Bonds moving on reflation while Equities moving on hope

Local market had a solid positive day on global reflation trade driving investors out of bonds and into equities. The reflation trade got a rocket after surprise win by Democrats to get control of all three layers of US government for the next few years till mid-term elections roll over. Miners and Energy stocks are outperforming on reflation upside to commodities while Banks are doing well on the rising bond yields. The high growth high multiple sectors like Tech and Health Care are seeing selling pressure due to rising bond yields. We see this reflation trade further supporting the growth to value rotation. Macro trade boosted equity markets while lockdown risk is raising economic downgrades on a global basis. Bond markets are pricing in risk and Equity markets are pricing in hope. Historical high equity multiples and rising bond yields can’t co-exist in a fading global economy taking hits from new waves of pandemic. Get ready for more money printing and currency debasement from US!

The Georgia senate runoff elections have been called for Democrats and that givens them control of all three layers of government. The pro Trump rally was always expected to get out of control but this time it ended with 4 deaths and 14 officers injured. The president carries all the blame for what happened overnight at Capital Hill and Republicans are jumping ship on an hourly basis. The blue wave will raise risk of more regulation, tax, currency devaluation and money printing. Major sectors that are affected are likely Tech, Health Care, Energy and Finance. The bond market agrees and drove bond yields substantially higher. US 30 year bond yield have reached late Feb levels…it’s above inflation…we have real interest rates again…as seen below. The inflation genie is out of the bottle…high multiples are not going to be sustainable now…US Fed is not going to step in…buckle up!

US market last close > US market started negative on senate result before asset allocation move from passive money pushed it mainly positive. Bond yields ran from 0.96% to 1.06% before settling at 1.03%. Equities benefited from the bond money coming it. And then it faded with NASDAQ leading to end the day down 0.6%. Russell up nearly 4% as reflation drives growth to value rotation. USD and Gold were under pressure short term with macro trade. Capital Hill has pro Trump support rioting and breaking in. We have 4 deaths linked to the riots. Reflation is out and proud. High market multiples, low corporate tax rate, weak regulations and growth premium are not going to last in this rotation. US Fed minutes suggest they will let it run and then chase. Expect bond yields to hit 2% by March. Tech is down the most. The big rotation is picking up steam...ignore the cycle at your peril!

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!

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