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Markets Today: Brits Big U Turn, America Buys the Dip

Another big fiscal U-turn in the UK and positive BofA earnings boosted global risk appetite last night.

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Podcast of the day

Preview: U-turn

  • UK U-turn sees gilt yields plunge (10y -35.6bps to 3.98%) and sterling jump 1.6%
  • BoE prices are also falling, the terminal now at 5.15% from 5.64% on Friday
  • Global risk appetite increases and US stocks jump 2.6%, helped by BofA earnings
  • USD (DXY -1.0%) down except against the JPY, AUD +1.4% at 0.6285
  • Upcoming: RBA Minutes & Bullock, NZ CPI, German ZEW, US IP & Fed Speak

Another big fiscal U-turn in the UK and positive BofA earnings boosted global risk appetite last night. Britain’s new chancellor wasted no time in reversing the ill-fated mini budget, scrapping £32bn of unfunded tax cuts, redesigning the energy support package to make it more targeted from April 2023, as well as to point out any savings measures in the next budget on October 31. Given such a massive rollback of Prime Minister Truss’ Conservative leadership promises, the question remains open as to how long Prime Minister Truss will remain in office. Latest polls have opposition Labor leading with a record 36 points and at least five Tory MPs have publicly called on the prime minister to quit.

Markets reacted favorably to the turnaround as gilt yields fell; the 10-year yield fell -35.6 basis points to 3.98%. BoE terminal prices also fell given reduced inflationary pressures and the rise in the pound, with the maximum discount rate now set at 5.15% from 5.64% on Friday and well down from compared to the 6¼% observed when the mini-budget was announced. The pound jumped, up 1.6% to 1.1349, in the shadow of the move in yields and it is worth noting that the 21-day rolling correlation between sterling and gilt yields is 0.69, its highest level since 2020. The next two crucial dates for the UK are October 31, when the budget is released, the same date the BoE was due to start QT, which has already been postponed, then to the BoE MPC meeting on Nov. 3, where markets are almost fully priced for a 100 basis point rate hike. Incidentally, the extended temporary repo facility continues until November 10, and the BoE also intends to resume corporate bond sales next week.

Developments in the UK spread to other markets with 10-year European key rates down around 8-9 basis points; the German 10-year yield was -7.7 basis points to 2.27%. In the US, movements in Treasury yields were volatile, first heading lower in the UK to 3.91%, then reversing as the rise in risk began with the 10 US years ending broadly unchanged at 4.01%. US federal funds pricing was little changed (peak 4.9% in March 2023), with much of the inversion due to the surge in US equities with the S&P500 up 2.6% as well as an even sharper 3.4% move for the tech-heavy NASDAQ.

BofA reported better-than-expected earnings with its stock up 6.1% (EPS 81 cents vs. 77 cents expected), while some equity strategists noted the very bearish positioning ahead of the earnings season that could lead to another technical rally similar to what we saw in Q2 short-term earnings with the S&P500 200-day moving average at a key level (4,155 vs. 3,678 at today’s close). As for BofA’s results, they highlighted a resilient consumer, with CEO Moynihan noting: “Our US consumer customers remained resilient with solid, albeit slower growing, spending levels and still maintaining high deposits”. Credit card delinquencies were also cited as lower than pre-pandemic levels, while NIMs widened to 2.06% from 1.86%, and were a little higher than the 2.0% expected.

In the FX market, positive risk sentiment saw the USD weaken against most major currencies except the JPY. Unsurprisingly, the gains were led by the GBP, as shown above, in the shadow of the move in gilt yields, with GBP +1.6% at 1.1349, not far from its pre-budget level. -mini of 1.15 and far from the lows seen at the height of the drama when it looked like it was going to dip below parity. USD/Yen was +0.2% at 148.95, a fresh 32-year high with BoJ rhetoric meaning the only way is until it is interrupted by the next set of dips. interventions in the foreign exchange market. Many note 150 as a key psychological level that the government will want to avoid a prolonged break from, for political reasons. The other major currencies reflected the more positive sentiment with AUD +1.4% at 0.6285, NZD +1.1% at 0.5625 and EUR +1.2% at 0.9834.

As for economic data, it was scarce and did not evolve in the market. The US NY Empire Manufacturing Survey disappointed at -9.1 vs. -4.3 expected. There wasn’t much in the report’s key developments with details noting little change in new orders, unfulfilled orders or shipments. Inventories increased slightly and on the price side, input prices recovered, but selling prices remained stable. North of the border, the latest consumer and business surveys from the Bank of Canada have revealed inflation expectations that are still very strong, firming up another 50 or 75 basis points at the next meeting. .

Coming :

  • UA: RBA and Bullock Minutes: The RBA’s October minutes will be read carefully to frame the decision to raise 25 basis points instead of 50 basis points. At the time of writing, this should not be considered accommodative and NAB sees the RBA rising 25 basis points in November and December. A return to a 50bp hike also cannot be entirely ruled out if the CPI were significantly higher and wider than the RBA forecast. Deputy Governor Bullock will also speak on “policy-making at the Reserve Bank” at the AFIA conference, the first high-level speaker since the decision to raise 25 basis points.
  • New Zealand: CPI-Q3: Headline CPI is estimated at 1.5% q/q, a slightly slower pace than the 1.7% seen last quarter. As for the risks, they are on the upside. Note that the RBNZ, back in its August MPS, was forecasting 6.4% y/y, based on a 1.4% rise for the quarter.
  • CH: GDP-3 and activity data: China’s third-quarter GDP and monthly activity data were due to be released today, but yesterday the statistics bureau announced that the numbers would be delayed, likely due to the CCCP Congress being ongoing.
  • EZ: German speakers ZEW and ECB: Analyst expectations remain dire with consensus at -66.6 vs -61.9 last month. Two ECB speakers are also scheduled with Makhlouf and Schnabel on the list
  • United States: Industrial Production and Fed Responders: The consensus calls for 0.1% m/m after -0.2% last month. There are also two Fed speakers with Bostic and Kashkari on the list.

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