Surprising risk-on rally
Macro & Overnight
Counterintuitively US markets reacted positively to higher than expected inflation data overnight. After initial markdowns in what appeared as short covering, then developed into a broader market rally, financial markets staged a significant risk on rally that extended into Asian trading. This move’s explanation includes “we have run out of sellers” and “the market was pricing in worse.”
At 8.2% year on year, US CPI was hotter than expected, with the core measures of inflation indicating that inflationary expectations are becoming baked into services and labour markets, thus making it “stickier.” The markets see nothing new here.
Sterling and gilts rallied on reports of further government U-turns on fiscal policy and speculation over Liz and Kwasi’s future. One report stated that Conservative MPs must choose between humiliation and oblivion. Sterling has now gained over 2% vs the US dollar since yesterday. This looks rather like a share price rally on the departure of a poorly regarded CEO.
Today is cliff edge day for the UK pension funds to accept BoE support. Governor Bailey may still have to decide between his two key mandates: to ensure financial stability or control inflation. Which is his favourite child? The game of chicken between the BoE and the government continues, and today it looks like Bailey has the stronger hand. But this might change over the next 72 hours.
For now, things remain relatively calm, with sterling and gilts both stronger and equity markets opening up at an end-of-week risk-on move.
UK Company News
Today is a quiet day for news in UK equities.
International Distributions Services, formerly Royal Mail, has warned about losses in its UK business. H1 operating losses of £219m are worse than expected. £70m of this is due to industrial action. While its international business continues to perform well, the UK is losing its share in the competitive parcel market.
NB Prices are as at the previous day’s close.
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