Morning Bid: Shaken but not stirred

A look at the day ahead in European and global markets from Anshuman Daga

Red-hot U.S. inflation data briefly rattled global markets before Wall Street made a dramatic recovery on Thursday.

U.S. stocks surged to finish more than 2% higher, reversing sharp falls as traders gave excuses of a “technical support” and “short covering”.

For now, it looks like investors are pricing in another leap-up in short-term borrowing costs from the Federal Reserve.

The seemingly-unstoppable dollar held firm and the yen hovered around 32-year lows. Now economists expect the Fed to raise rates, which currently stands at 3.125%, by at least 75 bps next month and to further raise them into next year.

Today, market attention is squarely on whether a turbulent UK bond market may force the Bank of England to maintain some kind of support though it has said its emergency bond purchases are due to end on Friday.

Underscoring the pressure on Prime Minister Liz Truss’s government, finance minister Kwasi Kwarteng cut short his trip to Washington and headed back to London amid reports Truss is considering reversing more of her controversial “mini-budget”.

Kwarteng confirmed to reporters in Washington that he was flying back to London early, without providing further details. Sources familiar with the matter said he planned to meet with colleagues to work on his medium-term budget plan.

Advice is coming in fast for Kwarteng.

The head of the IMF, Kristalina Georgieva, said she had told Kwarteng of the importance of “policy coherence and communicating clearly”.

On Thursday, British government bond prices rose strongly on speculation about the mini-budget u-turn. Sterling last traded slightly weaker, reversing earlier steep gains made late on Thursday.

Meanwhile, sources told Reuters that European Central Bank policymakers discussed earlier this month a detailed timeline for running down a 3.3 billion euro ($3.23 billion) bond portfolio and envisioned the start of quantitative tightening sometime in the second quarter of 2023.

In Asia, investors poured money into risky assets, driving up stock markets after the stellar gains on Wall Street.

Key developments that could influence markets on Friday:

Economic data: China’s Sept trade figures; euro zone Sept flash CPI

Speakers: Fed Reserve Vice Chair Lael Brainard and Fed Reserve Bank of New York President John Williams speak at conference on monetary policy

($1 = 1.0216 euros)