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Rally On ! - End of Buyback & Month End

In the past two weeks, global markets have seen a reversal in the large negative moves that had eclipsed the outlook for the year. In the last two weeks, global equity markets have gained 6% from the lows and at the same time bond markets have cooled off. There are qualitative elements for this relief as Fed is expected to only increase rates in smaller portions and there is the incremental lower premium of conflict of Russia - Ukraine in the oil markets.

There are quantitative elements that have more weightage in this rally. One of them had been the removal of the Buyback blackout period since last week that has to almost $11bn buying flows per day as per reports and is expected to continue till month end.

Another element is Month end rebalance by pension funds, this has to another round of inflows that continues last month's rebalancing flows. In addition to these, the market on close flows since 21st July has accumulated to $5.15 Bn one of the biggest in recent months.

And lastly, August is taken to be the summer break for the most of USA's federal and private corporations. Thus, there are reductions in positions, the creation of hedges, and the winding up of major positions that occur during this period.

But do these elements point towards a sustainable reversal, that is unlikely as the flows are not sustainable ones. The impact of these will fade away by the second week of August when inflation data is due. It will also create a risk in the Fed Swap markets that have the most optimistic view on rates from hereon. Any negative surprises will create volatile rate expectations that will result in a reversal of these moves and a spike in the Volatility Index.


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