Upcoming RPT-Wall St Week Ahead-Fed Fans Talk About New ‘Reflation’ Trade


(Rehearsal of the SCHEDULED COLUMN originally released on September 24, no change)

NEW YORK, Sept. 24 (Reuters) – Signal from the Federal Reserve that it will soon cancel its bond buying program strengthens arguments in financial markets for so-called reflation trading, which has increased Treasury yields and boosted stocks of banks, energy companies and other economically sensitive companies in the first months of 2021.

Reflation trade stagnated over the summer. But the central bank said this week it would likely start withdrawing its $ 120 billion-per-month government bond buying program as early as November, while also signaling that it could raise interest rates. in 2022, sooner than expected.

While monetary tightening is often seen as a drag on stocks, some investors see the Fed’s stance as a vote of confidence for the US economy.

“Normally, a hawkish turn would be bad for risky assets, especially stocks… US stocks at Aberdeen Standard Investments.

The Russell 1000 Value Index, where reflation trade stocks are heavily represented, is up 0.9% year-to-date, well behind the 5.7% gain in the Russell 1000 Growth Index on the same. period. The value index is up 17% year-to-date with the growth index up 19%, compared to an 18.7% rise for the S&P 500.

Market watchers have also been keeping a close eye on Treasury yields, which have risen since the Fed meeting, as expectations of stronger growth and inflation fears have prompted some investors to leave safe-haven government bonds. .

The US 10-year benchmark yield recently stood at 1.45%, close to its highest level since early July. Higher yields on treasury bills make some stocks less attractive.

Analysts at UBS Global Wealth Management said the 10-year yield would rise to 1.8% by the end of the year, but do not believe such a move will disrupt stocks. The pace of any rise would be decisive: the bank’s research showed that a three-month change in nominal returns of between 50 and 100 basis points was accompanied by a 5.7% return on the index. MSCI US since 1997.

“Only a rise in real yields of more than 50bp over three months would likely weigh on equity returns, especially in emerging markets,” the bank said in a report.

Investors will be watching a range of US economic indicators next week, including durable goods orders and the ISM manufacturing index, as well as the progress of debt ceiling negotiations in Washington.

Investors will also be watching how the Evergrande saga unfolds, after the heavily indebted Chinese company missed a payment deadline on a dollar bond this week, leaving global investors wondering whether they will have to take significant losses at the end of a 30-day grace period.

Margaret Patel, senior portfolio manager of equity and fixed income funds at Wells Fargo, said the Fed’s tapering should benefit high yield bonds as it implies a stronger economy that will lead to fewer defaults. business payment.

The trend in the number of coronavirus cases in the United States will also influence financial markets, said Jim Paulsen, chief investment strategist at the Leuthold Group. A resurgence of COVID-19 earlier in the year helped undermine forecasts of an economic rebound in the United States.

“We know where to go during the reopening cycle,” he said, referring to value stocks and small caps.

The current seven-day moving average of the number of cases in the United States now stands at 146,182, an increase of 6.1% from the previous seven days, although there has been a decrease of 1, 8% of the number of tests that came back positive for the virus, according to the Centers for Disease Control.

At the same time, investor confidence in the economy could be shaken by a prolonged struggle to raise the US debt ceiling, analysts at Capital Economics said.

The US Senate is days away from voting on a measure to suspend the $ 28.4 trillion debt ceiling and keep federal agencies in business after September 30, the end of the fiscal year.

“Next week the focus will be on fiscal policy,” Capital Economics said in a report. “A debt ceiling crisis in late October could even delay the Fed’s debt reduction plans,” the firm said. (Reporting by David Randall; Editing by Ira Iosebashvili and David Gregorio)

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