Stocks and the dollar leapt higher Thursday while bonds remained under pressure as investors bet that a Donald Trump presidency could mean more fiscal stimulus, lower corporate taxes and higher inflation.
The Dow Jones Industrial Average gained 129 points, or 0.7%, to 18719 shortly after the opening bell. The blue-chip index ended Wednesday 0.2% below its record close hit in August. The S&P 500 added 0.6%, and the Nasdaq Composite rose 0.6%.
Investors around the world followed Wall Street's lead Thursday, with markets in Europe climbing about 0.4% after shares in Japan rebounded more than 6%.
Asian and European government bond yields hovered around six-month highs, while the yield on the 10-year U.S. Treasury note rose to as high as 2.118% from 2.070% on Wednesday, when it climbed above 2% for the first time in nine months. Yields move inversely to prices.
"There is a lot of sorting out going on right now," said Tom Manning , chief executive at F.L. Putnam Investment Management . "Markets were clearly caught offside."
U.S. stock futures and government bond yields initially dropped sharply as markets digested the unexpected outcome of the U.S. presidential race, before staging a swift reversal and ending the day higher.
Financial, pharmaceutical, defense and engineering companies led the rally on expectations they would perform best under the new U.S. government with decreased regulation and more government spending, while utilities and consumer staples, considered bond proxies, sold off in both Europe and the U.S.
It was a surprising turnaround for many investors as the market had sold off risk assets in the run-up to the election as Mr. Trump appeared to fare better in the polls, citing concerns about his potential trade policies.
"Everybody is saying this is one of the great seismic events in U.S. political history, but that's certainly not how the stock market is seeing it," said Guy Monson , chief investment officer at Sarasin & Partners .
Investors' caution in the lead-up to the election underscored the relatively modest reaction in global equity markets, he said. Unlike the market fallout from the surprise outcome in the U.K. referendum, global investors were much better hedged for either outcome in the presidential race, declining to take a strong bet on the polls.
Mr. Monson has been adding to his holdings of U.S. banks, expecting them to benefit from decreased regulatory uncertainty and a steeper yield curve under the new administration.
"Banks are the last thing left on planet Earth that you can buy where you're absolutely sure profits will go up when interest rates go up," he said.
In Europe on Thursday, shares of UBS Group gained 9.8%, while Credit Suisse added 7.8% as the broader European bank sector headed toward its highest close since March.
Banks, insurance companies and miners led gains in Europe , while utilities companies suffered.
Meanwhile, gold and iron ore prices climbed, supporting the basic resources sector, as LME copper surged nearly 4% to $5,634 a ton. Copper and iron ore both touched their highest levels this year, boosted by bets on a rise in infrastructure spending and continued optimism over Chinese demand.
Rising commodity prices buoyed shares of Antofagasta , which was up as much as 21%, while Glencore rose 5.5%.
The moves followed steep gains in Asian markets, which had closed Wednesday with losses before a sudden reversal in risk sentiment across the globe.
Stocks in Shanghai added 1.4%, Hong Kong markets added 1.9%, and Australian shares rallied 3.3%.Japan's Nikkei Stock Average climbed 6.7% on Thursday in its best day since February, as the market more than reversed an initial selloff following the surprise outcome of the U.S. presidential race.
Investors bought local infrastructure companies and electronic-parts makers in Japan on hopes for more infrastructure spending in the U.S., while a softer yen helped exporters recover from a brutal session on Wednesday.
The yen had initially risen sharply against the dollar as the votes pointed toward a victory for Mr. Trump, but the dollar more than reversed all its losses against the yen after Asian markets closed.
The dollar was last up 1% against the yen at Yen106.7510 and up 0.3% against the euro. The broader WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, gained 0.4% after its best day since the U.K. referendum in June.
The Mexican peso fell further, shedding 1.7% against the dollar.
"At this point, investors are basically still flying blind," said Abi Oladimeji , chief strategist at Thomas Miller Investment in London . "The reality is we don't know what a Trump presidency will look like in terms of the policies that are actually carried forward."
At the minute, investors are focused on the shorter- term positives such as the boost to nominal growth from infrastructure spending, while overlooking the risks of a more protectionist stance on global trade, he said.
In government bond markets, investors were betting that expansive fiscal spending and tax cuts under a Donald Trump administration would mean higher bond yields after years of low real growth and low inflation across Europe , North America and Japan .
Many said they believe that the plan would expand budget deficits and likely add to upward pressure on bond yields, as investors demand more compensation for lending to a country with greater borrowing needs.
The 10-year German yield climbed to 0.316% Thursday from 0.179% in the previous session. Other European countries posted steep declines, amid concerns that the Trump victory would bolster populist movements across the Continent. Italian bond yields climbed to as high as 1.891% Thursday while French yields climbed sharply to 0.711%
