Since July end the market globally witnessed almost a month-long relief that was led by algorithm funds buying with a total amount of $129 Bn throughout the major equity indices. This was accompanied by a flat inflation number and also a long gap for the next FOMC meeting. All this resulted in market watchers believing that worst of rate hikes is over and led to rate swap market pricing the same as the odds shifted to the lowest point before the Jackson Hole event on Friday.
As the event started and Chairman Powell came to speak everyone interested was ready with largely buy orders. But then, instead of a Fed pivot, there was a market pivot. This was obvious to the rational nothing much changed in terms of the risks and only relief from the volatility helped the recovery.
Even the chairman cautioned that there is pain ahead for housing and businesses with some labor losses. He also indicated that what markets think is not what markets get.
The problem for all the optimistic does not end there. From this week the asset reduction program accelerated brings large volatility and liquidity issues to mortgage and bond markets. In addition to this algorithm funds are estimated to sell around $38 Bn of equities if it is a flat month and $155 Bn if it is a negative month.
This might be justified as a seasonality impact but given the risk to the real and financial world has only increased as winter approaches there will be much more volatility ahead than estimated.