20 to 26 February: Let’s Be Having You

Our interpretation of post-election trading dynamics for US equities is as follows:

• Investors are reticent to reduce exposure because economic data is resilient, supported by a broader global rebound.
• Investors are afraid to materially increase risk because political uncertainty is heightened and valuations are challenging.

The result has been a consistent rally on record-breaking low volatility. We wonder, however, whether warning signs are now flashing:

• Bond yields have faded the “reflation” trade. The US 10-year yield has slipped some 30bps from its December peak.
• The Trump government is getting side-tracked from its growth agenda. Time and political capital has focused on immigration, staffing and Obamacare repeal, rather than investment and tax reform.
• The FED is getting closer to a 3rd rate hike. After the release of the February FOMC minutes, markets now price over a 60% probability of a May move.
• Technical indicators are suggesting caution. Insiders sold USD 7.8bn of stock in February (most in 6 years) whilst the 14-day RSI for the S&P 500 has breached 70.

On Tuesday the President has a chance to keep the show on the road with the State of the Union address to Congress. Markets will be looking for more detail.

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