The US Federal Reserve has begun to pivot. Monetary tightening is coming sooner than the world expected, with sober implications for overheated bourses, and for those in Asia, eastern Europe and Latin America that drank deepest from the draught of dollar liquidity.

We can expect a blistering dollar rally, perhaps akin to the early 1980s or the mid-1990s. It is fortuitous that the BRICS quintet of Brazil, Russia, India, China and South Africa have just launched their $100bn monetary fund to defend each other's currencies. Some of them may need it.

America's unemployment rate has fallen from 7.5pc to 6.1pc in 12 months. The country has been adding 230,000 jobs a month in the first half of this year.

Since Fed chief Janet Yellen targets jobs above all else, this was bound to force capitulation by the Fed before long. It happened this week in her testimony to Congress. "If the labour market continues to improve more quickly than anticipated, then increases in the federal funds rate likely would occur sooner and be more rapid than currently envisioned," she said.

This is a policy shift. Mrs Yellen has admitted that the Fed misjudged the pace of jobs recovery. The staff did not expect unemployment to fall this low until late next year. The inflexion point has come 15 months early.

To some it feels like 2004, when the Greenspan Fed found itself badly behind the curve, suddenly switching from nonchalance in May to rate rises in June. "They may have left it too late again: the risk is a reckoning point when rates rise abruptly," said Jens Nordvig, from Nomura.

David Fuller's view

It is well worth reading the rest of this article. 

I think and certainly hope he is overstating the risks but the fact is, no one knows.  There is plenty of leveraged momentum money in the US stock market and other high performers.  The minimal volatility of recent weeks was unsustainable.  Arguably, we are still in the ‘sweet spot’ for a while longer, but we can expect choppier action as investors become more nervous.  The next 10 percent plus correction is long overdue.

This chart of the S&P 500 Index is fascinating.  You can see its overall loss of volatility in recent years, as it moved towards the psychologically important 2000 roundophobia level.  We saw a downward dynamic today.  We have seen others over the last two years or more, from temporarily overextended conditions, and downside follow through was short lived, causing no more than temporary mean reversion towards the MA.  However, market trends do not reach the sky and risks increase after a long advance.  The minimal downside expectation is for another mean reversion, and it could easily be more.