US stocks rallied on the first day of the fourth quarter, posting their biggest daily rise since August after the UK government on Monday reneged on plans for an unfunded tax cut that had spooked investors and rattled bond markets.
Wall Street’s benchmark S&P 500 stock index closed up 2.6%, while the tech-heavy Nasdaq Composite added 2.3%. Both indexes recorded their biggest daily increases since August.
U.S. stock indexes have had a bruising year to date, with declines in each of the three quarters through September in the longest streak of quarterly losses since 2008.
“What we see today is not necessarily healthy. People are full of hope and desire and want to put September behind them, but the underlying issues are still 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 slipping 0.18 percentage points as its price rose. The two-year yield, which is more sensitive to changes in interest rate expectations, fell 0.09 percentage point to 4.12%. Ten-year gilt yields also fell on Monday, falling 0.19 percentage points to 3.96%.
Concerns have intensified this year that the US Federal Reserve and other central banks will raise borrowing costs so rapidly in their efforts to rein in inflation that they are worsening a global economic slowdown.
On Monday, markets were pricing in expectations for US benchmark interest rates to rise to just under 4.4% by March 2023, down from expectations of around 4.7% a year ago. 10 days. The Fed’s current target range is between 3% and 3.25% after three consecutive increases of 0.75 percentage points.
Monday’s upbeat activity came after British Prime Minister Liz Truss’ government scrapped plans to cut taxes on high earners in the UK.
Chancellor Kwasi Kwarteng’s ‘mini’ budget, which included a plan for £45billion in unfunded tax cuts, had caused global stocks to fall and gilts to sell off. This eventually led the Bank of England to intervene last Wednesday, pledging to buy long-term government debt to stabilize the market.
UBS analysts wrote on Monday: “The biggest question for markets in the wake of the UK crisis is whether this is just a limited one-off event in the UK, or whether increased volatility of the global rates market will expose similar risks. cracks in the financial system here across the pond?
The pound rose after Westminster’s U-turn on Monday, rising 1.3% against the dollar to $1.13 after falling last week to its lowest level on record. London’s FTSE 100 index gained 0.2%.
Still, analysts remain unconvinced that the pound would rally much further. “The [U-turn] is rather symbolic, being less about the amount of money it will save. . . and more about the wrong signal he sent of ideological (unfunded) tax cuts,” according to ING strategists.
U.S. data on Monday showed growth in manufacturing activity was weaker than expected last month, with an ISM index registering a reading of 50.9 for September – the lowest since May 2020.
Economists polled by Reuters had expected a figure of 52.2, down from 52.8 in August. Any number above 50 indicates expansion.
In commodities, benchmark Brent crude was up 4.4% at $88.86 a barrel, helped by news that international producer alliance Opec+ was planning a substantial production cut. Those gains in turn propelled energy stocks higher on Monday.
The European regional Stoxx 600 index ended the day up 0.8%.