Budget U-Turns Spark Turnaround for Stocks
Markets endured another rollercoaster ride last week as concerns over inflation and political upheaval triggered more sharp gyrations between gains and losses. Despite the wild ride, most markets ended the up in positive territory, including the blue-chip S&P 500 and technology focussed Nasdaq indices which gained 1.8% and 1.3% respectively.
Close to home, the furore over the mini-budget overshadowed everything and the dismissal of its architect, Kwasi Kwarteng, drove a strong rebound in UK government bonds and the pound. 10-year gilt yields, which move inversely to price, fell by 0.5% in just one week.
The newly appointed chancellor, Jeremy Hunt, can also take some credit for restoring some confidence by bringing forward the revised budget to Monday morning. He effectively tore up the previous version, scrapping two-thirds of the £45 billion of tax cuts and the Energy Price Guarantee will now last until next April, rather than for two years as originally announced.
The more austere budget has dampened expectations of future interest rates in the UK. Just a couple of weeks ago, money markets were pricing in interest rates hitting 6% next summer but they now see them climbing just above 5%. While the Bank of England is still expected to raise rates by a full percentage point on 3rd November, future hikes should be more measured.
Further afield, the release of the US inflation report for September set off one of the most volatile trading days in history on Thursday. US stock indices initially sold off as much as 3% after it was revealed annual core inflation, which strips out more volatile items like food and energy, accelerated to 6.6%.
However, stocks quickly recovered and ended the day more than 2% higher, realising a more than 5% intraday swing. There were no clear reasons for the dramatic bounce back with some arguing it was a technical rebound off oversold levels and others suggesting some key components of the inflation data, such as rental costs, may be peaking.
Company earnings also helped to lift the mood. PepsiCo kicked off the third-quarter earnings season on Wednesday, reporting a 9% increase in revenue to $22 billion. The drinks and snacks company has protected profit margins by raising prices and reducing the size of its products throughout the year. Investors were impressed and its shares rose more than 4% on the day.
Earnings reports from leading US banks followed and the tailwind from higher interest rates was a common theme. JPMorgan Chase reported record net interest income (NII), the difference between the income a bank earns from lending and what it pays on deposits, of $17.6 billion during the quarter.
Citigroup and Wells Fargo also posted better than expected NII but all three banks cautioned that higher interest rates are a double edged sword. They also increase the risk of a recession and higher provisions for bad loans will be needed as some households and businesses find it harder to meet debt repayments.
JPMorgan and Citi also saw investment banking revenues slump as the volatility in markets during the summer sapped appetite for mergers, acquisitions and public listings.
The backlash against the decision by Opec+ to cut oil production by 2 million barrels a day rumbled on. US President Joe Biden asserted that Saudi Arabia, the largest producer in the cartel, will face “consequences” and the International Energy Agency warned the output cut could push the global economy into recession.
Sentiment was further undermined over the weekend when Chinese President Xi Jinping signalled the country’s zero-covid policy would remain in place for some time. China is the world largest importer of oil and the price of Brent Crude fell $5 over the week to $92 a barrel.
(Cover Image Source: Bailey Zindel)