Is It A Bear Trap?

Economic crisis - Stock market graphs and charts - Financial and business background

Genuine turning point, or classic bear market rally?

World markets continue to rip higher as the dollar, bond yields and Fed interest rate expectations decline, confounding even the biggest optimists who had called for a positive start to the fourth quarter.

The strength of the turnaround suggests the turmoil in recent weeks might have been related in part to quarter-end factors. Equally, the strength of the current whoosh might simply be a bout of short covering to claw back some of this year’s losses.

According to Goldman Sachs, the median S&P 500 peak-to-trough decline in past bear markets has been 34%. That would coincide with the 3400 area from its January peak of around 4800. Friday’s low was just below 3600, down 25% from the high.

By this measure, Wall Street has further to fall before putting in the definitive bottom. It’s worth bearing in mind that bear market rallies tend to be pretty rapid, ending almost as quickly as they started, Reuters stated.

Tuesday’s “risk-on” rally was widespread. The S&P 500 recorded its strongest two-day rise – more than 5% – since March 2020, and emerging market bonds had their best day since March this year.

U.S. job openings data fuelled hopes that the Fed will soon take its foot off the tightening pedal, Australia’s central bank only raised rates by 25 basis points and the dollar slumped more than 1% to post its longest losing streak – five days – in over a year.

It may turn out to be a bear market rally, but for now, investors are enjoying the ride.

Key developments that could provide more direction to markets on Wednesday:

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Australia PMIs (September)

South Korea inflation (September)

Euro zone, UK, U.S. PMIs (September)

U.S. services ISM (September)

Fed’s Bostic speaks

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