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TRADING THE WEEK: ‘Reflation’ Trade Allows Market to Drift Higher

Traders Magazine Online News, June 5, 2017

John D'Antona Jr.

The equity markets moved higher amid a recently coined trade – reflation – which has kept a solid floor on stock prices.

The equity markets had little to cheer or trade about last week as the shortened work week, lackluster economic data, continued lack of volatility and quiet geopolitical landscape provided traders with little impetus to trade.

William Mingione

But, according to William Mingione, Head of Equities at Drexel Hamilton, trading in the equity markets did seems to be coming back after slow start to the week due to the U.S. Memorial Day holiday. As he saw it, with the U.S. Treasury 10-year yield are at or near a bottom, buying seems to be the trade.

“A few weeks back we said that the 10-year would be overbought at 2.15% and would likely be the level yields would bottom at,’ Mingione began. “We would be buyers of financials if the 10-year holds these levels and that helped provide some support after the initial sell off Friday morning. The rally appears to becoming more and more narrow as we've continued to go higher.”

In what he termed the end of the “reflation trade” or the market ending the purchases of fixed income securities and buying stocks, such as utilities and technologies, can move higher as the 10-year Treasury note yield has fallen to its lowest close since April 18th. .

“More recently, we've been led higher by utilities and large cap technology,” Mingione said. “Financials and energy have been the weakest groups. Energy has dramatically underperformed year to date and has gotten decimated over the course of the last week.”

He added that May brought a new all-time monthly high for the S&P, which gained close to 1%. Best performing sectors in the S&P for May were the aforementioned technology and utility stocks, up 4.1% and 3.6% respectively.

“We have seemed to come through most of the earnings calendar with markets trading strong,” Mingione concluded. “No real important economic numbers are critical this week. All this means is that the markets will likely look forward to Comey’s testimony.  Markets will likely react to his testimony.”

Fired FBI director James Comey plans to testify publicly in the Senate later this week to address lingering  accusations that President Donald Trump pressured him to end his investigation into a top Trump aide's ties to Russia. According to CNN, Comey is expected to appear before the Senate Intelligence Committee on June 8.

On the interest rate front, Federal Reserve Governor Lael Brainard said soft inflation could cause her to reassess the path forward for monetary policy should it linger, even as the global economic outlook brightens and U.S. growth looks poised to rebound.

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