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Confidence in the ‘reflation’ trade is fading

The U.S. Presidential Election has certainly been a catalyst for financial equity market performance. The primary reason being, that the market expected that the new administration will promote a set of economic policies that will ‘reflate’ the U.S. economy sooner than anticipated, and will bring about regulatory changes that will benefit specific sectors. On the macroeconomic front, a swifter ‘reflation’ of the economy, theoretically, could have direct implications for the projected monetary policy stance, and, if true, would most likely lead to a new monetary regime. It is not coincidental, that Treasury yields have moved significantly higher, during the last period. On the regulatory front, financial sector stocks have clearly outperformed other groups since the Election Day, as investors have been counting on a lighter regulatory environment.

It is evident, however, that the initial optimism regarding the policy agenda of the newly elected administration has faded during the last two month period, and financial markets have lost part of their initial positive momentum.