Despite “Mega-Relief-Rally”, RBC Warns Beware “The Reflation Trap”

Jon Alternative Media, Blogosphere, Market Commentary, Politics

The most widely-expected “base-case” outcome of the first round of the French election occurred… and yet, as RBC’s head of cross-aset strategy Charlie McElligott notes, risk-markets have still screamed-higher in comedic relief rally fashion.
Why?
McElligott write, this sounds obvious, but two points:
1) the hedging-flows into the event-risk now come off (i.e. Japanese owners of OATs punting on their EURJPY downside hedges, thus EURJPY 2.7% on day as an example) and
2) we now see general investors ‘unshackled’ and able to add exposure to the region in what has rapidly become the world’s favorite risk-region.
But, now is where it gets interesting though, as the ‘risk-ON’ / ‘bond bear’ catalysts by-and-large are again being priced back into the market, with little thought of downside. This is where expectations are again ripe for an overshoot.
So taking a step back from Euro-phoria for a hot-second… I wanted to touch on a concept that Mark and I have been discussing / working-on – this idea of a tactical ‘US reflation trap.’

This post was published at Zero Hedge on Apr 24, 2017.