What goes up must come down!

The sell off triggered by China's Tuesday drop continued amid deepening pessimism regarding the outlook for global growth. A flight to quality ensued as volatility surged and the appetite for risk dwindled somewhat, boosting the yen as carry trades started to unwind and pushing treasuries higher, especially in the short end, as the likelihood that the Fed would start cutting rates earlier than anticipated increased. The big uncertainty in this environment became the extent to which this unwinding activity would continue. There was at least some good news to cheer about with the release of stronger than expected personal spending and personal income figures to help counter the growing slump in housing and manufacturing. Also, a stronger than expected PCE Core indicator, one of the Fed's favorite gauges for inflation, confirmed the view that inflation warranted close scrutiny. We don't believe that the current correction will lead to a recession, considering that fundamentals are stable. We think the sell off is due to the unwinding of riskier positions that have been accumulating over the last couple of months.