US stocks rose on Monday as investors prepare for a busy earnings week for blue-chip technology groups, whose results will be used as a barometer for the health of the consumer economy.
On Wall Street, the benchmark S&P 500 closed 1.2 per cent higher, while the tech-heavy Nasdaq Composite added 0.9 cent, continuing a rally from last week, driven by news that the Federal Reserve may soon slow the pace of interest rate rises.
That positive sentiment will be tested this week as investors examine earnings from Meta, Amazon, Microsoft and Alphabet, which will offer guidance on the strength of the US consumer in a year where online spending and digital advertising revenues have decelerated in the face of rising inflation.
“We believe the full effects of restrictive monetary policy for the economy and corporate profits are not yet well reflected in consensus forecasts — leading to potential disappointments ahead,” UBS analysts wrote on Monday.
“Companies face the challenging combination of weakening demand, rising labour costs and unfavourable comparisons with 2021–22 earnings growth.”
Apple, which on Monday increased prices on its music and TV services, will also report earnings this week. Its shares rose 1.5 per cent on Monday.
Nasdaq’s Golden Dragon index, which tracks US-listed shares in Chinese companies, fell by a record 14.4 per cent on Monday as Alibaba, JD.com and Pinduoduo sold off heavily. The index is down by about 50 per cent this year.
Analysts said that the sell-off was compounded by Beijing’s release of economic data that showed China’s GDP grew by 3.9 per cent year-on-year in the third quarter, below the government’s annual goal of 5.5 per cent.
In the UK, gilts rallied sharply on Monday as Rishi Sunak was confirmed as the UK’s next prime minister, with investors betting that the former chancellor would stick to the economic policies that have calmed markets in recent days.
The 10-year gilt yield sank 0.34 percentage points to trade at 3.71 per cent, reflecting a sizeable rise in price. The pound climbed by as much as 0.9 per cent against the dollar in early trading before falling back amid a broad rise for the US currency to trade little-changed on the day at $1.1279.
Sunak is seen by investors as far more likely to back the fiscal plans of the new chancellor Jeremy Hunt, which helped to restore order to the gilt market.
“Rishi Sunak stands a much better chance of bringing stability to government,” said Derek Halpenny, head of research for global markets at MUFG. “He will not have a privileges committee investigation into lying to parliament that Boris Johnson has and will command credibility from financial markets given his strong opposition to the economic policies of Liz Truss.”
Ten-year yields remain above levels of roughly 3.5 per cent seen prior to Truss’s ill-fated fiscal plans last month, which sent gilts and sterling into a nosedive, triggering a liquidity crisis at pension funds and prompting the Bank of England to step in with an emergency bond-buying programme. But shorter- and longer-dated gilt yields fell back to roughly where they were before September 23.
Investors had also bet that the BoE would be forced to raise interest rates rapidly to prop up a falling pound and offset the inflationary effects of £45bn of unfunded tax cuts.
Interest rate expectations had begun to fall back down following Hunt’s announcement last week that he would scrap most of Truss’s tax-cutting measures.
They moderated further on Monday. Traders expect UK interest rates to rise to just above 5 per cent by next summer, compared with 5.25 per cent last week.
The move comes after Ben Broadbent, the Bank of England’s deputy governor for monetary policy, last week cast doubt on market expectations that interest rates would need to rise to more than 5 per cent to bring down inflation.
Two-year gilt yields, which are highly sensitive to rate expectations, fell 0.33 percentage points to 3.38 per cent.
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