(Neil Wilson – Markets.com)
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. 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 – who else could lead the Tories into an election and stand a chance of winning? Pizzas and parties are quickly forgotten when your gas bill is up 300% and you need to refinance your 2yr mortgage at 5%.
The Bank of England is 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 has not kicked the can further down Threadneedle Street. Market participants were 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. This should ease near-term fears about the functioning of the gilt market but it’s hard not to see this as a dovish pivot. It underlines the difficulties in attempting to stabilise financial markets whilst still acting to combat inflation. The Bank hopes to focus tightening on interest rates and not lean on QT; this will be difficult. Expect QT when it does come to be focused on the shorter end of the curve.
Could the Bank of England have done more? Why didn’t the Bank say it ‘do whatever it takes’ to calm markets and restore order and confidence? Governor Bailey held a very firm line last week and this must have been a key reason for the new chancellor rushing out his Budget reversal early yesterday before the markets had time to act. Should CBs be able to dictate fiscal policy?
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%.
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.
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%.
Morgan Stanley: If rates fall ahead of a decline in inflation “it will give legs to the rally that began last Thursday … We think 4000 is as good a guess as any and would not rule out another attempt to re-take the 200-day moving average (~4150).” Mike Wilson at MS adds: “While that seems like an awfully big move, it would be in line with prior bear market rallies this year and prior ones. The other factor we have to respect is the technicals. As noted two weeks ago, the 200-week moving average … is hard to take out without a fight.”
Pivot? Minutes from the Reserve Bank of Australia show there was a “finely balanced” debate over hiking by 50bps or 25bps, but the committee settled on the latter because “the cash rate had been increased substantially in a short period of time and the full effect of that increase lay ahead”. RBA Deputy Governor Bullock added later in a speech: “The international economic environment has also deteriorated quite sharply.”
Earnings – Netflix 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.
Investors are also eyeing earnings updates from Goldman Sachs, Johnson & Johnson and United Airlines
And finally, why are people are so cynical now? Perhaps it’s because things like this happen – the Biden administration is reportedly set to release millions more barrels from the US Strategic Petroleum Reserve to dampen gasoline prices ahead of the mid-terms. Sources indicate the White House could release 10-15m barrels to push prices down even though the SPR is at its lowest in 40 years. Amrita Sen from Energy Aspects reckons the WH could release another 100m barrels as the existing plan to release 180m barrels comes to an end.