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Now the hard yards

As former Bank of England deputy governor Sir Charlie Bean put it last night, rolling back tax cuts and killing off Trussonomics was the easy bit. It was a myxomatosis rabbit of a policy. The hard part comes next – tough tax and spending choices, a febrile market backdrop and an economy struggling against high inflation and low productivity; stalking growth in this environment is a true test. And whilst the bulk of the mini-maxi-micro-Budget has been ripped up, there’s still a hole in the finances, gilt yields are still materially higher than before it (the stupid premium remains), and credibility is still a problem for the government. Truss looks doomed, but who next? Sunak and Hunt are favourites, and of course if the electorate get a say soon then Starmer. But don’t rule out Boris making a surprise comeback.

BoE delays gilt sales

The Bank of England was reported to be easing things by postponing gilt sales again. The Bank had temporarily paused the start of its planned gilt sale programme from Oct 6th to the end of the month, but the FT reported it had kicked the can further down Threadneedle Street. Cue a rebuff from the BoE, which says it has no intentions to delay gilt sales again. Market participants are worried that commencing gilt sales so sooner after a period of immense stress and with fragility still an issue, it would be too early to start selling. Pausing sales would ease near-term fears about the functioning of the gilt market, whilst going ahead may lead to further uncertainty and volatility. It underlines the difficulties in attempting to stabilise financial markets whilst still acting to combat inflation. 

UK assets recover

Sterling and gilts rallied on the U-turn by the Chancellor. GBPUSD approached a two-week high near 1.1450 yesterday afternoon before easing back overnight. This morning it’s tested the 1.13 with news that the BoE is holding off gilt purchases maybe seen as a dovish twist that could temper sterling bulls’ expectations for further recovery. Meanwhile markets are paring back expectations for the size of the BoE’s hike in November and the terminal rate – how far the BoE goes in this cycle – is now seen about 5.25% from 6% during the peak of the turmoil. This tells much about the market views the Hunt intervention. The 30yr gilt yield was down around 40bps on the session and trades around 4.36% this morning, with the 10yr below 4%. 

Stocks rally

European stocks kicked on in early trading with a positive session on Wall Street reflecting relief at the Hunt doctrine, a weaker US dollar and better-than-expected bank earnings. The FTSE 100 added around 1% in early trade to around the 7,000 level. The DAX added more than 1.5% to 12,840 and the CAC rose 1% to 6,100. Wall Street posted strong gains – the Nasdaq composite rallied more than 3.4% for its best day since July but remains 34% below its 52-week high. The S&P 500 rallied 2.65% to 3,677 and the Dow Jones industrial average jumped almost 2%, or 550pts, to 30,185. Futures are trading higher again pointing to strong gains at the open later – middle of a bear market rip. 

Earnings

Bank of America beat expectations and raised its full-year guidance. So far bank earnings point to a resilient US consumer and things not being as bad as feared – as noted before this less-bad earnings season could catalyse a much sharper bear market rally from here. BofA managed a 24% jump in net interest income to $13.8bn, with net interest margin up above 2% from 1.68%. Investment banking revenues fell 46% however. Shares rallied 6%. 

Netflix reports today. Can it deliver net subscriber adds that satisfy the market? How does it see the new ad-supported service boosting revenues? Will it need to spend more on content to catch up with rivals? On subs – it's been down for two straight quarters but I think it’s not as important as it has been due to the upcoming launch of the ad-supported stream: the focus will be on the guidance for this – how big is the addressable market? It will support new subs and the risk of consumers trading down to save a few bucks a month is probably overdone. The subscriber forecasts from the Street range from +2.3m to +6m….pretty wide and well above the 1m guided by management three months ago. Advertisers seem to be onboard already. Shares are down about 60% and the stock is trading about 20x forward earnings – cheaper than it has been at just about any point in recent history. 

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