Reflation remains in play

Reflation remains in play

Equities 5 minutes to read

Summary:  We recap drivers of todays trading session, Yellens testimony and the stimulus focus of the incoming administration and touch upon our preferred overweight Asia.


The ongoing reflation trade fuelled ahead of Yellen’s testimony has set the tone for the week’s trading activity – Commodities pushing higher alongside Asian equities and a weaker USD. All-time highs for US indices, the small cap Russell 200, S&P 500 and the NASDAQ. The NASDAQ soaring as Netflix delivered a beat on subscriber growth - 8.5mn in the final quarter of 2020, well ahead of expectations. Lockdowns across Europe likely helping alongside several big hits in the content library boosting performance.

US equities pushed higher as President Joe Biden was sworn in, anticipation of more stimulus, more spending, more borrowing with the incoming Yellen, Powell tag team. Along with a dose of dealer gamma perpetuating the virtuous feedback loop higher as market makers a forced to buy equities.

Focus Inequality - The US dollar remaining under pressure following confirmation of the Yellen Treasury MMT-lite shift. A long awaited realisation that monetary policy cannot fix the structural issues weighing on potential growth in many developed economies. In fact, it exacerbates one of the most precipitous issues – ever-growing wealth concentration and a deeply polarising, uneven recovery from the COVID-19 crisis. This is in many ways, the evolution of central banking, the former Fed Chair at the helm of Treasury – a big step toward fiscal primacy and the merging of the two functions.

Yellen has been spruiking the “living wage” argument, pointing to the K-shaped economy and has her sights firmly set on the labour market. A fiscal push aimed at maintaining income/demand in a more evenly distributed fashion and expanding the social safety net - More money straight to the pockets of those with the highest propensity to consume. This regime shift for fiscal, combined with supply side pressures, will be a perfect storm for higher inflation.

These policy shifts, continuing to support our expectation of a weaker USD and positive views on emerging markets, commodities and higher inflation and higher long dated yields, yields globally have likely seen their lows. For now, the Fed seem happy to let longer dated yields climb (likely until this becomes a pain point for asset markets).

As we wrote back in November, this set up is favourable for non-US markets, Asia in particular a beneficiary of the ongoing rotation and shift in market leadership accompanying these policy changes afoot – we flagged South Korea, Japan, China, Taiwan as opportunities within the broad Asia region in. Asian outperformance has been driven by an increased delta to the vaccine rollout and recovery story, which is where investors have focussed since the back end of 2020. Asia also benefitting from better virus handling, the engine of China’s reflationary regime with broad scale infrastructure and construction stimulus, and continued dollar weakness, supporting flows into higher beta emerging markets. This is still the case, although following the bout of outperformance we would not be surprised to see a corrective move in the near term – a good place to re-establish longs.

Another flag in November, was the trifecta of support measures in place for Australian stocks to break higher. The resource heavy nature of the index and heavy weighting toward financials should continue to support performance throughout 1Q21. As we transition toward an inflationary regime, with a synchronised global growth reacceleration, coupled with unprecedented liquidity injections against the backdrop of extraordinary fiscal stimulus, we continue to see a shift in market leadership toward cyclical sectors and geographies, real economy stocks, non-US markets and commodities. Also flagged in November - (industrials, materials, miners, travel and leisure, energy etc., emerging markets - favoured EWZ, EWW, THD, small caps - IWM). Therefore, the more cyclically orientated nature of the ASX 200 should support index performance as the reflation rotation continues.

Disclaimer

The Saxo 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 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 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 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 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 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/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
Most of our staff in Singapore are working from home to help limit the spread of the coronavirus. We remain at your service on the details below. Thank you for your understanding.

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.