The “deflation tradeThe one that has dominated financial markets since the emergence of coronavirus vaccines last year, has been hit hard after Federal Reserve He unexpectedly signaled a shift in his stance on inflation.
Investors rushed to buy securities that could benefit from faster inflation, betting that the combination of exceptionally easy monetary and fiscal policy and a global economy emerging from the Covid-19 lockdown would send prices higher.
However, after inflation data has come in unexpectedly strong in recent months, the Federal Reserve earlier this week moved its guidance on when it might be Start raising interest ratesAnd it indicated that it would soon begin discussing when it would scale back its $120 billion per month bond purchases.
The Unexpected central bank pivot It triggered many of the more common deflationary trades, such as smaller stocks, gold and commodity prices, and boosted other assets that have fallen recently.
Krishna Guha, Vice President of Evercore ISI, said: “The Fed’s abrupt turnaround on risk-management fundamentals on Wednesday resonated across financial markets globally on Thursday, with violent moves across and within asset markets as investors liquidated an inflation hedge. Deflation deals are gone.” .
Guha said the leveraged liquidation of deflationary trades made it difficult to draw firm conclusions about market views of the Fed’s shift because it could amplify market moves, but noted that investors may begin to question the central bank’s commitment to a new, more flexible one. Inflation targeting system.
Natural resources suffered the biggest blow from the unraveling of deflationary deals. Bloomberg’s commodity price index fell 3.6 percent Thursday, its biggest one-day drop in more than a year, with West Texas Intermediate crude down 1.5 percent.
The so-called United States stock value – Cheaper companies are often unfavorable and more sensitive to the pace of economic growth – shedding another 1.3 per cent on Thursday to extend the initial decline they suffered on Wednesday, the day of the Fed’s announcement. The MSCI index of global value stocks was already down 1.2 percent on Thursday.
The Russell 2000 index of smaller US companies fell 1.1 percent – the largest reversal in more than a month – while the price of a troy ounce of gold fell to a two-month low of $1,773 on Thursday, before paring the decline slightly on Friday.
Other assets benefited, though. Fading chances that the Fed will allow inflation to spiral out of control helped trigger a rally in long-term US Treasuries and other securities that benefit from deflationary pressures, such as Highly rated corporate bonds, The U.S. dollar And many big tech stocks.
Matthew Hornbach, head of global macroeconomic strategy at Morgan Stanley, said the Fed was risking another “taper tantrum” similar to the market turmoil it caused when it signaled in May 2013 that it would start to pull back after the financial crisis. crisis stimulus.
“The risk of little tantrums has gone up,” Hornbach wrote in a note. “The hardening shift in . . . assessments of appropriate policy raises legitimate questions about the timing and pace of tapers, and the pace of rises thereafter.”