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Is The Inflation Panic Over?

By Daniel GoldbergBondsNov 15, 2016 13:36
Is The Inflation Panic Over?
By Daniel Goldberg   |  Nov 15, 2016 13:36
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Last week, Donald Trump's election win heralded the end of the world. We went into the election with the view that globally, we wanted 4 more years of the same from Clinton, which would be great for the equity markets. The dollar would be firm and bonds would carry on the QE run forever. Trump was the antithesis of all of this. Equity markets would collapse, the dollar likewise and everyone would run into bonds as a safe-haven, fearing that a less that stable president may cause some issues.

And what's more, the markets entered the election with this firmly in place. The S&P had backed off it's upward course as Trump gained momentum, until we saw the FBI read 650,00 emails in a day and exonerate Clinton! Likewise, the euro strengthened as the dollar feared a Trump win, moving from 1.0900 areas to 1.1163.

How wrong were we? And how quickly. Everything we thought going into the election was the carbon opposite. How? The S&P recovered from it's overnight limit down knee-jerk reaction to finish the day 140 handles higher. A move from 2028 to 2166!! I've been trading for 20 years and I have never seen a reaction like that before. The dollar went rampant with the euro going back to it's "scene of the crime" at 1.0950. Bonds collapsed as well, not just the US 10 Year Note but the German Bund also.

But why? How did we get this so wrong and what story are we chasing now? Well, the answer is simple. We now believe that Trump will bring a concise era of government as he controls both the House and the Senate. In other words, he'll get things done. And with that he will focus on tax reform as well as American growth.

This is all good news for the S&P and the dollar. Not so good for bonds, as this stance is inflationary and would possibly see inflation hit the Fed's target quicker than we had anticipated, causing them to accelerate their rate path somewhat faster than the market had anticipated. Cue a move from roughly 13100 in the 10 years to 12600.

But hang on a minute....we were so sure we were right going into the election what makes us think this version we have subsequently come up with is now so correct? In my opinion........nothing.

The markets are basically one big over-reacting hormonal beast. Since the election we have, for the most part, been trading on pure emotion. Logic went out the window Wednesday morning. Part of my job running a trading floor and training traders is to keep this emotion in check. And it's hard. Human beings have a tendency to overreact, get emotional and behave somewhat irrationally. Market moves get over-cooked and I do believe this notion of pricing in hyper-inflation before Trump has even been inaugurated falls into this category.

Things will calm down. Markets will find their balance once again and we won't straight line down by this time next week unwinding 8 years of a QE trade. I mean seriously, the UK are willing, at any sign of a slowdown caused by Brexit, to pump more QE into the system and Europe, in my opinion, still has a long way to go before we talk about job being done and unwinding QE.

As ever, I find myself turning back to a strong grasp of proper technical analysis. Unusable over major fundamental shifts, of course, things will always revert back to playing out in the patterns that they have done so many times before. Don't forget, as much of the so-called "Trumponimcs" we may be being force fed at the moment may have validity, we still don't have any factual basis for it and should maintain a healthy sceptisism.

The chart I have included is of the German 10 Yr Bund. I note a few things.

Firstly, we have for the first time since the election closed back within the Bollinger Bands® (these bands being a tool I use to trade with to alert me to excesses in the market, marked by the red extremes and the middle blue moving average). It tells me that the excessive moves we have been seeing are winding back into a more structured dynamic. Secondly, yesterday (14th November) we posted a lower low but a higher close.

Thirdly, very simply, we posted a higher close than we opened. This all looks very much like a "swing rebound" trade that I favour very heavily. It looks technically to me as if the low has been put in for the bond markets yesterday. The reversion that I am looking for is a move back to standard deviation ie the middle Bollinger Band or the 200 Day Moving Average (the purple line).

In essence, I do believe that the chart is telling us that this mini inflation panic is at an end. Order should be restored. Now, of course, markets are ever changing and it is our job as traders to pass on to those we train the message to stay on point with these changing environments.

Yet we must alway be aware: markets get it wrong sometimes as per the pre-election hype. They get over-emotional and irrational, the moves always go too far and can last for too long but so long as we stay balanced in our thoughts and our approach and have a process by which we trade and assess what the market is doing, we can avoid getting sucked into the hype. And more importantly profit from it!

FGBL 10 Yr Bund 3 Day Chart
FGBL 10 Yr Bund 3 Day Chart

Is The Inflation Panic Over?

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Is The Inflation Panic Over?

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Howard Shaw
Howard Shaw Nov 17, 2016 14:20
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Great article.
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