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Classic bear market relief rally

Yields and the dollar roll over and equities rally from oversold levels. The reason: chiefly some softer US data has people thinking the Fed might need to take a step back and pause hiking rates earlier than maybe thought. After a very sharp runup for bond yields last week as the UK’s gilt market broke, Monday saw a very abrupt correction. Rate cut bets in 2023 are on the rise again. But I think thoughts of pivots are a little premature. Indeed the acceleration in services inflation in the EU and US is a worrying sign that they will need to do a lot more. Where we could get to is a situation where the CBs pivot prematurely for financial stability reasons (gilt markets, CS, whatever) whilst inflation is still running super-hot, further embedding inflation. We await to see what happens when the BoE ends its gilt market operation in the coming days.

Stocks rally

The Dow Jones rallied over 765pts, its best day since June, while the S&P 500 rose 2.6%, with only an 8.6% decline for Tesla taking the shine off things a bit. Previously on Friday the Dow had closed below 29,000 for the first time since November 2020, dropping 8.8% for the month of September and 6.66% for the quarter. The S&P 500 fell 9.3% last month and more than 5% over the quarter, the third consecutive down quarter – the worst run since 2009. But Monday saw relief as yields tumbled. The yield on the 10yr Treasury note fell to 3.58%, down from multi-year high 4% last week. Declining US yields dragged gilt yields lower too, further easing pressure in the UK market. Later on we have JOLTS jobs openings ahead of Friday’s nonfarm payrolls and some Fed speakers on the wires. 

Sentiment remains quite bubbly this morning with the FTSE 100 rallying about 1% in early trading to move close to 7,000 again, whilst the DAX climbed 200pts to 12,400. Sterling rose to a two-week high at 1.14 as the dollar index slipped to 111, its lowest since September 23rd. The sharp decline in US yields has dragged the dollar down, whilst there is some limited relief about the fiscal situation in the UK and the Bank of England has made it pretty clear that the chancellor’s tax cuts will require more hikes, chief economist Huw Pill on Thursday saying that “it is hard to avoid the conclusion that the fiscal easing announced last week will prompt a significant and necessary monetary policy response in November". 

Sterling at two-week high

Sterling also got some support from a more emollient chancellor as he said ‘I’m listening’, but pushed on with the bulk of the tax cuts that so upset the markets last week. He will bring forward details on how to pay for it all. Whilst the pound has recovered ground, we are not back to where we were – rates are going to have to move higher faster.  Liz Truss this morning says now is the time to take on more borrowing – I beg to differ here – the post-GFC austerity was the time to spend. I think we have seen that bond vigilantes are back – we are a new monetary policy paradigm with rates higher for longer, even if there has been an abrupt correction this week in bond markets.

RBA hikes less than expected

Buoying the mood was the Reserve Bank of Australia only raising rates by 25bps. Investors are starting to belief the big central bank pivot is coming. Governor Lowe wasn’t exactly dovish though: “The cash rate has been increased substantially in a short period…The Board expects to increase interest rates further over the period ahead.” New York Fed president John Williams said tightening in the US still has “significant” way to go. 

OPEC+ set to cut tomorrow

OPEC will cut production, with sources indicating it will agree, along with allies including Russia, to remove more than 1m bpd from the market. Brent trades at its highest in a couple of weeks ahead of tomorrow’s meeting at $89. But can a cut really lift the market beyond $100 again? SPR releases will come to a halt and an EU ban on maritime services transporting Russian oil will see that nation’s production down to 9.5m bpd by February next year, which is a 1.9m bpd drop compared to February 2022.  

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