Morning Wrap: Wall St rallies, Bank of England pivots to avert 'Lehman' moment, ASX to rise

US stocks rallied after the Bank of England launched an emergency intervention in bond markets which sent global bond yields lower, oil and gold prices bounce, Germany's consumer confidence hits a record low for a fourth straight month and Fed Evans is nervous about going too far with rate hikes.

Let’s dive in.

MARKETS

• Major US benchmarks rallied after the Bank of England stepped in to buy long-dated UK government bonds

• All three major indices managed to close towards session highs

• The US 2-and-10 Year Treasury yields sank -3.7% and -5.4% respectively

• All 11 US sectors advanced

• Energy rose an outsized 4.4% as oil prices bounced back

• Discretionary, Materials, Industrials and Healthcare all rose at least 2%

• Staples, Utilities and Tech underperformed benchmarks

• 81% of US stocks advanced

• 71% of US stocks trade below their 200-day moving average (74% on Wednesday, 70% a week ago)

STOCKS

• Netflix (+9.3%) was upgraded to Overweight by Atlantic Equities. The broker said Netflix’s upcoming discounted and ad-supported subscription tier could boost its valuation by as much as 26%

• DocuSign (+5.1%) announced a restructuring plan that’ll cut its workforce by 9% 

• Apple (-1.3%) shares failed to rally following a report about the company ditching plans to boost new iPhone production due to weak demand 

QUICK BITES

• Yuan in freefall: The Yuan's drawdown has been unprecedented as the People's Bank of China retains an accommodative stance on monetary policy while the rest of the world rushes to tighten financial conditions

Source: The Daily Shot

WORLD NEWS 

• BoE pledges unlimited bond-buying to avert imminent gilts crash (Bloomberg)

• The reason the BoE is buying long gilts: an LDI blow-up (FT)

• Rio warns miners not moving fast enough on lithium extraction (Bloomberg)

• Florida braces for disaster as Hurricane Ian nears landfall (Bloomberg)

• NFT trading volumes collapse 97% from January peak (Bloomberg)

ECONOMY

• Germany’s GFK consumer confidence index hit a record low of -42.5 in October

  • This is a fourth straight month of record lows and below market expectations of a -39 reading

Highlights from key central bank policymakers:

• Fed Atlanta President Bostic:

  • Inflation is still too high and he backs raising interest rates by a further 125 bps by the end of this year

• Fed Chicago President Evans: 

  • "There are lags in monetary policy and we have moved expeditiously. We have done three 75 bps increases in a row & there is a talk of more to get to that 4.25% to 4.5% by the end of the year, you're not leaving much time to sort of look at each monthly release.”

  • "Well, I am a little nervous about [going too far] … I still believe that our consensus, the median forecasts, are to get to the peak funds rate by March — assuming there are no further adverse shocks. And if things get better, we could perhaps do less.”

The Bank of England started to buy UK bonds in an attempt to stabilise the market. Some interesting extracts from IFR:

• “Traders have reported heavy selling of long-dated Gilts in recent days as so-called liability driven investment strategies managing defined benefit pension schemes have been forced to raise money to fund margin calls on their portfolios.”

• “Those margin calls had threatened to create a self-reinforcing feedback loop, where rising yields precipitate more calls for collateral and further selling, pushing up yields once more.”

Another interesting line(s) from the Financial Times:

• "That process had put pension funds at risk of insolvency, because the mass sell-offs pushed down further the price of gilts held by funds as assets, requiring them to stump up even more cash."

• "At some point this morning I was worried this was the beginning of the end," said a senior Long-based banker, adding that at one point on Wednesday morning there were no buyers of long-dated UK gilts.

• "It was not quite a Lehman moment. But it got close."

COMMODITIES

• Iron ore futures fell -0.4% to US$98.2 a tonne on Wednesday

  • “The National Development and Reform Commission reiterated that new infrastructure will be the focus of pro-growth measures. Beijing will continue to front-load major projects,” said Daniel Hynes, Senior Commodity Strategist at ANZ

• Oil prices rallied after the EIA report showed a drawdown in crude and gasoline stockpiles. US production is also falling due to maintenance across offshore pipelines in the Gulf of Mexico

  • Hurricane Ian could be another looming factor to disrupt US oil production

• Gold prices bounced strongly after the Bank of England’s intervention that sent global bond yields sharply lower

What on earth is happening. We're all starring in a comedy show right now where:

• The BoE has no choice but to intervene to divert a bond market collapse and bail out pension funds

• The BoE is buying long-dated bonds, otherwise known as quantitative easing or Powell's special: printing money

• The emergency QE is happening as the BoE is stepping up efforts to tighten financial conditions with aggressive interest rate hikes

• The BoE is also arguably 'behind the curve' with rates currently sitting at 2.25% after its September meeting

What the BoE is doing here isn't so much a 'pivot' but rather panic as it ventures into these untested waters. Anyway, back to markets.

The S&P 500 managed to defend June lows and SPI futures imply the ASX 200 will do the same. (Implied open area in the chart below)

XJO chart (Source: TradingView, Annotations by Market Index)

We're looking at a bounce but so what?

Previous Wraps have talked about how the markets were extremely oversold and ripe for a reversal. The million dollar question was when and it seemed like the BoE intervention helped trigger a bounce.

Some of the biggest rallies occur during bear markets as selling exhaustion kicks in (the S&P 500 was on a six day losing streak before today). The rally would also likely trigger some short covering, which further fuels the upside move. But after such a damaging selloff in the past few months, a lot of work is needed.

ASX sectors to watch

Most commodities rallied overnight and most of the ETFs we track closed 2-4% higher. With SPI futures implying a +1.51% open, it wouldn't be surprising to see several stocks and sectors gap up as the market opens.

Copper: Global X Copper Miners ETF rallied 4.3%. Copper spot prices bounced 2.3% from 2-month lows but its still down -3.1% in the last three sessions. Still, expect to see some strength return for local names.

Tech: The Global X Cloud and FinTech ETFs rallied 4.1% and 3.4% respectively. This could see some positive flow for local tech plays.

Global X Cloud ETF chart (Source: TradingView, Annotations by Market Index)

Uranium: ASX-listed uranium stocks gave back all their early gains on Wednesday. We could see them have another crack at a positive day after the Global X Uranium ETF rallied 3.8% overnight.

Energy: Oil prices rallied massively overnight as risk appetite improved, the EIA report posted a massive draw in inventories and on expectations that OPEC+ will cut production at its next meeting. Woodside (ASX: WDS) shares closed 0.3% on Wednesday despite rallying 4.1% in early trade. Maybe the rally has a better chance of sticking today

Brent crude oil chart (Source: TradingView, Annotations by Market Index)

Stocks going ex-dividend:

• Thu: AOF, ARF, CIP, CLW, CMW, COF, CQE, CYG, DXC, DXI, HCW, HDN, KKC, LNK, MGL, NPR, PCI, REP, RFF, SFY, SKS, SLF, TCF, TOT, WPR, XRF

• Fri: EP1, GVF, NCK, PGG, SST

• Mon: VAS, LCE, IPC, WAR

• Tue: SGM, WAX

• Wed: CAM, X64, RIC 

ASX corporate actions occurring today:

• Dividends paid: APM, ARA, BEN, BVS, CAF, CBA, FMG, GQG, IEL, IFL, MPL, NCM, NST, NWL, RHC, UNI

• Listing: None

• Issued shares: AQC, ART, ASN, BLG, CAD, CNU, COI, CVV, DMP, DUB, EAI, EFE, G50, GW1, HMC, LOT, MEU, MFG, MHJ, MRI

Other things of interest (AEST):

• 10:00 pm: German Inflation Rate