EUR 231.76 For Business Accounts Only

Vermilion Compass: Weekly Equity Strategy

Key Points:

• Trump's first political defeat may usher in an unsettled period of short-term sector rotation.

• Questions now circulate as to how successful Trump will be in invigorating growth in the U.S. economy (starting with legislation), which have caused longer-term interest rates to back off. What's disconcerting is that the yield pattern has formed a descending triangle (rates go lower), something that will take time to resolve.

• Moreover, the U.S. dollar can't seem to get any momentum going, and falling economic growth hopes certainly won't help. It's not to the point where interest rates have to go up to support the dollar, but given the depressed currencies elsewhere in the world we doubt it rallies materially in the near term.

• A falling dollar is not such a bad thing, but it could buoy commodities and spark inflationary pressures. However, it would be a big boon for exports and the profits translated into dollars. The Technology and Manufacturing Sectors are poised to benefit the most from this.

• Crude oil has been under pressure so far this year and managed to break down through $50/bbl and its 200-day MA. This has brought selling pressure and underperformance back to the Energy Sector, prompting us to downgrade the Sector last week to a Market Weight.

• We like what we are seeing from the Health Care Sector lately and upgraded the Sector to Market weight three weeks ago. Perhaps there was a sense by investors that Trump's new ACA bill wouldn't get through Congress. Anyway, biotechs are bubbling up from the depths of despair at the expense of larger-cap pharmaceuticals, and the rest of the Sector has appeal as well.

• Trump's legislative failure in reforming health care may result in an unsettled period of sector rotation as the dust settles. Thus, because patterns within Utilities and Staples have remained constructive looking with only the relative strength lacking, we think there is a tactical opportunity to park some funds into those two Sectors to wait out Sector transitions.

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