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Following the US election results in November, ‘Trump trades’ based on reflation in the US have done well, but are now starting to fade. Post US election momentum is starting to fade, as can be seen in the recent performance of the S&P, T-Notes, and the flows related to the largest ETFs.
As we highlighted last week, the focus is now on Europe and several key election dates. European asset prices continue to underperform, and fund flows suggest some investors are getting out of the region to go into the US and even EM. We like to see this move from a contrarian point of view and use our model which looks at equity investor sentiment.
This indicator suggests a correction is approaching, but for now inflows into equities continue to be supportive. Finally, our MarFA™ correlation model suggests volatility has become the main short term explanatory variable (ahead of term premium). W e simulate how assets will respond to rising implied vol and take a look at the risk-premia priced into European assets.
Overall position: Given the uncertainty related to the upcoming election dates, markets are holding in a tight range as very few investors are looking to commit strongly in one direction, particularly in the major rates markets.
We remain bullish USD: investors have unwound their long positions, the market is under-pricing the Fed, in our view, and upcoming US tax changes should be supportive.
Even if we do not like US equities at current prices, inflows and risk aversion in Europe lead us to think that now is too early to implement a strong bearish view.