As Breakevens Plummet, The Narrative Has Reset

For those following the progression, and most recently – unwind – of the Trump reflation narrative, below are some critical observations from Charlie McElligott, head of cross-asset strategy at RBC.
Big Picture: Narrative Reset
On January 11th, I highlighted the risks developing via a potential breakdown of the USD–specifically as it related to its role as ‘chief proxy’ for the ‘reflation’ trade. Since that time, we have seen the Bloomberg Dollar TWI -2.4%, and with it, reversals in popular ‘reflation’ trades despite BOTH flat benchmark S&P stock index and US 10Y yields over this period: ‘cyclical’ equities have lagged ‘defensive’ equities / ‘long duration’ significantly; ‘value’ has lagged ‘growth;’ ‘small cap’ has lagged ‘large cap;’ ‘momentum’ and ‘anti-beta’ factor market neutral strategies are significantly outperforming Q4 leaders ‘value’ and ‘size;’ popular ‘long copper’ significantly underperforming popular ‘short gold’; crowded ‘EM shorts’ squeezing higher (from EEM to EMFX); popular short EUR 1.1% over this window et cetera.
Again, the thought was that these crowded trades needed to see some of the froth come out…and that is exactly what has happened. Today we see more of the same, with popular Q4 longs like ‘value,’ ‘high beta’ equities, HY, ‘small cap,’ ‘early cycle,’ ‘copper’ and ‘cyclicals’ all down sharply while popular Q4 shorts / ‘sources of funds’ like ‘long duration,’ ‘low vol’ stocks, ‘defensives’ and ‘growth’ all squeezed higher.

This post was published at Zero Hedge on Feb 7, 2017.