China's market holiday leaves the focus for broader APAC markets elsewhere. The biggest two-day rally in the S&P 500 since April 2020 (5.6%) chimes a 28bp two-day decline in UST 1.0y real yields that is a convincing driver of the 7% rally in the Hang Seng Tech Index. Such large moves tend to be associated with positioning reversals or squeezes. In U.S. equities, for example, the most crowded US shorts identified by US Research were outperforming longs by —2pp during Tuesday's session.
Short squeezes nonetheless require triggers. A rally in global fixed income after the UK rate shock abated following BoE intervention is being given legs by the RBA's smaller-than-expected 25bp rate increase. A soft dovish pivot in Australia does not imply others will follow suit. After all, the RBNZ debated hiking by 75bp before settling on the 50bp increase expected by the market consensus.
But more constructive cross-asset price action following the RBA meeting - including lower FX, equity and rates implied vols - suggests markets are moving beyond expecting central banks that are not too far behind the inflation curve to keep pace with the Fed. If correct, that interpretation suggests a hiatus in the non-linear tightening in global financial conditions that was playing out in the second half of September, even if the FOMC is on autopilot for a 75bp increase at the November meeting.
- UBS Strategy
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