Global equities post large gains amid moderating CPI data

written on November 11, 2022

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

US equities posted their biggest daily gain since 2020 yesterday, following data on October’s consumer price inflation (CPI), which came in cooler than expected. The data seemed to curb expectations regarding how aggressive the Fed could remain with its monetary policy tightening. Treasury yields and the US dollar tumbled to provide fuel for the equity rally. The Dow Jones Industrial Average jumped 3.7%, the S&P 500 Index soared 5.5%, and the Nasdaq Composite skyrocketed 7.4% in heavy volume. European equities also ended decisively higher, with the Euro Stoxx 50 Index up 3.2%.  

Summary

  • Asian equities extended the global rally, buoyed further by news that China eased some Covid rules involving travellers and close contacts. The Hong Kong market led the advance, surging more than 7%, while shares in Australia, Japan, South Korea, and mainland China also posted strong gains. 
  • European and US equity futures edged up, signalling the global relief rally might still have some steam left. 
  • Oil prices rose by around 2% on Friday but were still headed for a sharp weekly drop as a weakening demand outlook overshadowed fears of tighter supply during the period.  
  • China this morning reduced the quarantine time for international travellers by two days. Instead of making travellers stay at a centralised quarantine facility for seven days upon arrival in the country, the new rules stipulate a five-day quarantine, followed by three days of home observation. The new timeframe also applied to close contacts of Covid infections within China.  
  • Inflation in the US rose 0.4% month-over-month (m/m) in October, compared to expectations for a 0.6% gain, and matching September’s unrevised increase. The core rate gained 0.3% m/m, below consensus estimates of 0.5% and south of September’s unadjusted 0.6% gain. Compared to last year, prices were 7.7% higher for the headline and 6.3% for the core rate, both below estimates. 
  • US Treasury yields tumbled following the inflation data, with the yield on the 2-year note plunging 31 basis points (bps) to 4.32%, the yield on the 10-year note dropping 33 bps to 3.82%, and the 30-year bond rate falling 26 bps to 4.05%. 
  • Data this morning showed the British economy shrank 0.2% in Q3, the first contraction in 1-½-years but lower than market forecasts of a 0.5% drop. The contraction does not yet represent a technical recession – characterised by two straight quarters of negative growth – after the second quarter’s 0.1% contraction was revised up to a 0.2% increase. 
  • Rivian Automotive posted an adjusted loss of $1.57 per share, smaller than the $1.79 per share loss that was expected, on revenues of $536 million, which came in south of the forecasted $550 million. The electric vehicle company reaffirmed its 2022 production guidance of 25,000 total units, while noting that the in-transit time from rail shipments coupled with an increase in volume from a ramp up towards the end of the quarter will cause a large discrepancy between production and deliveries. 
  • In his first address to Twitter employees, Elon Musk said that bankruptcy was a possibility if the company does not start generating more cash. The warning came amid a tumultuous start to Musk’s reign at the social media company – a two-week period in which he has fired half of the staff, ushered out most of the top executives, and ordered the remaining employees to stop working from home. 

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