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Wall Street stocks rally as traders turn to corporate earnings

Wall Street stocks rose sharply on Monday, as better than expected earnings from Bank of America and an abrupt U-turn on tax cuts from the UK government buoyed market sentiment.

The S&P 500 was up 2.7 per cent by the early afternoon in New York, while the tech-heavy Nasdaq Composite gained 3.3 per cent. In Europe, the regional Stoxx Europe 600 closed up 1.8 per cent and London’s FTSE 100 advanced 0.9 per cent.

Those rallies came after Bank of America posted stronger than anticipated third-quarter results on Monday, pointing to “resilient” US consumer clients. Expanding profit margins from consumer lending helped to temper falling investment banking revenues.

Shares in the US bank rose 5 per cent, as it followed JPMorgan Chase in reporting a smaller than expected drop in profits.

Investors are watching corporate earnings closely for signs of strain from high inflation and rising borrowing costs. The Federal Reserve has raised interest rates 0.75 percentage points over three consecutive meetings, taking its target range to 3 to 3.25 per cent.

“The resilience of the consumer in the US and the UK has been a big support for earnings resilience,” said Eren Osman, a senior investment manager at Arbuthnot Latham & Co. “That’s going to come under increasing pressure as we see inflation remain high.”

However, robust third-quarter reports and the UK government’s “sincere apology” on its disruptive tax cuts both supported the market on Monday, said Thomas Thygesen, head of strategy at SEB Research.

“From a broader perspective, you could say that all this has happened as we were ‘due’ a break,” he added, after significant sell-offs in stock markets this year. This “could [lead to] some kind of stabilisation or even a bear rally for stocks while we wait for . . . lower earnings estimates.”

The rally on Wall Street reversed declines in the previous session. The S&P and Nasdaq had dropped sharply on Friday, with the latter gauge sliding more than 3 per cent after a downbeat survey of inflation expectations from the University of Michigan sparked fresh concerns about the Federal Reserve raising rates more aggressively into a slowing economy.

Investors will also analyse fresh UK inflation data on Wednesday, with economists polled by Reuters expecting the consumer price index to have climbed 10 per cent in September — an acceleration from 9.9 per cent in August.

A higher or lower than expected reading could trigger further moves in UK bond markets, which have swung by historic magnitudes in recent weeks in the wake of the “mini” Budget delivered on September 23.

Gilts rallied on Monday after new UK chancellor Jeremy Hunt abandoned many of the government’s fiscal proposals unveiled last month, scrapping tax cuts and shortening the length of its package to subsidise energy bills in an attempt to reassure markets.

As gilt prices rose, 30-year yields dropped more than 0.4 percentage points to 4.36 per cent, but remained above their levels of about 3.75 per cent before former chancellor Kwasi Kwarteng announced Westminster’s fiscal plans.

“There is no doubt this means market turmoil should lessen,” said Neil Birrell, chief investment officer at Premier Miton. “However, political uncertainty has not gone away but has probably increased. Furthermore, for investors outside the UK looking to commit money here, this seesawing can’t help our case.”

The pound rose 2.2 per cent against the dollar to $1.141. Sterling had fallen 1.4 per cent on Friday after UK prime minister Liz Truss sacked Kwarteng and abandoned a corporation tax cut.

Elsewhere in currencies, the Japanese yen weakened to ¥148.89 against the dollar, a fresh 32-year low. The greenback, which has risen 18 per cent in 2022 against other peers because of climbing US interest rates and its status as the world’s reserve currency, slipped 0.9 per cent.

In Asian equity markets, Japan’s Topix index ended the day down 1 per cent, while Hong Kong’s Hang Seng closed up 0.2 per cent.

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