The Reflation Trade Is Not Over, But It Is Getting Long In The Tooth

Risk assets will continue to edge higher over the next couple of months on improving economic data, notably from China. Longer term however, EMs - including China - are starting a prolonged deleveraging cycle, keeping commodities and cyclical stocks on the back foot. The dollar will likely follow the mirror image of commodities: down slightly the next two months, up substantially thereafter. A stronger dollar, in turn, will limit any rise in Treasury yields. Long-term investors should remain modestly overweight duration.