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Key takeaways:

  • The inflation frenzy got a cold shower. Such a strong reaction to rather minor changes in central bank communication points to extreme positioning ahead of the event.
  • The buying opportunity for inflation beneficiaries, such as gold or cyclical stocks, may yet require more patience. Investors should go for stable growth, such as healthcare, German real estate, or circular economy stocks instead.

There is also a full moon this week, which may unsettle some moonstruck investors. But all of this can hardly explain the sharp moves in assets prices that we witnessed in the past trading sessions. The breakdown in gold and US Treasury yields was quite extreme, and it seems that the inflation frenzy got a cold shower. If markets show such a strong reaction to a rather minor change in central bank policy, the reflation trade must have been quite crowded.

Yield curve is set to steepen
As to the fundamental shifts in central bank policy, we struggle to see them as too material. In fact, most of our macroeconomic forecasts for the US and elsewhere stay largely unchanged, as do our currency projections. This means our expectations were that the expansion of the economy will continue into next year and that financial markets would eventually anticipate this. So the yield curve is set to steepen into 2022 – eventually, yes. In the meantime, financial markets may have to work off the extremes in positioning. This may take a while, as the ‘inflation’ buzzword was ubiquitous this spring, and the fund flows apparently followed. To reverse some of this, let alone open a buying opportunity for inflation-related assets, may therefore take a while.

Conclusion for investors
In the meantime, investors are best off piling into defensive growth franchises. Defensive means less prone to the global business cycle, and growth means, well, growth! In fact, there are a few sectors that fit the bill. First and foremost, there is healthcare, where a demographic growth trend is offered at more than decent valuations in historical comparisons. Merger and acquisition activity may be instrumental in bringing back valuations to more normal levels (see our number of the week). Other than that, we see German real estate stocks and the circular economy as attractive growth opportunities.

Number Of The Week

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Markets Explained

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