Reflation trade fueled ahead of Yellen testimony

Equities 4 minutes to read
Eleanor Creagh

Australian Market Strategist, Saxo

Summary:  Asian stocks have set a risk on tone for Tuesdays trade. Regional indices are firmly in the green with US futures powering higher ahead of tonights cash session, post US markets holiday closure on Monday.


Asian stocks have set a risk on tone for Tuesday’s trade. Regional indices are firmly in the green with US futures powering higher ahead of tonight’s cash session, post US markets holiday closure on Monday.

The data docket is light but Treasury Secretary nominee Janet Yellen has a Senate confirmation hearing later tonight which traders are looking ahead to for further confirmation of the reflation trade which has so far dominated the tape action of 2021. Yellen is expected to spruik the $1.9trn already on the table to the Senate Finance Committee and urge lawmakers to “act big”. Following a moment of consolidation turnaround Tuesday is in action today, with the reaction to Yellen’s testimony to set the tone for momentum throughout the week. The weaker dollar all-important for the near term outlook of inversely correlated reflation trades.

The dollar has remained on the back foot in today’s trade, anticipating further confirmation of the Yellen Treasury MMT-lite shift – More stimulus, more spending, more borrowing. With Yellen on course to stress the importance of demand side policy in rectifying a K-shaped economy and righting prior policy errors that have exacerbated these structural issues. Again highlighting a shift toward fiscal primacy with a focus on lowering inequality, unemployment and maintaining demand, particularly for the bottom leg of the ”K”. This regime shift for fiscal, combined with supply side pressures, is a perfect storm for higher inflation.

With these shifts in mind, the name of the game in asset markets remains one of reflation.

Container freight costs, ISM price gauges, PMI surveys, food price indices and the recent run in commodity prices all point to price pressures already present on the supply side. Coupled with an aggressive demand bounce back accompanying vaccine rollout, the impact of Covid related supply bottlenecks and green policy agendas, headline inflation will not be hard to achieve - especially against incoming low base effects.

On the demand side, the prospect of a unified government in the US with unimpeded fiscal stimulus puts upward pressure on inflation and long bond yields, whilst the USD is debased and that is fuel for emerging markets, Asia, commodities and bets on higher inflation.

We expect the broad commodity rally seen throughout the last quarter to extend throughout 2021. Huge supply deficits with structural underinvestment, green transformation tailwinds, fiscal primacy and the engines of a weaker dollar plus higher inflation, coincide with a historic underweighting and a multiyear bear market to bring renewed interest in the space and a new bull market that is just getting started.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Due to coronavirus controls, with many of our staff working from home, we are not able to meet with clients in our reception at present, unless by appointment in exceptional circumstances. We remain at your service on the phone and email details below. Thank you for your understanding.

*Please expect very long waiting times on the line when calling us, we advise you to send us an email instead.

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.