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Weekly Commentary - 13 July 2021

Weekly Market Commentary

 

 

 

The reflation trade reversed further last week with cyclicals underperforming the rally in growth sectors

 

US equities rallied strongly on Friday, bringing the index to a fresh high. Below the surface there has been a significant rotation away from cyclical sectors (banks and energy) into technology names, as the reflation trade continues its reversal. The all-important US 10-year Treasury has moved from its recent lows but is still back at levels last seen in the first quarter of this year.

 

This week sees the US Consumer Price Index (CPI) release and a large Treasury auction which will test the drivers of the recent rally

 

This week will see a smorgasbord of data releases, with the US CPI on Tuesday being the main highlight. Over the last few weeks, despite signs of near-term inflationary pressure, longer-term estimated levels of inflation have plummeted. This week’s inflation number will be an important test of whether some of the sub-components that have led to shorter-term price increases, such as used cars and trucks, are slowing. The current drivers of inflation have been relatively narrow, including items which are coming from a low base last year such as airfares. Investors will be watching closely for signs that inflationary pressures are filtering into other areas, such as rents. What is happening in the sub-indices is arguably more important than the headline data in this month’s release.

In seeking to explain the current rally in Treasuries, investors have pointed either to technical imbalances in the Treasury market or the death of the reflation trade. The technical argument will be tested this week when we finally see a large amount of Treasury supply come on to the market after a dearth of issuance since 24 June. In that interim period, we have seen a large amount of US Federal Reserve bond buying which has undoubtedly helped the drive lower in yields, whether or not the market happily absorbs this week’s $120bn1 will help answer whether the recent rally has been technical or more fundamentally linked to inflation expectations.

 

US earnings season begins this week with markets closely watching management guidance for the rest of the year

 

This week also sees the start of the US Q2 earnings season with, as is tradition, US financials leading the way. This will be another quarter impacted by base effects so we expect earnings increases well above 50% year on year in many sectors. Industrials and Consumer Discretionary, hard hit by the pandemic, are expected to lead the way on a sectoral basis but investors will be closely watching the management forecasts for the rest of the year to determine share price direction.

 

1Bloomberg, 16 December 2020 (https://www.bloomberg.com/news/articles/2020-12-16/fed-to-maintain-bond-buys-until-substantial-economy-gains-seen?sref=CZCP1vND)

 

The Week In Numbers

 

 

 



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