Recent sell off more about positioning than fundamentals

There have been plenty of discussions about the recent sell off in bond markets, what sparked it and what it means. Some think it is a reflation trade while others worry about stagflation. I think reflation is believable given the rise in oil prices from depressed levels and the fact the inflation has turned positive in some key economies recently. However, stagflation is quite wide of the mark from my perspective. I think the recent sell off in bond and equity markets was more about positioning than fundamentals. Many investors were long US dollar, US bonds (on a disinflation trade) and US equities and were caught when expectations abruptly changed. The soft US economy at present is likely to continue to pressure the remaining US dollar longs in the near-term as a US Fed rate hike before September remains a low probability event. I maintain my view that the US soft patch will pass, but that the US economy is not as strong as what the market thinks with growth likely to be in the high 2%’s in 2015.