By Stephen Innes, Chief Global Market Strategist at Axi,
Inflation expectation changes continue to drive market airtime and asset allocations.
With that has come increased volatility – less at the index level but noticeable at the sectoral and single stock level. The day/day sectoral dispersions were very evident last week and the equity reaction to negligible yield moves at times was disproportionate, which shows equity investors grappling and jostling with positioning.
The real yield moves have been limited compared to the Taper Tantrum in 2013, so perhaps there is more to come.
Despite the “worries” last week, the market was firmly up, and Futures shorts proved to be an imperfect hedge and consternation for many. Last week saw a considerable amount of debate on the market strength suggesting as much.
It’s been more a choppy and messy rotation at the index level than the start of broad correction – breadth has improved despite Tech weakness, and therefore hedging sectors is likely the way forward near term. Credit remains firm amid some aggressive reopening led moves – Boeing was up 20% last week
For the past two months, the smart money was clearly towards long Value, as investors grew worried about the rate of change in inflation and taxation expectations post January runoffs, which remains the playbook, suggesting as things stand, at least over the near-term sector dips should be bought.
Central banks – the US Federal Reserve and the Reserve Bank of Australia – in particular, continue to emphasize that inflation expectations are transitory and manageable.
Not only is the market testing this narrative (which CBs could start to waver on), but the underlying drivers and data will begin to show otherwise.
Thus far, while we’ve seen rotation, the aggregate market remains calm despite the weighting towards growth so heavy – possibly on rotation from bonds to equities, but also with the view that there is no reason to panic until the central banks blink and the balance sheets top out.
Watch this space like hawks. If we are realistic, we know that even the slightest hint of any rate rise expectations moving forward would see equities move significantly lower.
So increasingly, the central banks could then become more market dependent rather than data-dependent in their views.
