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The Bounce Trap

After a week of large down days, almost every asset class is positive with a large percentage change. Is it the bottom or just a bounce after the fall? Every time such a question arises it is dependent on the time horizon that an investor is willing to hold on for.

But from a broad perspective, this will be a bottom for the next two or three months. There are various factors contributing to it and some of them are in the details to make you aware to not fall into the trap.

The most important reason is that in the near term the inflation momentum on monthly basis would be flat or slightly down. This is because there is already a reduction of new orders and rising inventory forcing manufacturers to pause the hikes and offer some discounts during the seasonally low demand period.

As this would occur the estimates of the central bank's further actions will also cool off resulting in swap rates peaking for the time being. This would be confirmed as the next few policy meetings would see inline actions. Thus, cooling off incremental panic movements and lowering volatility to some extent.

Being a seasonally low demand period the demand reduction would ease the stress on the supply chain and might lead to even further reduction in shipping and commodity prices. This would add further cooling off to future inflation estimates that are extreme.

Finally, extreme estimates will make incoming data look better. Helping inflows further accelerate though still being low but more consistent every week.

All these reasons will bring relief while the real world prepares for the cold winter that would bring depression in the medium term.

Remember on actual bottoms everyone is either too scared to buy or has no money left to allocate.


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