Reflationary trade seems to have taken off

The markets took a different turn ever since the so-called ‘Pfizer Monday' on the 9 th of November. The markets got new hope at the back of announcement about successful trial 3 results from Pfizer, followed by AstraZeneca, and Moderna at a later stage. Investors started betting on sectors and asset classes that benefit from re-opening of the economy. The winners have had a few additional catalysts since, in particular Georgia Runoff on 5 January, where Democrats took the final 2 Senate seats, leading the way for the ‘Blue Wave', which comes with additional fiscal stimulus. The Federal Reserve Bank of the U.S. has committed keeping interest rates ultra-low for another 3 years, whilst still purchasing US$ 120 trillion worth of assets on a monthly basis. The Fed's balance sheet is now 33% of GDP, while central government debt to GDP stands near 128%.

USOIL had been trading sideways since early June, being range-bound between US$ 36.0- 43.0. At the end of November, the price broke the resistance and has been supported by 8- day Moving Average since to US$ 51.0 levels, trading in a tight channel. Moving Averages support short- and long-term bullish momentum on the daily chart. ADX of 40.2 indicates the trend is moderate, while DMI+ of 29.5 and DMI- of 6.6 confirm the bullish momentum. Oil price is also supported by the announcement from the Saudis about production being cut by 1 million barrels a day and China's rapid industrial recovery. Oil would also benefit from re-opening of the economies with increased demand in various sectors.

UST 10-year yield broke 1.0% level on 5 March 2020 and except for a brief gain at the back of U.S. credit markets freezing mid-March, it remained below 93 bps. The price was carried by bullish short-term momentum since October, until consolidation in December. On January 6 this year, on the day when Georgia Runoffs tilted towards Democrats, the yield broke above 1.0% level continuing to climb higher. The investors are betting on incremental fiscal stimulus from the Federal government which may give a boost to inflation and hence push bond yields up. ADX is currently 29.6, signaling a moderate strength in bullish trend. DMI+ is currently 34.4 and DMI- is 8.6, confirming the bullish trend.

KRE, representing U.S. regional banks, crashed in March, losing around 37% of value, as investors feared about non-performing loans on banks' balance sheets, as well as a flattening of the yield curve. Restrictions on economic activity and movement of people plunged expectations about future economic growth, as well as inflation - 10-year breakeven inflation rate dropping to 0.73%, which was last seen in January 2009. Also, Federal Reserve Bank of the U.S. cut the Fed Fund rate to 0% back in March, decompressing the net interest income for deposit taking banks. On 9 November price jumped, breaking upper Bollinger Band resistance, to US$ 45.7, and has been carried by bullish momentum since. The price has found support near 8-period Moving Average, indicating a strong short- term momentum. On the day after Georgia Runoff KRE jumped 8% and is now trading near US$ 57.0 levels.

Gold was one of the best performing assets in 2020, gaining 25%. The bullish trend during the first 9 months of the year, was supported by momentum indicators. After losing 12% of its value in March and dropping to 1,473.75 levels, the price recovered fast and was trading near 2,075.52 in August. The price retreated to 1,900 levels, until November the 9 th , when investors rushed for risk assets and gold lost 4.6% in one day. Subsequently price fell briefly to 1,775.50 level, breaking 200-day Moving Average support. On the 6 January Runoffs outcome pushed gold briefly to 1,950.00 levels but the price has bottomed near 1,845.88, testing once again 200-day Moving Average support level near 1,836.87. Gold has been inversely affected by strengthening of US dollar by 86 basis points to US$ 90.1, and also investors' appetite for risky assets.

Investors are betting on the reflation trade as reflected currently in the asset markets. Technicals seem to signal the continuation of the current momentum, supported somewhat by fundamentals. Whether the secular trends of aging demographics, technology driven deflationary forces, and a massive global debt overhang change the inflation expectations is yet to seen.