What is happening?
The two primary trades in markets since 9 November – ‘vaccine day’ – have been Covid recovery and reflation. The Covid recovery trade is to buy anything hit hardest during the height of the pandemic, including retail, airlines, pubs, cinemas, certain types of property and pretty much anything else that operated in the physical and face-to-face world we all abandoned at pace last year.
It also involves selling anything that benefited from going online and digital last year; the ‘stay at home’ trade. The reflation trade is to buy commodities and financials, both of which benefit from inflation, and to sell growth stocks, which as long-duration assets are most impacted by rising bond yields, themselves a consequence of higher levels of inflation. Together, these two trades have resulted in a rapid and significant rotation in equity markets of a size rarely seen in recent times.