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Video / 10 January 2017 at 8:24 GMT

From the Floor: 'It's safe to say reflation is here' — #SaxoStrats

#SaxoStrats
   • Chinese PPI data 'confirm reflation theme': Wu
   • USD continues to retreat from multi-year peak
   • Mining, biotech sectors outperforming relative to indices
   • 'We see much more upside for global financials': Garnry
   • Record long position weighing on crude oil prices
   • $1,196-1,204/oz 'the key resistance level' in gold: Hansen
   • Small risk-off trend capping yields, boosting bonds
   • European and emerging market corporate bonds supported: Fasdal

SaxoStrats
By Michael McKenna

December saw Chinese producer prices rise to five-year highs, posting a 5.5% gain (year-over-year) versus the 4.5% expected by a Reuters analyst poll in the sharpest rise since September 2011. According to Saxo Bank head of equity strategy Peter Garnry, the print “confirms the reflation theme” afoot in global markets, with Garnry adding that the policies of incoming US president Donald Trump are likely to add further tailwinds to inflation’s return.

The release was met with a mixed Asian session overall, as Japanese equities dropped after Monday’s holiday closure, Hong Kong rallies for a fourth straight day, and the Australian S&P 500/ASX200 index tumbled by 1.1% led by declines in the financial sector.

In an overall sense, however, Garnry notes that he expects financials to outperform in 2017, stating that he sees “much more upside” for the sector, particularly global investment banks with a strong focus on the fixed income, currencies and commodities, or FICC, segment.

Garnry also reports that biotechs and miners continue to perform strongly, with the Saxo alpha model singling out Southern Copper, Antofagasta, Vale, Norsk Hydro, Rio Tinto, and Newcrest Mining as particularly promising firms.

Among the major factors at work in today’s markets is the weakness seen in crude oil, where Saxo Bank head of commodities strategy Ole Hansen says that prices are “unlikely to recover until the record long position held by hedge funds and money managers is reduced”.

WTI crude oil targeting $51.25 followed by $50/barrel:
WTI

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Source: Saxo Bank 

“Oil has stopped rising on good news but is still falling on bad,” says Hansen, adding that WTI short-selling rose last week for the first time since early November.

The softness seen in oil comes on the back of the sustained upward move that followed the Opec/non-Opec production cut agreement, which Hansen says is beginning to reveal cause for suspicion.

“Kuwait is reporting 60-70% compliance,” says Hansen, “but the monitoring group has not even been established yet… how do they know that?”

Compliance, of course, has historically frustrated such production cut efforts and tomorrow’s US inventory numbers, which are expected to show a rise in oil stocks, are unlikely to aid crude futures.

In gold, Hansen reports that the unexpected “Trump rally” that followed the US election is beginning to turn around with $1,196-$1,204/oz as the key upside resistance level.

“Bullish bets in gold are down 88% from their July peak,” explains Hansen, adding that hedge funds are essentially “out of the market” at present.

Finally, Saxo Bank head of fixed income strategy Simon Fasdal reports that a small outbreak of risk-off sentiment is boosting bonds as investors make tentative moves out of the equities space and towards safe-havens. “We have seen lower yields over the past two sessions,” says Fasdal, “although the effect remains very small.”

China PPI
Chinese producer prices are on the rise, signalling a return to inflation. Photo: iStock 

Michael McKenna is an editor at TradingFloor.com

Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios 
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