NEW DELHI: There are significant concerns emanating from global markets, largely on account of uncertainty around the quantum of rate hike by the US Federal Reserve and its timing amid a slowdown in global growth, which triggered large selloff in most emerging market funds. Most of the global emerging market funds (GEMs) have large exposure to the Indian market, and whenever the US Fed decides to hike rate, the pressure might intensify, which would provide investors better entry points, say experts.
It has been another choppy, illiquid, volatile overnight session, which started with weakness out of China, whose Shanghai Composite dropped 20% into another bear market in early trading, then further slammed by news of a terrorist attack in Jakarta, only to rebound back over 3000 as the Chinese National Team decided to intrevene again, this time in the ChiNext small cap index, pushing it higher by 5.6%.
Over the weekend, New River CIO Eric Peters had a simple and concise summary for events over the past year: "Pretty much everything that happened in 2016 can be explained by two things; China and oil prices,” he said. “Literally, that’s it."
Today, thanks to a research report from UBS titled "Where is the epicentre of the reflation trade?", we have confirmation that Peters was spot on.
“Trump trades” have run out of steam lately, amid growing market skepticism about the likelihood of significant near-term U.S. tax reform and infrastructure spending. Yet we believe the bigger-picture reflation trade has room to run. This week’s chart helps explain why.
Despite today's surge in global equities, which may be as much driven by the France relief rally as the unwind of recent hedges, the latest attempt to reignite the reflation rally is fading as US Treasury yields have given up on much of the overnight move, following two weaker than expected "soft data" reports, the CFNAI and Dallas Fed, released earlier today.
Having recently observed that markets are rapidly "losing the reflation impulse", in his note today RBC's Charlie McElligott comments on today's precarious attempt by traders, or perhaps just algos, to spur another push at risk recovery.
As noted this morning, there are three drivers to today's action: i) last week's Trump promise of "phenomenal" tax cuts, ii) tomorrow's Janet Yellen testimony before Congress in which she is expected to sound hawkish, and iii) the overnight end of China's reverse repo drought which injected CNY100 billion in liquidity in the banking system after a 6 week pause.
As RBC's head of cross asset strategy remarked yesterday, a key validation of whether the reflation trade may be coming back, was the market's response to today's 5-Year TIPS auction, which priced at 1pm.
With an otherwise stellar Q1 ending with a whimper, traders expected that Monday would bring a return if not the "animal spirits", then at least the Reflation trade. That, however did not happen, for various reasons as profiled earlier by RBC, among which:
One week after RBC's Charlie McElligott pointed out that the "someone is going to get hurt badly" in the upcoming clash between leveraged and real money investors in 5Y bonds, whose divergent opinions on the future of interest rates, and thus inflation, has reached record levels...