Friday Close and Weekend Wrap: 14 October 2022

Friday Close and Weekend Wrap: 14 October 2022

Key Points:

  • Stocks Surge in Wild Ride After CPI Data Selloff
  • Rally follows S&P 500 drop to intraday low after CPI data
  • Short covering possible, but much priced in: Richard Bernstein

US stocks roared back from losses sparked by a hot inflation reading on speculation the yearlong selloff had potentially reached a bottom.

The S&P 500 closed up 2.6% after swinging more than 5% during a wild trading day. The benchmark clawed back more than 40% of the losses over a six-day selloff that took it to a two-year low.

Technical levels factored into the bounce. At one point, the benchmark S&P 500 had given back 50% of its post-pandemic rally, triggering programmed buying. A wave of put options bought to protect against such a rout moved into the money, and as profits were booked, that prompted dealers to buy stocks to remain market neutral.

A gauge of consumer price growth rose to a 40-year high last month, sealing the case for the Fed to deliver a large rate hike in November. Stocks plunged 25% this year before Thursday’s rebound, as the central bank tightened policy to curb inflation, leaving investors to weigh how much damage is left for share prices.

Risk assets have been under pressure all year as central banks around the world attempt to tame runaway inflation. The latest data added to evidence the harsh monetary medicine has yet to take hold and comes on the heels of last week’s payrolls figures that showed unemployment rate at a five-decade low in September.

The Treasury curve flattened, with the yield on policy-sensitive two-year notes up 18 basis points at 4.47%. Market bets on rates now lean toward back-to-back 75 basis-point hikes at the next two Fed meetings and expect the central bank to push rates past 4.85% before the tightening cycle ends. The current rate is 3.25%.

Meanwhile, UK markets remained in turmoil almost two weeks after the government unveiled a plan to drastically cut taxes. The pound surged back above $1.13, buoyed by reports that government officials are working on a U-turn of tax cuts. Gilts also rallied, with the yield on 30-year debt dropping as much as 46 basis points.

The yen sank to its lowest level in more than 30 years after the US inflation report, before reversing the move in a whiplash trade that raised market chatter of potential intervention

Elsewhere, oil gained for the first time this week, with crude in New York rising back above $89 a barrel after a US crude report flagged potential bullish drivers, shrugging off inflation data. The International Energy Agency earlier warned production cuts agreed by OPEC+ risked causing oil prices to spike and tipping the global economy into recession. 

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