Marketmind: QTips

[October 18, 2022]  A look at the day ahead in U.S. and global markets from Mike Dolan.

Whether you believe Britain is a canary in the coalmine of global economic policy or just a idiosyncratic yarn of gross government missteps, world markets remain in thrall to the drama and how it could mark a turn in a relentlessly gloomy year.

Another stream of explanations for the slightly puzzling jump in global stocks since last week did the rounds over the past 24 hours - technical chart patterns, overstretched portfolios and seasonal flows, strong U.S. bank earnings, speculation of geopolitical detente and several other tentative angles.

The S&P500 and MSCI's world stock index have now risen more than 5% since the intraday troughs of last Thursday after the "hot" U.S. inflation report for September. Most Asian and European bourses and the S&P500 futures added another 1% or more on Tuesday.

And that's despite U.S. Federal Reserve interest rate rise expectations homing in on 5% by next March and both 10- and 30-year U.S. Treasury yields above 4%.
 

But many investors do view the UK's handbrake turn as a potential gamechanger. Its new finance minister, Jeremy Hunt, was on Monday forced into a near 180 degree U-turn on last month's tax-slashing budget - moves that are redrawing the outlook for UK public finances, borrowing costs and even the Bank of England (BoE) interest rate trajectory.

If the episode reveals the limitations of a policy mix of fiscal largesse and monetary tightening, then it packs a punch.

One direct read-across for U.S. investors and Fed watchers is what it all means for BoE policy and the outlook for its planned "quantitative tightening" (QT) that would sell down its huge balance sheet of bonds.

On Tuesday, the BoE questioned the accuracy of a Financial Times report that said the central bank would further delay QT beyond next month for fear of destabilising the government bond markets that it's spent two full weeks directly supporting.

The pound slipped again after the BoE statement and UK gilt yields climbed anew.

A Wall St. street sign is seen near the New York Stock Exchange (NYSE) in New York City, U.S., September 17, 2019. REUTERS/Brendan McDermid

What's more, Prime Minister Liz Truss said late on Monday she wouldn't resign yet - adding more uncertainty about what happens at the top of British government.

Elsewhere, Japan's yen continued to plumb new 32-year lows close to 150 per dollar on Tuesday despite persistent verbal protests from Japanese government officials.

There was puzzlement, meantime, over China's last-minute decision to postpone its third-quarter economic growth numbers due to the week's Communist Party congress - with no new schedule for the key data release yet.

With shares in Bank of America and other major U.S. bank stocks surging on Monday on the positive bank earnings twist, Goldman Sachs is due to report third-quarter earnings later on Tuesday - amid Monday's reports of a major internal restructuring.

The other hotly anticipated earnings reports this week are from streamer Netflix, on Tuesday, and electric automaker Tesla later in the week.

Key developments that should provide more direction to U.S. markets later on Tuesday:

* U.S. Sept industrial production, NAHB Oct U.S. housing index, U.S. Aug TIC data on Treasury ownership

* U.S. corporate earnings: Goldman Sachs, Netflix, Lockheed Martin, State Street, Hasbro, J&J, United Airlines, Omnicom, Trust Financial, Signature Bank, Intuitive Surgical, JB Hunt

* Atlanta Federal Reserve President Raphael Bostic speaks in Atlanta, Minneapolis Fed President Neel Kashkari speaks in Minneapolis

* European Central Bank board member Isabel Schnabel speaks in Mannheim

(By Mike Dolan, Editing by Susan Fenton [e-mail]. Twitter: @reutersMikeD)

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