Market snapshot: what does yesterday's incredible rebound mean?

After one of the most dramatic recoveries in a single trading session, our head of markets rounds up the action and explains what's going on.

Markets staged an astonishing rebound despite a hotter-than-expected inflation report in the US.

The consumer price index rose by 0.4% in September against an estimate of 0.3%, with the annual number coming in at 8.2% against expectations of 8.1%.

Despite the market initially reacting negatively on the news, which further underlined the case for more aggressive tightening from the Federal Reserve, the Dow Jones surged 1,500 points from low to high.

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Driven by energy and bank stocks, with an additional tailwind coming from the beleaguered technology sector as the likes of Apple Inc (NASDAQ:AAPL) and Microsoft Corp (NASDAQ:MSFT) enjoyed strong gains, each of the major indices ended comfortably higher.

The reasons for the sharp reversal of early losses were not immediately clear, although traders pointed to a technical rebound as investors unwound defensive positions which had been in place ahead of the inflation report. There was also a possibility that the marginal gain in the number could reflect a move nearer to peak inflation, which in turn would at least leave the Fed with something to consider in terms of tapping on the brakes.

Even so, the report has not altered the fact that perhaps at last the message has hit home to the interest rate hike naysayers. The likelihood of a rise of 0.75% at the November Fed meeting is now fully priced in – with a small number speculating a 1% hike – and with the consensus expecting a similar jump in December.

In such circumstances, it remains to be seen whether the rally will prove to be short-lived. The third-quarter earnings season begins in earnest as many of the major banks report today, and as barometers of consumer activity, trends will be closely watched for the likes of mortgage demand and also any deterioration of credit quality. 

In the meantime, sentiment generally remains fragile, with the major indices still deeply in the red despite the overnight bounce. In the year to date, the Dow Jones has declined by 17%, the S&P500 by 23% and the Nasdaq by 32%.

Supportive comments from the Chinese authorities buoyed Asian markets, with the central bank promising more support to an economy which has been hamstrung by Covid-19 lockdowns, deteriorating consumer sentiment and a hapless property sector. However, sentiment also remains on edge with the larger threat of global recession in play.

In the UK, sterling managed some breathing space on speculation that the government could further reverse some of the measures announced at the recent mini-Budget, with the currency standing at around $1.13. 

However, the situation remains poised on a knife-edge, with the Bank of England insisting that it would be ending its emergency support as previously advised, and with comments from the International Monetary Fund that “fiscal policy should not undermine monetary policy”. 

With the UK economic outlook being particularly uncertain, and despite a relief rally in early trade, the FTSE250 continues to bear the brunt of investor pessimism and has declined by 27% in the year to date.

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 The FTSE100 also took some solace from the possibly temporary flip in sentiment, moving ahead in early exchanges and underpinned by gains in the likes of potentially oversold sectors of late, most notably the banks and housebuilders. 

The index is down by 6% in the year to date, which leaves it as a relative outperformer in global terms given its exposure to overseas earnings, which should continue to benefit from a strong US dollar as investors have sought haven destinations.