Although the New Year has just started shortly, the trading theme of financial markets is already very clear.
Bank of America (Bank of America) survey shows that inflationary assets have risen the most since 2006 compared to deflationary assets. Several large hedge funds are discussing commodities are entering a pricing super cycle.
Inflationary assets include commodities, real estate, Inflation-protected bonds (TIPS), stocks of U.S. banks and value stocks, Bank of America said. Inflationary trades typically occur during economic recoveries and are mainly characterized by commodity price shocks to the upside and rising interest rate expectations.
Deflationary assets, on the other hand, include government bonds, corporate bonds, the S&P 500 and growth stocks. Deflationary trades tend to correspond to a phase of stagflationary or downward pressure on the economy, corresponding to a pullback in commodity prices and lower interest rate expectations.
Investors are putting a lot of money into inflation-themed trades.
According to Bank of America, last week’s influx of money into energy stocks was the second largest ever, into TIPS was the third largest ever, into emerging markets was the sixth largest ever, and into bank loans was the largest in nearly four years. Municipal bonds, which enjoy federal tax and most state tax exemptions, recorded the largest inflow ever.
Bank of America chief investment strategist Hartnett (Michael Hartnett) said that the vaccine has triggered a strong “economic reboot” transactions, recovery is expected to exceed the speed and scale of 2008, the recent trend of inflation expectations and economic reboot, resource supply and demand situation coincides. Moreover, the Fed’s relatively forgiving attitude toward inflation has somewhat eased concerns about a shift in monetary policy.
The Bank of America believes that inflationary pressures are already driving oil prices higher. The data also suggests that investors and oil companies are returning to the crude oil market.
Positions in Brent and WTI crude futures have climbed to their highest levels since May last year, with open interest in crude oil increasing again.
There were 163 fund managers with long positions in Brent and WTI crude oil last week, the most since February last year and up sharply from 94 in March last year.
Swap dealers’ short positions rose last week to the highest level since last April, a sign that banks are hedging their bets.
However, the current open positions in both Brewers and WTI crude are still about a third below the 2018 peak of $408 billion. This suggests that crude oil could yet attract more money amid a global economic recovery.
Investment banks, from Goldman Sachs to JPMorgan Chase, see the outlook for the crude oil market becoming brighter.
Not only crude oil, but speculators have placed bullish bets on 20 of the 23 raw materials tracked by the Bloomberg Commodity Index, which is approaching $120 billion.
Most of the bullishness emerged from late last year and early 2021, but former Goldman Sachs CEO Lloyd Blankfein made bullish calls on commodities as early as last Sept. 16 at a CME-organized online conference on the topic of metals.
Since then, the value of bullish bets on commodities has grown by more than $30 billion.
The size of these calls on agricultural markets has increased by more than 30%. Corn prices recently reached a seven-year high, and soybean and wheat prices reached their highest levels since 2014.
The outlook for copper is even more promising. Francisco Blanch, global head of commodities research at Bank of America, said copper is already facing supply disruptions and could rise more than 20 percent and top $10,000 per ton.