Marketmind: Mystery Dance

A look at the day ahead in U.S. and global markets from Mike Dolan.

The British government isn’t alone in performing dramatic U-turns.

After lunging to 2022 lows on a surprising hot September U.S. inflation reading and the resulting spike in Federal Reserve interest rate expectations, Wall St stocks then suddenly staged their the biggest intraday bounce in nine months – the 5th biggest in the history of the index.

And even though no one was clear why U.S. stocks rose on Thursday, markets around the world rallied in the slipstream anyway overnight.

Sudden and sometimes unexplained stock rallies are often hallmarks of prolonged bear markets. But inevitable “after the fact” speculation on possible triggers has pointed at anything from chart signals to overly skewed exposure to last-minute positioning ahead of today’s big third-quarter earnings slate.

JPMorgan (NYSE:), Morgan Stanley (NYSE:), Citigroup (NYSE:), Wells Fargo (NYSE:) all report profits later on Friday. U.S. stock futures have retraced a bit – but an hour is a long time in markets these days.

Fundamental reasoning for Thursday’s volte face seems thinner, not least with money markets now seeing the Fed’s peak “terminal rate” up another 25 basis points next year and homing in on 5% – which would be the highest policy rate since 2007.

Two-year Treasury yields held most of their gains on Friday and continue to hover about 15-year highs of 4.5%, while 10-year yields keep flirting with 4%. Few saw any crumbs of comfort in the runes of the consumer price report.

So was it all down to the British U-turn and subsequent rally in its “gilts” and the pound – which was unfolding in press speculation as the U.S. inflation news was hitting?

Some said it helped, not least in easing contagion and firesale fears emanating from the UK pensions market but also how a possible reversal of tax cut plans has reduced expectations the Bank of England may need to jack up its policy rates by a full percentage point early next month.

But we still don’t know how it will unfold, despite all the reports of the government ripping up the fiscal plan and even speculation about an ouster of new Prime Minister Liz Truss. The Bank of England is scheduled to end its bond buying intervention on Friday and its ability to do so will hinge on the government’s next move.

British finance minister Kwasi Kwarteng cut short his trip to Washington to return to London, where pressure is mounting for the new government to scrap an economic policy that unleashed turmoil on financial markets.

Elsewhere, China’s stocks surged ahead of the Communist Party Congress and amid an expected rise in domestic inflation.

And Twitter stock was down ahead of the open after news that Elon Musk is being investigated by federal authorities over his conduct in his $44 billion takeover deal for the social media company.

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

* U.S. August retail and business inventories, University of Michigan’s October consumer sentiment and inflation expectations survey.

* U.S. corporate earnings: JPMorgan, Morgan Stanley, Citigroup, Wells Fargo, US Bancorp (NYSE:), PNC, First Republic Bank (NYSE:), UnitedHealth (NYSE:),

* Federal Reserve Board Governor Christopher Waller, Fed Board Governor Lisa Cook, Kansas City Fed President Esther George all speak

* European Central Bank President Christine Lagarde speaks at annual IMF/World Bank meeting in Washington; ECB Board member Fabio Panetta speaks

(By Mike Dolan, mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)

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