donald trump <u+2019>s u.s. election victory has shattered assumptions in global markets. the potential change from monetary to fiscal stimulus and from free trade to reversing globalization upends nearly every belief held by investors. in reaction, investors are betting the result is a jump in inflation. the biggest change though may be a return of divergence in global economic growth and the policies that drive it. bond markets were already providing a window into these shifts . but mr. trump<u+2019>s move to the white house make them impossible to ignore. steeper yield curves<u+2014>the gap between u.s. two and 10-year yields has vaulted to its widest since january<u+2014>and higher yields are likely here to stay. for the first half of this year, global economic policy was surprisingly consistent . interest rates in developed markets were stuck at or near zero because any time there was an expectation of tightening, currencies rose, pushing down inflation expectations. fiscal policy was being talked about, but few believed much would really happen. in markets, global yields converged<u+2014>particularly on a currency-hedged basis, where u.s. 10-year yields adjusted for the cost of hedging into euros and yen fell to zero. that has reversed, notes j.p. morgan asset management. in the u.s., the shift reflects big expectations for potentially higher growth and higher inflation. that puts the expected u.s. policy mix at one end of the spectrum: looser fiscal policy and potentially tighter monetary policy if inflation picks up. in the u.k., the shift is all about inflation for now thanks to the collapse in the pound as uncertainty persists about what brexit will do to underlying growth. it isn<u+2019>t clear that the u.k. has the political or fiscal space to open the fiscal taps. that means u.k. monetary policy stays loose for now, but may not get looser. in the eurozone, the rise in yields is mostly due to rising rates overseas, and threatens still fragile growth. a key worry is the widening in yield spreads against germany for countries like italy and portugal. the need for fiscal policy to pick up the slack from increasingly ineffective monetary policy has been talked about forever, but the currency bloc<u+2019>s rules make a big switch hard to contemplate. japan, meanwhile, is at the other end of the spectrum. the bank of japan <u+2019>s shift to targeting the yield curve means the country could get loose monetary and fiscal policy in concert. a good deal of policy uncertainty lies ahead: markets may be overreacting now. but that still argues for higher yields to reflect rising risks after a period where global central banks were all singing the same market-friendly melody and governments were more passive. it is time to throw out old assumptions. write to richard barley at richard.barley@wsj.com
global markets: talking <u+2018>bout a fiscal revolution - wsj
richard barley