Since the Fed’s September FOMC meeting and official taper announcement, we are witnessing what appears to potentially be a shift back into the reflation trade. With the bond market reacting to the announcement by selling off sharply, yields look to be trying to now price in inflation. A clear repricing of those assets who benefit from higher yields has been evident. Despite much of the leading data suggesting economic growth looks set to decelerate over the coming months, it’s important to remember that, when the bond market makes a move, it is generally the right move and investors ought to pay attention.
Indeed, on the back of rising yields and a steeping yield curve, one of the biggest beneficiaries of this shift has been the energy sector, namely oil and oil related equities. With crude oil leading the charge, the energy sector looks to be breaking out of an important technical resistance point, a potentially bullish outcome for the immediate future.
The fundamental case for crude oil and energy related equities, particularly in the exploration and production space, remains as bullish as ever. The sector has been starved of capital since 2014 and is a trend set to continue for the remainder of 2021 and 2022 at the very least. Ever increasing ESG pressures will only exacerbate this dynamic over the coming years. The energy sector remains one of my favourite trades for the next few years.