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No pivot, no cry

Stocks roared higher, turning around big losses at the open on Wall Street yesterday after a hot inflation reading initially spooked investors. The S&P 500 rose 2.6% to snap a six day losing streak. The Dow Jones finished 827pts higher having been down by more than 500pts at one point. It was a remarkable turnaround – one of the widest intraday swings – about 5% - for the S&P 500 in history. The buoyant mood lifted European stocks, which trade around 1% higher in early trade on Friday. The dollar initially popped on the CPI report but then erased gains as risk sentiment turned a lot more positive. 

Was that the moment of capitulation? 

Maybe...but I don’t think so. Things looked pretty heavily oversold with the S&P 500 at 3,500, but when you get that kind of vicious rip against the data points it’s not a sign of strength. Undoubtedly dip buyers sniffed that as their opportunity – at 3,500 it was screaming to bounce back at least a bit. And shorts were covered. But I think when there is this level of volatility we still need to be cautious about calling the end. Markets, though, have moved to price in more like the kind of hiking the Fed will need to do. Worth noting that we saw a similar kind of rip on October 13th 2008 – the market didn’t bottom until March ’09.

Kwarteng flies home

Gilts are in focus with the Bank of England set to end its market intervention today. The 30yr gilt fell about 12bps to 4.42% at the open before inching higher to 4.45%. It had been above 5% just two days ago. The 10yr also shed about 12bps at the open to 4.07% from 4.19%. The 20yr declined by a similar margin to 4.53% from 4.64%. Sterling also traded higher, with GBPUSD at 1.1270 on Friday morning – boosted in part by a rally for risk assets yesterday afternoon in the US, but clearly helped by the partial recovery in gilts we have seen. 

Gilt yields fell as investors speculated Truss and Kwarteng will be forced into a humiliating U-turn on tax cuts. There is not the same fear as there was a couple of days ago when Andrew Bailey laid down the law and said funds have three days to get their house in order. Given the Bank is maintaining a hard line, we think that the market is moving on expectations that the government will back down or seek to soothe markets somehow. Could this be a false hope? Kwarteng is flying back from Washington early to speak to Truss – he could be made the fall guy.

Bank earnings

JPMorgan, Wells Fargo and Citigroup get earnings season unofficially off to a start today. Profits at JPMorgan are set to drop 24%, while net income at Citigroup and Wells Fargo are expected to decline 32% and 17%, respectively, according to Refinitiv data. Whilst rising rates are expected to help net interest income, it’s feared that the Fed’s aggressive hiking cycle will push the economy into recession. Investors are also concerned about increasing loan loss provision. "We expect moderate, yet increasing, negative impact on banks' asset quality and loan growth stemming from the higher rates, inflation and a mild recession in the US, negating some of the benefits of higher rates," analysts at Fitch Ratings said.

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