US stocks rallied on the first day of the fourth quarter, notching their largest daily increase since August after the UK government on Monday reneged on its plans for an unfunded tax cut that had spooked investors and roiled bond markets.
Wall Street’s benchmark S&P 500 share index closed up 2.6 per cent, while the technology-heavy Nasdaq Composite added 2.3 per cent. Both indices recorded their biggest daily increases since August.
US stock indices have had a bruising year to date, with declines over each of the three quarters to September in the longest quarterly losing streak since 2008.
“What we’re seeing today is not necessarily healthy. People are very hopeful and wishful and want to put September behind them, but the underlying problems are still out there,” said George Goncalves, head of US macro strategy at MUFG.
US government bonds rallied sharply on the first trading day of the fourth quarter, with the yield on the benchmark 10-year Treasury note sliding 0.18 percentage points as its price rose. The two-year yield, which is more sensitive to changes in interest rate forecasts, shed 0.09 percentage points to 4.12 per cent. Ten-year gilt yields similarly slid on Monday, falling 0.19 percentage points to 3.96 per cent.
Concerns have intensified this year that the US Federal Reserve and other central banks will raise borrowing costs so fast in their efforts to curb inflation that they compound a global economic downturn.
Markets on Monday were pricing in expectations of benchmark US interest rates rising to just under 4.4 per cent by March 2023, down from expectations of about 4.7 per cent 10 days ago. The Fed’s current target range stands at 3 per cent to 3.25 per cent after three consecutive increases of 0.75 percentage points.
The upbeat activity on Monday came after UK prime minister Liz Truss’s government scrapped plans to reduce tax on the UK’s higher earners.
Chancellor Kwasi Kwarteng’s “mini” Budget, which included a plan entailing £45bn in unfunded tax cuts, had spurred a downturn in global equities and a sell-off in gilts. That ultimately led the Bank of England to intervene last Wednesday, pledging to buy long-dated government debt to stabilise the market.
Analysts at UBS wrote on Monday: “The biggest question for the markets in the wake of the UK’s crisis is whether it is just a one-off event limited to the UK, or is the increased volatility in the global rate market going to expose similar cracks in the financial system here on the other side of the pond?”
The pound advanced on Monday following Westminster’s U-turn, rising 1.3 per cent against the dollar to $1.13 after tumbling last week to its weakest level on record. London’s FTSE 100 index gained 0.2 per cent.
Still, analysts remained unconvinced that sterling would rally much further. “The [U-turn] is rather symbolic, being less about the amount of money it will save . . . and more about the poor signal it had delivered of ideological (unfunded) tax cuts,” according to strategists at ING.
US data on Monday showed growth in manufacturing activity was lower than anticipated last month, with an ISM index registering a reading of 50.9 for September — the lowest since May 2020.
Economists polled by Reuters expected a figure of 52.2, compared with August’s figure of 52.8. Any number above 50 indicates expansion.
In commodities, oil benchmark Brent crude settled up 4.4 per cent at $88.86 a barrel, helped by news that the international producers’ alliance Opec+ was planning a substantial cut in output. Those gains in turn propelled energy stocks higher on Monday.
Europe’s regional Stoxx 600 index ended the day up 0.8 per cent.
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