US equities rebound 2.8% from oversold level, helped by positive Bank of America earnings. Risk appetite improves on UK government policy U-turn

The new week has begun with a rebound in risk appetite, buoyed by the U-turn in UK government policy and a strong earnings result from Bank of America. Global equities show strong gains and the USD is under pressure, with GBP leading the gains and the NZD driving well up through 0.56. UK rates show some large falls across the curve, dragging other global rates lower.

New Chancellor of the Exchequer Hunt has wasted no time in reversing much of what PM Truss and ex Chancellor Kwarteng announced since coming to power, scrapping £32b of unfunded tax cuts, including the planned basic income tax cut and cuts to dividend taxes, adding to the savings on corporate taxes announced at the end of last week. Additionally, the energy support programme would be redesigned, making it more targeted for households from April, reducing the exposure of public finances “to unlimited volatility in the international gas prices”. Hunt indicated that there would be “many more difficult decisions” to be announced, with the Budget update still due 31 October. Hunt addressed Parliament and conveyed “a very firm and clear commitment to fiscal responsibility”.

How long Truss will remain PM remains an open question, with at least five Conservative MPs publicly calling her to resign and the latest political poll puts support for Labour at 56% and the Conservatives at 20%, a record gap of 36 points. However, the appointment of Hunt and more favourable market backdrop has brought Truss some time and she looks likely to outlast the iceberg lettuce that the Daily Star has put her tenure up against.

The market has given a big thumbs up to the government’s policy U-turn, unwinding some of the risk premia that had been built into UK asset prices, and supported by the fact that it tones down the required BoE policy tightening that was previously necessary to counteract the massive fiscal splurge. The Bank of England confirmed that its temporary emergency gilt buying programme had ended and the temporary expanded collateral repo facility would be available until 10 November. It also intends to resume sales next week of the £18.6b corporate bonds it holds under its Corporate Bond Purchase Scheme.

Market pricing for the BoE’s November meeting now sits a little under 100bps with a peak rate of 5.15%, well below the 150+bps and peak rate of over 6.25% seen near the end of September. UK gilt yields have plunged overnight in the order of 35-45bps and GBP is the best performing of the majors, up nearly 2% to just under 1.14.

Lower UK rates have spilled over into global markets, with key European 10-year rates down about 8-9bps. The US 10-year Treasury rate fell as much as 10bps to 3.91% but a strong “risk-on” rally in US equity markets has since spilled over into higher rates and the 10-year rate has climbed back to just under 4%, now only down 2bps from last week’s close.

The S&P500 is currently up 2.8%, supported by stronger earnings and signs that the market has been oversold recently. Bank of America posted a strong result, with CEO Moynihan saying the “the customers’ resilience and health remain strong”, a contrast to JP Morgan CEO Dimon’s “economic hurricane” narrative.

In currency markets, positive risk sentiment has seen the USD knocked off its perch, led by GBP as noted above and with strong gains from all the key majors apart from the yen. USD/JPY traded a fresh 32-year high of 148.89 overnight, the market continuing to test the levels for the next round of FX intervention. Many are noting 150 as a key psychological level that the government will be keen to avoid a sustained break of, for political reasons.

The NZD is up over 1.3% from last week’s close and traded just under 0.5650 in the last couple of hours. The AUD has returned to a 0.63 handle and NZD/AUD has slipped a little to 0.8950.  NZD/GBP is down to levels not seen since February, at 0.4950. NZD/EUR is slightly stronger at 0.5925 while NZD/JPY is up nearly 1½% to 83.9.

The domestic rates market continued to face upside pressure from global forces, with the 2-year swap rate crossing the 5% mark for the first time since 2008, consistent with market pricing of the OCR at that mark by May next year. While swap rates were up 7-9bps across the curve, NZGB yields were better contained, with a lift of about 3bps, seeing a widening of bond-swap spreads. A wider spread is likely to be sustained as we head towards the inclusion of NZGBs into the WGBI from 1 November. The Australian 10-year bond future is down 8bps in yield terms since the NZ close, setting the scene for NZ rates to reverse course on the open.

In the day ahead, NZ CPI data for Q3 is likely to show ongoing strength in inflation, so don’t get sucked in by headlines of annual inflation falling from 7.3% to around 6½%. Core inflation measures will remain uncomfortably high and non-tradeables inflation of 1.8% q/q will be testament to that. As with global inflation, the balance of risk is weighed towards a stronger result.

China Q3 GDP and monthly activity data were due to be released today but yesterday the statistics bureau announced that the figures would be delayed, likely linked to the fact that the CCCP Congress is still underway.