Bailey vs Kwarteng

Andrew Bailey’s gamble appears to be paying off, at least for the time being. Analysts predicted that the Bank of England governor would be forced to reverse his vow to end the Bank’s £65 billion ($74 billion) emergency bond-buying facility this Friday as planned. Chancellor of the Exchequer Kwasi Kwarteng warned that it would be “a matter for the governor” if the rout extended into next week, but he then dashed back to London from the International Monetary Fund’s meeting in Washington to deal with the mounting crisis. It was clear Kwarteng’s budget was unraveling and he had no choice but to prepare what could prove to be the mother of all U-turns.

Reversal for the Ages

It was a stock reversal for the ages: A near-uniform plunge followed by an everything rally made for a dizzying day on Wall Street. The S&P 500 wiped out a 2.4% loss, marking the first time since July that it reversed a decline of 2%, and closed a whopping 2.6% higher. Never before has the market experienced such extreme readings in both directions in one day, according to Bloomberg data going back to 1990. Whatever the reason, it’s pain for bears who found their stance validated by a stronger print on the US consumer price index, with core inflation at 40-year high, only to see their profits evaporate in a matter of hours.

ECB Balance Sheet

Hawkish European Central Bank officials aim to start unwinding the institution’s €5.1 trillion ($4.9 trillion) asset hoard by early 2023 while retaining interest rates as their primary monetary-policy tool, according to people familiar with the matter. A consensus is emerging among some Governing Council members that the process of shrinking should run in the background while the ECB focuses on setting borrowing costs. ECB hawks have effectively dictated the momentum of monetary policy since early June, a dominance over decision-making that suggests their opinions might well continue to hold sway. 

Private Bets

A shift toward private markets is cushioning many of the world’s largest investors from the wreckage wrought by runaway inflation and spiraling interest rates. The big question now looming over giants from China’s $1.2 trillion sovereign wealth fund to California’s public pension, the largest in the US, is how long those private bets will remain insulated as the economic outlook darkens. The ten biggest global funds that disclose holdings in non-public markets doubled their combined weightings to assets such as private equity and credit, real estate, infrastructure and hedge funds to about a quarter of their portfolios since the global financial crisis.

Courting Credit Suisse

Mizuho Financial has emerged as a suitor for at least part of Credit Suisse’s securitized products group as the Swiss bank moves closer to a final deal, according to people with knowledge of the matter. The Japanese bank is competing against parties including Apollo Global, Centerbridge Partners, Pimco and Sixth Street. Credit Suisse has said the securitized products platform is highly profitable and employs about $20 billion in risk-weighted assets and roughly $75 billion of leverage exposure, which is a regulatory measure of assets. It is due to unveil the results of its strategic review on Oct. 27.

Coming Up…

European shares are set to rally after US equities rebounded from losses that were fueled by a hot inflation report. Finland, France and Spain also issue CPI prints today. The BOE’s emergency bond buying is set to end. ECB’S Robert Holzmann speaks at a conference. JPMorgan, Wells Fargo, Citi and Morgan Stanley are the first major US banks to report quarterly earnings.

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(Source: Bloomberg, Oct. 14-2022)