will be needed to cool these inflationary pressures, with the 10 and 30-year yields hitting their highest levels since January .

The rise in the 30-year yield, in particular, has been remarkable. It is up more than 30 basis points this week, on course for its biggest weekly rise since 2009 and among the biggest of the last three decades.

This has led to a so-called "steepening" of the yield curve, where the gap between short and longer-dated yields widens. Flattening curves often indicate a weaker outlook for growth and inflation, while steeper curves suggest the opposite.

The seismic moves aren't exclusive to the U.S. bond and inflation markets. Bonds across the developed world have been on a near-uninterrupted bull run for 35 years, and some analysts say this year is the turning point.

Euro zone inflation expectations as measured by five-year inflation swap rates posted their biggest rise since August last year on Thursday, and the 30-year German yield surged almost 20 basis points. .

CONSTRUCTION, METALS

These shifts across global interest rate markets in response to the changing inflation outlook are being mirrored in commodity and equity markets too.

Bank of America Merrill Lynch on Thursday reiterated its "overweight" position on the European basic resources and oil sectors, areas where investors are still "underweight".

Copper surged more than 5 percent to a 16-month high of $5,714 a ton on Thursday . Nickel also hit its highest since July 2015 and zinc rose to a 5-1/2 year peak .

This is already filtering into related sectors and companies across global equity markets. Shares in the world's largest steelmaker ArcelorMital rose more than 10 percent on Thursday.

The steel sector is poised to continue in the same vein, says Barclays, especially if China responds to Trump's U.S.-focused largesse with a fiscal stimulus of its own to lift its domestic economy.

"The outcome of the U.S. elections is a positive surprise for steel equities. Mr. Trump aims to boost infrastructure spending and tighten trade protection, further supporting the local steel sector," Barclays added.

Europe's constructions and materials index hit a nine-year high on Thursday .

Shares in Spanish construction conglomerate ACS , which does business around the world, rose more than 5 percent on Wednesday, the biggest rise since February. They are up 10 percent so far this week.

Irish construction firm CRH , which derives half of its revenues from the United States, hit a nine-year high on Thursday, at 34.40 euros. That was within a whisker of its all-time peak of 34.56 euros.

(Additional reporting by Alistair Smout; Editing by Pravin Char)