Financial markets are back to a complacent stage once again. Following a long time of stability, a lot of traders have become accustomed to treating macroeconomic news as something predictable – even unimportant. And yet, historical examples show quite the opposite – a period of relative stability is often followed by a highly aggressive price response.
Expectation vs Reality: That’s Where the Risk Comes From
The market environment is marked by tightly priced expectations. Outlooks from analysts are published; they get priced into the market right away, and their conditions become stable.
Yet, the more expectations become correlated, the higher the probability of a disproportional reaction to their non-correlation.
It looks like the classical “expectation trap”, when all participants expect the same outcome, and every kind of surprise becomes a catalyst.
For instance, any deviation in an inflation report can:
cause a shift in expectations regarding rates; lead to
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