The reflation trade seems to be over although there is still some hope. The FOMC meeting seems to have been the catalyst to confirm the end, but that reversal was brewing for quite some time. We had excess speculation, we had people truly believe this wasn't transitory... and we might get some persistent inflation due to supply constraints, but this isn't due to demand being high. Bitcoin & Crypto reversed months ago and that was the first sign of weakness. Bonds have bottomed for quite some time and Inflation expectations have also started rolling over. They seemed to have been in the same cyclical pattern as they were in 2008-2010 and nothing more than that. Of course this could continue for another year mainly due to oil going higher, as I am still bullish on it given the supply constraints and how good the chart looks like. Oil alone going higher doesn't mean we have true reflation, but some demand coming back and not enough supply which might take 1-2 years to get back. 63-67 Seems strong support for oil.
Bonds have had a very clear reversal and a very clear bottom and now they have formed a mini uptrend. I don't believe yields will fully crash or that we are going below zero soon, but I also don't believe they will go way lower soon. Usually when we get such a top like the one we go in March 2020 things don't come back super strong (look at UB & TLT), especially as we are closer to the 0 bound. Currently this looks like another typical correction for bonds... so if they keep going higher the hopes for inflation get crushed. And that's normal because the world is drowning in debt and soon people will have to start paying back their debts as things are re-opening. However the problem is that the economies are not in a good shape and the covid shock isn't one that can be ignored. The damage has been huge.
Bonds & USD going higher isn't a good sign, especially as the USD seems to be breaking out. It has now closed above the 200 DMA for the second time and not only that, but for example when looking at GBPUSD we see a clear breakdown for the GBP. Until it breaks 1.43 this could be a pretty bearish signal. Maybe this move is an overreaction and nothing happens, but we need to be aware that certain trends are showing weakness and it is better to wait before stepping in. Now stocks aren't in such a bad state, at least not yet. I am worried a bit that this very low volatility + some other catalyst could send them much lower. Maybe Tech stocks are the ones that benefit the most from lower yields, but smaller stocks could suffer. Nasdaq still looking strong and during such a period it could benefit the most if the rest don't have a mega crash. If everything crashes, then I would expect it to roll over too. Metals like Copper and Silver have also dropped a lot, but it isn't over for them. They are at support, but if the USD keeps going up along with bonds they might suffer more because real rates will be going higher again.
The truth is that the current move have been pretty large on FX and Metals so we might take a break here. After that we can re-evaluate what is going to happen. Stocks are still in a large bullish trend at least in the long term but if everything else has reversed I think stocks will eventually be affected. Now when it comes to Central banks, their moves will be such to test the market, potentially cause a correction and then they buy the dip. Essentially this is what they've been doing willingly or unwillingly. They can't really raise rates with debt levels so high but they are bluffing. They are essentially trying to manage expectations and actually claim they tamed inflation, when the inflationary trend (reflation) was already reversing. People believe they are so powerful and they know what they are doing... but they really don't. It isn't QE or their actions that create results, but people actually believe that they are powerful. The Fed is in the business of managing expectations, not money.
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Bonds have had a very clear reversal and a very clear bottom and now they have formed a mini uptrend. I don't believe yields will fully crash or that we are going below zero soon, but I also don't believe they will go way lower soon. Usually when we get such a top like the one we go in March 2020 things don't come back super strong (look at UB & TLT), especially as we are closer to the 0 bound. Currently this looks like another typical correction for bonds... so if they keep going higher the hopes for inflation get crushed. And that's normal because the world is drowning in debt and soon people will have to start paying back their debts as things are re-opening. However the problem is that the economies are not in a good shape and the covid shock isn't one that can be ignored. The damage has been huge.
Bonds & USD going higher isn't a good sign, especially as the USD seems to be breaking out. It has now closed above the 200 DMA for the second time and not only that, but for example when looking at GBPUSD we see a clear breakdown for the GBP. Until it breaks 1.43 this could be a pretty bearish signal. Maybe this move is an overreaction and nothing happens, but we need to be aware that certain trends are showing weakness and it is better to wait before stepping in. Now stocks aren't in such a bad state, at least not yet. I am worried a bit that this very low volatility + some other catalyst could send them much lower. Maybe Tech stocks are the ones that benefit the most from lower yields, but smaller stocks could suffer. Nasdaq still looking strong and during such a period it could benefit the most if the rest don't have a mega crash. If everything crashes, then I would expect it to roll over too. Metals like Copper and Silver have also dropped a lot, but it isn't over for them. They are at support, but if the USD keeps going up along with bonds they might suffer more because real rates will be going higher again.
The truth is that the current move have been pretty large on FX and Metals so we might take a break here. After that we can re-evaluate what is going to happen. Stocks are still in a large bullish trend at least in the long term but if everything else has reversed I think stocks will eventually be affected. Now when it comes to Central banks, their moves will be such to test the market, potentially cause a correction and then they buy the dip. Essentially this is what they've been doing willingly or unwillingly. They can't really raise rates with debt levels so high but they are bluffing. They are essentially trying to manage expectations and actually claim they tamed inflation, when the inflationary trend (reflation) was already reversing. People believe they are so powerful and they know what they are doing... but they really don't. It isn't QE or their actions that create results, but people actually believe that they are powerful. The Fed is in the business of managing expectations, not money.
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