Treasuries and cyclicals valuations stretched after Republican clean sweep – BAML

Added 11th November 2016

The outcome of the US election has triggered a largescale sell-off of bonds and splurges on cyclicals, according to data from Bank of America Merrill Lynch.

 Treasuries and cyclicals valuations stretched after Republican clean sweep – BAML

BAML reported its composite technical indicators (CTI) models had not registered such stretched signals since “the trough of the post-Brexit sell-off, which marked a significant buying opportunity for markets.”

On the expectation that a Republican dominated House of Representatives and Senate would approve Trump’s proposed fiscal spending, investors hurriedly ditched their bonds to the point at which the asset became technically oversold.

In the three days since the election, 10-year US Treasuries sold off 30 basis points, the greatest shift since 2011. Bunds also appeared oversold, BAML stated, despite less extreme European rate moves.

Also swept up in the reflation trade tide were cyclical stocks, which BAML said looked “very overbought by historical standards.” Given Trump’s pro-coal and fossil fuel remarks, miners were in particularly high demand, followed by banks and insurance stocks.

The natural resources shopping spree prompted BAML to downgrade its position to neutral and upgrade technology from underweight to neutral and trim its underweight in food and beverages, which was also close to extreme oversold.

The bank anticipates that while there may be a slowdown in trading for the market to catch its breath, the reflation rotation of bond and equity markets will remain a sustained trend.

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