Daily Alert – Wednesday 12th May 2021: Inflation fears stalk the land

Mark NugentDaily Alert, May 2021

Daily Alert – Wednesday 12th May 2021: Inflation fears stalk the land

Apologies for not getting this Daily Alert to you yesterday.

The story of the week is fear of inflation. Inflation prompts central bank interest rate hikes (bad for corporates and hence equity indices) and trashes bond yields (hence a bond sell off, bond prices drop and yields rise).

It is important to note that when inflation stalks the land, the usual inverse relationship between equities and bonds breaks down (i.e. risk-on: buy equities and sell bonds and the opposite when risk-off). So, if you are using my simple sentimentometer to judge risk sentiment, please note you will get a reading of “indecisive” when in fact we are risk-off.

The focus on inflation right now is due to the general expectation that it is coming as pent-up demand is released as covid lockdown restrictions are eased. Further, the US CPI reading yesterday was a high not seen since 2009. Finally, the GSCI commodity index is very bullish (raw materials costing more prompts inflation). So, there are multiple reasons, all pointing in the same direction – INFLATION.

As always, I will trade equities long when the market calms down. So as equities fall, there is no fear of missing out for me, as I wait patiently for the reversal.

I closed my GBPUSD long trade (based on strong GBP) on Tuesday night for a gain of 3.46 percent on a risk of 1 percent.

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I’ll be back tomorrow.

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