Pass me the towel

It’s still all about inflation; China does not have any, according to the latest figures. Americas is coming down faster than anticipated. After yesterday’s CPI report, at 4%, US inflation is at its lowest level since March 2021. The prospect of inflation remaining higher for longer in the UK is pushing UK interest rates above the level when the financial world threw its toys out of the pram on the announcement of the Liz Truss budget. This is despite Mr Bailey’s expectation inflation will fall sharply in the coming months; UK interest rates are now forecast to peak closer to 6% than 5%.

Equity markets were boosted early on Tuesday as Chinese authorities announced they were lowering short-term interest rates in what is seen as an attempt to help boost their economy. Whilst the rest of the world grapples with rising prices, the Chinese economy is facing the prospect of deflation.

Equity continues to creep up the wall of fear, the economic outlook may not be improving much, but there is a lack of any signs that economies are getting worse. The latest NFIB small business economic trends survey reported that “Overall, small business owners are expressing concerns for future business conditions.” As the index ticked up marginally from last month’s survey, one assumes they feel modestly better than they previously did.

Bears are getting squeezed as the best prepared for bear market continues to fail to materialise. Eventually, the pain gets too great, and the urge to buy something takes over. So where is sentiment, at present, on the pain trade? According to the latest Merrill Lynch fund manager survey, cash levels have fallen, but investors remain underweight equities overall in favour of credit. They are positive on tech. Citywire reported that two-thirds of respondents to the survey said they are now positioning for a soft landing. Signs that money managers may be picking up the towel, if not throwing it into the ring.

BCA research highlights another survey. According to the Exposure Index compiled by the National Association of Active Investment Managers (NAAIM), active risk managers are increasing their net exposure to equities, and FOMO is taking over.

A Citi research note, Bullish sentiment across US equities continues to widen. In contrast to the week before, last week saw a significant rise in risk flows to S&P; as a consequence, positioning for both S&P and Nasdaq futures is extended. Speculative futures positioning would also indicate a more bullish stance.

For today’s attention will be the conclusion of this month’s FOMC meeting, with particular scrutiny of any changes in the Fed’s messaging, on its planned pace of tightening, within the statement text and Fed Chairman Powell’s post-meeting press conference. The start in Europe sees equity futures flat.