LONDON On the face of it, the first quarter of the year followed the 'risk on' script.
U.S. stocks surged to new highs, the Federal Reserve raised interest rates, high yield debt rallied yet again and Wall Street volatility slumped to its lowest in a decade.
But that masks a palpable deterioration in sentiment and sharp market turnaround in recent weeks, so much so that the best two performing asset classes in the quarter, according to a Reuters checklist, were at the opposing ends of the risk spectrum - emerging market equities and gold.
The first half of Q1 continued from where Q4 last year left off. Investors piled into riskier, high-yielding assets at the expense of safe-haven bonds on the view that Donald Trump's election victory would propel U.S. growth and markets higher.
But that optimism has evaporated. The dollar slid from a 14-year high in January to a four-month low on Monday, safe-haven gold had its best quarter in a year and oil fell 12 percent, its worst quarter since the end of 2015.
The turnaround is encapsulated in the performance of U.S. financial stocks. They soared 30 percent in Q4, much of that following the U.S. election on Nov. 8 in the hope that new president Donald Trump would slash taxes and bank regulation.
The steepening yield curve - a widening gap between longer term and shorter term yields - helped boost them too. But the curve has since flattened on growing doubts about the Federal Reserve's ability to embark on a sustained path of rate hikes. U.S. financials are ending the quarter flat.
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World FX rates in 2017 tmsnrt.rs/2egbfVh
EM stocks in 2017 tmsnrt.rs/2hn5N02
EM currencies in 2017 tmsnrt.rs/2hniYya
What's more, asset correlations have started to break down, most notably in the dollar's inverse relationship with commodities. Normally, a rising dollar means lower commodity prices, and vice versa. But both have fallen in recent weeks.
Analysts are now wondering if the "Trumpflation" trade has come to a premature end. U.S. stocks are the most overvalued in 17 years, according to Bank of America Merrill Lynch fund manager survey.
Or is this just a pause before the next leg higher?
"Perceived delays to U.S. tax reform and fiscal stimulus have led to underperformance of 'Trump' trades and have generated a short-term top in yields and equity prices," Citi strategists and economists said in a note to clients on Monday.
"We can see this extending .. (but) we doubt this is an end of cycle moment, since monetary policy remains supportive. Hence we would be inclined to buy a dip in risk assets and sell a further rally in fixed income if this transpires," they added.
Mirroring what appears to be the broad consensus, Citi remains overweight in equities and cash, underweight in government bonds and neutral in credit and commodities.
(Reporting by Jamie McGeever; Graphics by Vikram Subhedar and London markets team; Editing by Tom Heneghan)