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'Good Trump' takes Dow to new high, but market still watch out for 'bad Trump'

The sharp jump in U .S. interest rates since Donald Trump's White House victory is sending a shudder through emerging markets, whipsawing currencies and separating the winners from losers in the U.S. stock market.

The 10-year U.S. Treasury yield went to as high as 2.14 percent Thursday from about 1.80 pre-election, on the idea the Trump era would mean lower taxes and usher in a large infrastructure program that could generate growth but also create inflation and more debt.

The U.S. stock market rallied Thursday, with rising industrials, transports, and banks stocks driving a surge in the Dow, which rose 218 points to 18,807, a new high. But tech names took big hits and sent the Nasdaq down 0.8 percent to 5208. The small cap Russell 2000 was up more than 1.5 percent Thursday and was on track for its best week in five years.

The S&P 500 rose 4 to 2167, after vacillating between positive and negative, but it continues to benefit from the idea that Trump and the newly elected Republican Congress will spend on infrastructure, remove some regulations and replace the Affordable Care Act. Tech stocks, however, have not joined the party as investors rotate away from some of their previous winners.

"We've heard the good stuff so far, but you have to wait for the other shoe to drop. A lot more was said on the campaign trail than has become elucidated," said Art Hogan, chief market analyst at Wunderlich Securities.


Rates around the world followed the U.S. lead higher, with German 10-year bunds, negative not too long ago, now yielding 0.27 percent. The emerging world, however was a blood bath, with yields jumping 0.5 percent or more., and stocks selling off from Sao Paulo to Mexico City.

While Trump has pressed his plans for infrastructure spending, he has not revealed in the days since his election any clarity on his trade views. Fears that he would ditch trade agreements and embark on a protectionist policies made him an unfavorable presidential option to most of Wall Street. He made conciliatory comments in his acceptance speech to the international community, but stressed he would put America first.

But the stock market has put concerns about trade aside, while the 'Trump trade' drives a slew of sectors higher, including defense and drugs.

The Biotech SPDR S&P Biotech ETF XBI was up nearly 20 percent week-to-date, for its best week ever. Democrat Hillary Clinton had said she would go after unfair drug pricing if she were elected, casting a pall over the group for more than a year. Biotech names are surging in a relief rally, and also with drug stocks, since Trump has promised to get rid of the Affordable Care Act.

Financials led Thursday's gains and are benefiting from the idea that rates will move higher and some regulations will go away.

At the same time, high-yielding stocks like telecom and utilities moved lower, while the highest flying tech names have been beaten down. IBM, meanwhile surged as it is one stock that could benefit from repatriation of foreign profits, when Trump enacts his promised one-time tax holiday. That would benefit other big tech stocks, yet they continue to move lower.

"It's hard to make sense out of the technology space," said Hogan. "To the extent you look at this and say. if you're going to take profits in technology stocks, IBM is not one of them. But Microsoft has had a great run, and Facebook, Amazon, Netflix, Google (Alphabet)."

Analysts say with the move up in rates, companies may begin to feel less interested in issuing debt to buy back stock.

"These are expensive stocks that don't like higher interest rates. These have been the leaders and the leaders are getting whacked…the FANG (Facebook, Amazon.com, Netflix, Alphabet) are expensive stocks that don't like higher interest rates because higher interest rates expose things that are overvalued," said Peter Boockvar, chief market analyst at Lindsey Group.

There was speculation that some stocks, like Amazon.com, were suffering from the anti-Trump positions of their CEOs. On Thursday, Amazon's Jeff Bezos tweeted his congratulations to Trump even though they had engaged in disagreements via Twitter in the past.

In the currency market Thursday, the U.S. dollar was higher against the safe haven yen and Swiss franc but sharply higher against emerging markets currencies. The dollar index rose to 98.80, up 0.3 percent and now just barely positive year to date. The greenback was 4 percent higher against the Brazil real and South African rand, and another 3 percent against the Mexican peso, after an 8 percent move Wednesday.

"It's mostly (U.S.) yields and nervousness about the unknown. When U.S. yields go up, emerging market's get hit, largely because they have dollar denominated debt," said Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman.

Markets had feared Trump's caustic and bombastic behavior during the presidential election would make him an unpredictable, but he appeared gracious in a meeting with President Obama, where he praised the president and said he would look to him for counsel.

"I think part of the better feelings in the markets has been that - we have a more moderate Trump. He was surprisingly gracious in his acceptance speech, he was surprisingly gracious in his meeting with Obama. That calms the nerves. But remember candidate Trump is separate from President Trump. He can be different people," said Hogan.

Hogan said Trump's talk about building a wall on the Mexican border and going after China for trade could be negatives for the market if he brings back those views. "He had to say things to get elected that he's going to realize he can't accomplish. All of that could come home to roost at some point and that will be less market friendly," he said.

That has made any glimpse at his cabinet all the more important. The dollar edged slightly higher as CNBC reported that Trump was considering JP Morgan Chase CEO Jamie Dimon for Treasury Secretary, among other candidates. Dimon, who is highly regarded on Wall Street, has said in the past that he would not be interested in that position.

"I think he's going to be so thoughtful in his choices. Obama's transition was very thoughtful and I think it was taken very positively by the market," said David Albrycht, president and CIO of Newfleet Asset Management.

Albrycht said the Trump trade in interest rates is affecting things like high yield municipal bonds, which have been outperforming over the last three years. "Obviously they're impacted by higher rates. The Mexican peso has felt the brunt of the impact. The long duration sovereigns are feeling the brunt of the steepening U.S. yield curve," he said.

The range on the 10-year yield had been 1.5 to 2 percent before the election, he said. "Now we're at 2.10 on the 10-year, and you could easily get to 2.5," he said. "At what point, do Treasurys become negative for the market? I think it's a 3 percent 10-year." He said that would drive mortgages toward 5 percent and slow housing.

"You should be shorting hospitals, long duration (bonds) and the Mexican peso," he said. He said he does not expect as much movement in the short end of the curve, even with the Fed raising rates. The 2-year has held steady just under 0.90 percent, after an initial jump, while the 30-year was at 2.90 and is expected to move above 3 percent.

Stocks like Caterpillar and Fluor continued a two day rally in infrastructure plays, while defense companies, like Lockheed Martin and General Dynamics, also rose. Banks and brokers bounced, with JP Morgan and Goldman Sachs both up about 5 percent.