A look at the day ahead in U.S. and global markets from Mike Dolan.
As scrambling relief rallies go, that was a whopper. Now the hard thinking sets it.
The sheer scale Thursday's surge in world markets on a surprisingly soft U.S. October inflation reading probably says as much about the prevailing gloom and uber bearish positioning in investment portfolios as any new found faith in disinflation.
A year ago, the prospect of a 7.7% annual inflation rate 12 months on would have been shocking. But there's been a lot of water under the bridge and market attrition since, in one the worst year for mixed asset portfolios in a hundred years.
So any sliver of light in that gloom now looks like a shining beacon of hope. That much was clear from the first single-day jump of more than 5% in the S&P500 since the pandemic rebound of 2020 and a 7% boom in the Nasdaq - even though the latter is now only back to where it was on November 1.
As world markets everywhere rose in sympathy, those Wall St gains appear to be holding at least on Friday.
The swoon in U.S. Treasury yields and the dollar was probably even more significant, with two-year yields recording their biggest one-day drop since 2008 and the dollar its deepest fall since 2015.
Prosaicly, it's taken a quarter percentage point off markets' assumed peak for Federal Reserve interest rates next year from 5.1% to 4.85%. And futures now price almost a half point cut from there by the end of 2023.
But that won't be enough to stave off recession, according to prescient bond market signals. The Treasury yield curve between 3-months and 10 years is now more deeply inverted than at any stage since 2019, with the 2-10 year curve at its most negative in 22 years.
But there were other signs of optimism on Friday.
Chinese stocks and bonds surged in the slipsteam of Wall Street's rally but caught an added boost from some easing of COVID quarantine rules there. Hong Kong's Hang Seng index soared almost 8%, its biggest gain in 8 months.
And investors eyed Russia's latest retreat in Ukraine and murmurs of 'talks about talks' there as a possible endgame in the 9-month war.
Britain also kept the 'disinflation' narrative going.
Although a shallower contraction than forecast, the UK economy shrank in the three months to September at the start of what is likely to be a lengthy recession, underscoring the challenge for finance minister Jeremy Hunt as he prepares to raise taxes and cut spending next week.
Ironically for a sector that was sold as an inflation hedge, battered crypto assets - teetering in another existential crisis this week - got some relief from the euphoric U.S. disinflation hopes. But the messy near collapse of cryptocurrency exchange FTX remains unresolved, with huge ramifactons for the future of the entire crypto universe and how it's regulated.
Although Bitcoin managed to bounce with all world markets, it's struggled to keep a foothold back above $17,000 on Friday and is still nursed losses totalling 17% this month alone.
And tech troubles don't end with disinflation. Twitter new owner Elon Musk late Thursday raised the possibility of the social media platform going bankrupt.
In the United States, meanwhile, hundreds of thousands of uncounted votes in Arizona and Nevada held the key to control of the U.S. Senate three days after Americans cast their final ballots in midterm elections.
Key developments that may provide direction to U.S. markets later on Friday:
* U.S. President Joe Biden attends COP27 climate summit in Egypt; U.S. Treasury Secretary Janet Yellen visits India. ASEAN leaders meet in Phnom Penh
* UK Q3 GDP and Sept manfacturing. University of Michigan November sentiment and inflation expectations
GRAPHIC: US inflation, Fed rates and markets - https://fingfx.thomsonreuters.com/gfx/mkt/lgvdkmrlgpo/One.PNG
GRAPHIC: This time it's different? - https://graphics.reuters.com/USA-DOLLAR/mypmomdgdpr/chart_eikon.jpg
GRAPHIC: Pain in crypto land Pain in crypto land - https://graphics.reuters.com/GLOBAL-MARKETS/THEMES/lbvggrkadvq/chart.png
GRAPHIC: UK gilts recover after September budget rout - https://graphics.reuters.com/GLOBAL-MARKETS/mypmomzznpr/chart.png
(By Mike Dolan, editing by Angus MacSwan mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)