Financial markets were hoping to start October on a good note after a difficult September. It looks like they found reasons to be hopeful, since the S&P 500, the Dow Jones and the Nasdaq 100 all recorded gains of more than 2% at the close yesterday. And they all started today well above 1%.

This is partly because of the U-Turn of the UK government on its tax plans. It decided to give up on scrapping the highest income tax bracket. Thus, Liz Truss cancelled out some of the chaos she had caused a few days ago on her country's bond market, that had sent gilt yields (British government bonds) through the roof, and investor morale on the floor, contaminating a good part of the financial world in the process. In reality, her government only reversed the smallest part of its controversial budget proposal, but it was the one that carried the heaviest symbolic burden. The market loves symbols. The announcement sent Gilts yielding sharply lower, made investors cheerful and allowed stocks to move forward again.

U.S. investors also reacted to the deterioration of an activity indicator that they follow closely: the Institute for Supply Management's purchasing managers' index, more commonly known as the "ISM manufacturing index", which is published on the first business day following the end of a quarter. The September ISM has deteriorated sharply and is approaching the contraction zone, a sign that the US economy is slipping. And now you might be wondering: why are the markets going up when the economy is slipping? Well, it’s another case of bad news is good news!

More than the state of the economy, investors are waiting for the moment when the Fed will stop its aggressive monetary policy. This key moment can occur in two ways. Either inflation evaporates or shows signs of evaporating. Or the economic situation becomes so calamitous that the US central bank will forced to say "well OK, we have no choice but to stop the liquidity vacuum cleaner because the cure will end up being worse than the disease". This is where bad news for the US economy can become good news for investors, who yesterday lowered their bets on the peak in key rates that the Fed will have to reach, which materialized in the decline in the yield of US government bonds.

So, yesterday was a good day for a rally, because many investors are starting to believe that central banks will not go as far as feared in their rate hikes. And also because, even if it sounds completely stupid when you put it like that, the beginning of a month, let alone a quarter, reinforces the possibility of an inflexion in the minds of investors. Moreover, the story the market started to tell itself yesterday is conveniently reinforced today by the Australian central bank. Let me explain: the RBA raised its key interest rates by 25 basis points (to 2.60%), while the market was betting on a 50 basis point increase. It explained in its statement that it had decided to moderate its rate hikes to avoid putting too much pressure on the economy, while indicating that further hikes would be necessary before regaining control of prices. This is in line with the narrative that investors want to hear: central banks remain firm, but are on a path to softening their rhetoric. The ASX 200, Sydney's index, is not mistaken as it was up 3.5% after the RBA announcement.

All of this is still very fragile of course, but we can feel that this narrative is quite powerful at the beginning of this week, while waiting for the next important deadlines, such as the September employment figures in the United States, which will fall on Friday, and then the first quarterly corporate results, starting next week.

 

Economic highlights of the day:

In the United States, the JOLTS survey on job openings for August and the durable goods orders for August are the main indicators. All the macro agenda here. 

The dollar is worth EUR 1.0084 and GBP 0.8802. The ounce of gold rallies to USD 1,712. Oil is holding recent gains, with North Sea Brent at USD 90.98 per barrel and U.S. light crude WTI at USD 85.52. The yield on 10-year US debt is little changed at 3.78%. Bitcoin is hovering around USD 20,000.

 

In corporate news:

* The Boeing Company does not expect to obtain certification for the 737 MAX 10 until next summer, according to a letter from the Federal Aviation Administration seen by Reuters.

* Rivian - The electric vehicle maker gained 8.7 percent in premarket trading after confirming its production forecast for this year.

* Poshmark - The U.S. clothing resale platform climbed 13 percent in premarket trading after announcing that it had been acquired by South Korean online retailer Naver for $1.2 billion, its largest acquisition.

 

Analyst recommendations:

  • Blackrock: Morgan Stanley lowers price target to $754 from $773, maintains overweight rating.
  • Gilead: J.P. Morgan raised its recommendation to overweight from neutral. PT up 28% to $80.
  • Hargreaves Lansdown: Jefferies upgrades from Underperform to Hold, targeting GBp 930.
  • Hikma: Berenberg starts monitoring with a "hold" position, targeting GBp 1440.
  • Micron:  Argus Research Corp cut the target on Micron Technology Inc. to $70 from $80. Maintains buy rating.
  • National Grid: Citigroup  upgraded to neutral from sell and lowered its price target to 9.21 pounds sterling from 9.98 pounds.
  • NatWest: AlphaValue moves from Light to Sell targeting GBp 173.
  • Nike: Baird adjusts  price target to $100 from $127, maintains outperform rating.
  • Severn Trent: RBC upgraded Severn Trent to outperform from sector perform and lowered its price target to 29.00 pounds sterling from 29.50 pounds.
  • T. Rowe: Morgan Stanley lowers price target to $114 from $123, maintains equalweight rating.
  • Uber: Morgan Stanley lowers price target to $54 from $70, maintains overweight rating.