Stock markets are ending the week with a strong rally after a frankly ridiculous reversal on Thursday following the US inflation data.
A 40-year high in the core reading initially triggered selling in futures which was swiftly followed by an unbelievable rebound that saw US indices recover more than 5% from the lows. The recovery in the Dow coincided with a test of the late September lows, while in the S&P 500 the low was roughly 20% from the summer recovery peak so there must have been a huge technical element to the move, at least initially.
What followed was extraordinary and may have been exacerbated by short-covering, perhaps even some panic. While it may indicate the market has established a bottom for now, given the scale of the declines since the August peak, that doesn’t necessarily mean the worst is suddenly behind us. Not when inflation is so stubborn, the labour market so tight and the Fed so intent on more aggressive hikes.
The next few weeks may simply be a question of how investors respond to earnings season which kicks off today with JP Morgan et al reporting. Needless to say, we’re going into this season with very low expectations on both the top and bottom lines and the outlook. It’s just a question of how pessimistic firms are going to be and how willing investors are to turn a blind eye. It all comes down to how low the bar is set and given the performance of US stock markets recently, I expect there won’t be much daylight below.
This Government Is For Turning
I’m not sure where we’re up to on the u-turn front but one thing is clear about the new government in the UK, they are absolutely for turning. Today, it’s Chancellor Kwarteng that is swiftly u-turning on his Washington plans to return to the UK amid speculation about further changes to his tax-cutting agenda.
The backlash against the mini-budget has been absolutely fierce to the point that after only five weeks in office, the Chancellor looks like a dead man walking and the Prime Minister is under immense pressure, perhaps even at risk herself. That is the scale of the atrocious handling of the situation in recent weeks and now both are scrambling to save their jobs.
Meanwhile, the BoE emergency gilt buying program is scheduled to draw to a close today which may coincide nicely with certain government u-turns and hopefully bring some stability back to the markets. Of course, we should be in no doubt that if we see further turmoil, the central bank will step back in but looking at longer-dated yields this morning, there’s some hope for the Governor, who himself has come under fire this past week. It’s not been a great few weeks for brand UK has it?
A Fortunate Rebound
The bizarre risk rebound in financial markets came at just the right time for Bitcoin on Thursday. While it had been slowly trending lower, the inflation report initially sent it into a spiral and it was seriously at risk of breaking the early summer lows which could have been devastating. And then the rebound came which has seen it rally back towards $20,000 where it now finds itself. A very fortunate moment for bitcoin. The question now is can markets sustain this risk rebound when the inflation report itself was anything but good news?