Stock futures reverse as big market rally fizzles out
franckreporter
U.S. stocks look ready to sing the bear market blues again this morning after the Bank of England shuffled sentiment with a dominant turnaround. Fearing a breakdown in market stability, the central bank promised to buy long-dated bonds "on whatever scale is necessary," sending the yield on the 30-year gilt down by a full percentage point in the span of just a few hours. The chorus quickly spread across the Atlantic, with U.S. debt echoing similar moves, as the 10-year Treasury yield fell 26 bps to 3.707% for its largest one-day decline since March 2009.
Knee-jerk reaction? Stocks soared higher as bonds surged - just a day after the S&P 500 notched a new bear market low - but many cautioned that the rally was far from sustainable. Futures are reflecting the outlook Thursday morning, with contracts linked to the Dow (DJI), benchmark S&P 500 (SP500) and tech-heavy Nasdaq (COMP.IND) off by more than 1.2% at the time of writing. Many also doubt that the Fed will blink like the Bank of England, which is worried about shoring up investor confidence after a series of planned tax cuts sparked days of turmoil in the financial markets.
In contrast, the U.S. central bank is steadfast in its mission to stamp out inflation. It has shown a disregard to the stock crash of 2022, soaring yields and a skyrocketing dollar, especially since it wants prices and consumer spending power to come down. The Fed is also not afraid of the "unwarranted tightening of financing conditions" and "flow of credit to the real economy" that was flagged by the Bank of England, and it would likely take a more serious breakdown in U.S. trading conditions to ignite a reversal of QT policies.
Will the strategy even work? "The BoE's bond purchases may temper the UK government's borrowing costs but have not resolved the tensions between fiscal loosening and monetary tightening," noted Carol Kong, strategist at Commonwealth Bank of Australia. "Sterling is not out of the woods [with] the BoE seen addressing the symptom and not the cause," added DBS currency strategist Philip Wee. "The government has yet to address the credibility of the tax cut plans, which critics see adding to the inflation woes."