Inflation Shock Tears Up Trader Playbooks From Stocks to Bitcoin

(Bloomberg) -- The latest surge in U.S. consumer prices is the strongest blow yet to views inflation is transitory, sharpening the focus among investors on how to position as risk assets swing.

Value shares, digital currencies, gold and bets on a flatter yield curve are seen as some of the potential beneficiaries from a higher inflation environment, after U.S. prices climbed by the most in three decades. The data sent Treasuries and tech stocks tumbling and pushed the dollar to near a one-year high as expectations mount the Federal Reserve will have to raise interest rates sooner rather than later.

“The last few days we’ve seen some really big information coming through which has made people want to go out and hedge themselves against inflation risks,” said Chris Weston, head of research with Pepperstone Financial Pty Ltd. “Bitcoin’s been doing well, crypto’s done well as a hedge I suppose, gold’s been moving up concurrently with the stronger dollar.”

Here’s a look at what’s been moving and what is likely to:

Inflation Situation

U.S. bond market expectations for future inflation are surging with each new data point, seen most clearly in so-called breakevens which track the difference between yields on inflation-protected securities and regular Treasuries. Five-year breakevens have climbed to a record.

Valuation Rotation

As inflation pushes ever higher, the potential for interest-rate hikes grows and that puts the most-highly valued stocks under threat. Globally that means technology and consumer discretionary shares are most at risk. Any shift out of those growth names is likely to benefit value sectors such as financials, materials and energy.

An “ultimate inflation hedge” is undervalued stocks that can keep up pricing power even with consumer price readings elevated above 5%, said Ben Emons, global macro strategist with Medley Global Advisors.

Gold 2.0

Real yields have also slumped and that is pushing investors to seek out riskier assets alongside more traditional hedges like gold. That’s helped send Bitcoin, the biggest digital currency, to a record high of almost $69,000 this week, while the total market value of the cryptocurrency industry recently briefly topped $3 trillion, according to CoinGecko.com. 

Flatter Curve

The U.S. yield curve is flattening again after a brief dalliance with a shift upwards. The difference between 5-year and 30-year yields narrowed to levels not seen since March 2020 overnight after the inflation report. That suggests bond traders are worried about the health of the U.S. economy or the risk of policy error should the Federal Reserve feel the need to act to curb runaway prices.

King Dollar

Accelerating expectations for rate hikes soon after the Fed concludes tapering of its stimulative bond purchases is also translating to a stronger dollar. That risks triggering capital flows out of emerging-market assets, impacting stocks, bonds and other currencies.

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