There are undoubtedly some chinks of light in what has been a very dark picture for holders of bonds, stocks and currencies.

As these chinks of light grow brighter, so asset prices will likely turn around and the dollar will fall. But it is knowing just how much light we need to see at the end of this particular tunnel before we can declare the all-clear.

What are these chinks of light? We can see them in many of the areas that first gave rise to global inflationary pressures. For instance, supply chain pressures have undoubtedly eased. It does not seem as if they are back to pre-pandemic levels but things definitely seem to be improving.

Another chink of light comes in the reduction of freight charges. These surged during Covid-19 as ships were stuck in ports but now if we look at the Freightos index of global shipping costs, for instance, we see that roughly three-quarters of the near ten-fold Covid-inspired price surge has now been eliminated. Costs are still above pre-Covid levels by some distance, but the fall has been sharp and at the current pace costs should be back to pre-Covid levels next year.

In commodity prices too, there has been a notable turnaround in prices. European gas prices, which have been the major culprit in the inflation surge, are now about a half of the peak seen after Russia moved in on Ukraine. When we put all these sorts of factors together, we can see another chink of light in the form of firms’ expectations for future prices. These had soared after Covid and the Russian invasion and, sure enough, actual inflation surged as well.

However, in recent months these surveys have been painting more optimistic pictures. Again, it would be wrong to get too excited here. For while there’s undoubtedly some downward pressure on goods prices now, it has been replaced by strains in services, much of it related to the tightness of the labour markets in many countries.

The labour data shows us that, while many things, like freight costs, might get back to their pre-Covid levels, many other things will not, or at least will take some time, and one of these is labour participation. This creates the possibility that, while inflation will likely come down, it won’t return to pre-Covid levels. But even this could be a good thing for, don’t forget, that policymakers struggled with inflation that was too low before Covid.

If the pandemic, Russia-Ukraine conflict and more, merely push inflation up to more desirable levels in the long haul, such as around, or just above, the 2% target that most central banks follow, then this should be good for asset prices not bad. The big question, of course, is whether inflation will come down to this sort of level, or get stuck much higher, so requiring policy tightening that goes beyond current expectations.

This being said, there are also some chinks of light on the policy side as central banks’ move closer to the point where they can consider smaller rate hikes. The Reserve Bank of Australia was a notable scalp on this front as it eschewed the expected 50-bps hike for just 25-bps. But herein lies the rub.

For while there are undoubted chinks of light, it seems difficult to believe that asset prices are going to post significant and sustained rallies until the major central banks – particularly the Fed – give the all -clear on rate hikes and that would seem to be a good few months away at best. So, the question is whether there will be enough brave investors out there to take a sufficiently bullish medium-to-longer term view that initiates a recovery in asset prices in Q4? Or whether most will still fear a final “blow off” in asset prices (and surge for the dollar) as the end of the tightening cycle is not just delayed, but is played out at much higher levels and involves a degree of financial stress that we have not seen until now.

We see sufficient risk of the latter to suggest that the chinks of light don’t quite brighten the investment landscape enough to declare an end to this very difficult period. We dare say that, in the end, we will give the green light well after the market has already moved but given how far asset prices have fallen, we think it prudent not to worry too much about the first 10% of the rally.