Is The Selling Madness About Over?

The inflation scare amplified by CPI data has died down yesterday a little. Buying returned into the S&P 500, lifting Nasdaq ever so little too. VIX steeply rejected moving higher, and looks ready to decline today, but the put/call ratio doesn‘t share the optimism as obviously the bearish scenarios, powered by the inflation scare forcing a deflationary outcome in an overleveraged financial system is emboldened by the downfall‘s steepness since Monday and ineffective attempts to counter it on Tuesday. While one swallow doesn‘t make a summer, the technical picture in the hardest hit tech is gradually improving, worthy of benefit of the doubt while you dance close to the Nasdaq exit door.

Credit markets have crucially improved, with the junk corporate bonds leading the way, and value stocks being soundly bought again. All it took was a decent daily stabilization in long-dated Treasuries coupled with an intraday upswing attempt – no issue that it fizzled out before the close, apparently. The markets are coming to terms with higher inflation, and the commodities hit starting with lumber, stretching to copper, and eventually also oil and soybeans yesterday, would likely recover – first those that hadn‘t been all that overheated.

The Fed isn‘t serious about fighting inflation, otherwise it wouldn‘t be rolling out the speaking procession on an almost daily basis. Occam‘s razor at work:

(…) all we‘re experiencing now, is:

(…) a risk-off move driven by the growing inflation threat – the market is getting attentive again. How long before it forces the Fed to talk, act and not play ostrich? The evidence isn‘t strong thus far, but there is a lot of time left till the Jun Fed meeting. Needless to say, bold moves would crater risk-on assets, which is why I‘m not expecting any real action yet with the 10-year yield…

… at 1.66% only, which by no means serious enough to spur the Fed into action.We‘ve been there already, and as stated, 10-year yields above 2% would start to bite stocks, but it‘s only higher levels that would force the Fed into action and pegging them in the 2 to 2.5% range. We‘re far away from that, these are just (mild) birthing cramps, a premature alarm. We‘re still in a reflation – so far.

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