Markets were feeling pretty good and the price action was normal ahead of CPI inflation report, but imploded on the inflation numbers, falling more than 2 cents, to reverse more than 3 cents higher. The 3,500 level held in S&P500 despite being pierced briefly which might have attracted some buyers. The implied odds of a 100 bps hike from the FED have declined to 9% from 13% post-CPI.

Now, S&P500 is trading above $3,650 points. None of this justifies such an enormous reversal in stock markets and forex. EUR/USD fell as low as 0.96.30 but is now trading at 0.98 — a 170 bounce. So what explains all this?

There’s no easy answer to explain the market moves sometimes. One thing I would highlight is that sentiment right now is as negative as it’s been since 2008. There aren’t many bulls out there and people are feeling pain. The liquidation trades in utilities and telecom show mom & pop selling stocks, which is generally a sign of the bottom.

Along the same lines, JPMorgan was talking about a 5% decline in stocks if CPI was hot today. When serious people are talking about a 5% daily fall, sentiment is awful. So the best you could say is that this is something of a short squeeze for those on the sidelines with cash stepping in.

The UK pension system also doesn’t seem to be imploding so the ‘Fed will hike until something breaks’ crowd will have to move on to the next target. All that said, I still don’t love what’s happening in bonds. US 2-year yields hit 4.50% and are back to 4.45% but that’s still up 16 bps on the day. I don’t think we get a sustainable rally in stocks until yields begin turning lower.