Must read: Wall Street boom, sterling, FTSE 100, Rio Tinto, 888, Moneysupermarket

After days of gloom and volatility, UK stocks are racing higher following an outbreak of optimism in the US overnight and following yesterday's budget volte-face. Our head of investment explains what's going on. 

GLOBAL MARKETS 

European markets have opened higher, extending gains, with the major bourses trading in the green as technology, media and construction outperform while the basic resources sector lags. 

US futures are trading higher after the Nasdaq logged its best day since July thanks to strong third-quarter earnings from Bank of America Corp (NYSE:BAC). It topped expectations on the top and bottom line, driven by improved net interest margins and described the US consumer as ‘resilient'.

• Read about how to: Open a Trading Account | How to start Trading Stocks | Top UK shares

Focus now shifts to The Goldman Sachs Group Inc (NYSE:GS) which is expected to announce a major reorganisation of its business when it delivers earnings later today.

UK MARKETS 

The pound is trading flat, having slightly come off yesterday’s highs against the US dollar. On Monday, sterling enjoyed its best daily surge since the start of Covid-19 after the new chancellor reversed almost all the tax cuts of his predecessor. The FTSE 100 is extending gains, trading just shy of 7,000, with finance and insurance stocks like Barclays (LSE:BARC), Legal & General Group (LSE:LGEN) and Prudential (LSE:PRU) towards the top of the UK basket. 

There’s no denying that the Trussonomics agenda to slash taxes, boost spending, borrow, and hope that growth will pay for it, is now dead. The bond vigilantes won after the gilt market turmoil prompted emergency intervention from the Bank of England.

• Record revenue but Bellway warns demand moderating
• Jeremy Hunt scraps tax cuts: winners and losers

New chancellor Jeremy Hunt has now outlined the beginnings of an entirely new economic strategy, focusing on fiscal prudence, boosting confidence. and restoring financial stability by cutting spending and raising taxes after all.

BANK OF ENGLAND 

The Bank of England could delay its shift to quantitative tightening following its intervention into the bond market to offset the negative market fallout from the mini-budget. According to the Financial Times, the central bank is expected to delay unwinding its £838 billion quantitative easing programme to beyond next month. 

Given the recent gilt market turmoil and the knock-on impact on pension funds, the Bank of England was forced to intervene with a temporary emergency long-dated bond buying intervention. Although that support has now been removed, the central bank’s mandate to ensure the orderly functioning of financial markets remains. That suggests it would be wise for the Bank of England to hold off at least for now from selling bonds, which could unnecessarily add to selling pressures in an already fragile market, given the financial contagion that a dysfunctional market sell-off would provoke.

Markets will be paying close attention to the Bank's rate decision early next month. On the one hand, the calm that has been restored to markets and a new fiscal strategy, which complements rather than conflicts with that of the central bank’s fight against inflation, could mean that less aggressive interest rate increases are now required, especially given the rebound for the pound.

On the other hand, Hunt’s changes to the energy price guarantee could mean higher fuel bills for households, adding to the UK’s inflationary burden which would need a more hawkish response from the Bank of England. At the moment, the Bank rate is expected to peak around 5% next spring, down from 6% a fortnight ago with a 75-basis point increase pencilled in for November.

RIO TINTO 

Rio Tinto (LSE:RIO) said its full-year iron ore shipments are expected to come in at the lower end of its guided range for between 320 and 335 million tonnes, as third-quarter iron ore deliveries fell 1% year-on-year to 82.9 million tonnes. 

The mining giant has been grappling with declining iron ore prices which have been trading lower since April, hit by softening demand particularly from the world’s second largest economy China and cost inflation which has sharply increased and squeezed margins.

Reflecting these headwinds, shares in Rio Tinto are down by more than 20% over the past six months, even after the slight rebound at the end of September. As a company that correlated with the economic cycle, a global economic slowdown could weigh on Rio Tinto and the broader mining sector in the months ahead.

888

888 Holdings (LSE:888) reported a 7% drop in third-quarter revenue to £449 million year-on-year. The bookmaker anticipates fourth-quarter revenue to pick up again but to come in broadly in line with the same period last year. Retail revenue hit £124 million despite a £4 million hit due to the period of national mourning for Queen Elizabeth II. 

888 is grappling with headwinds from regulation that requires increased gambling safety measures, the closure of its Dutch operations and macroeconomic pressures including the increasing cost of debt. It is also facing the cost of completing its acquisition of William Hill’s non-US assets from Caesars during the quarter for £1.95 billion.

• 10 beaten down cyclical shares that could lead a future recovery
• The 50% Club: bombed-out cyclical stocks to own when the market turns

There has been a flurry of M&A activity in recent years as individual bookmarkers look to join forces to increase their power in an increasingly competitive and regulated sector. Investors in 888 have had an extremely tough time this year, with shares down by more than 70% since January, sharply underperforming the FTSE 250, with losses extending today.

MONEYSUPERMARKET.COM 

Moneysupermarket.com Group (LSE:MONY) has raised its full-year guidance, forecasting earnings to come in towards the upper end of market expectations. Third-quarter revenue hit £101.9 million versus £76.4 million a year ago. Following the upbeat trading statement, Credit Suisse raised its price target on the stock this morning from 202p to 215p. 

With the cost-of-living crisis and squeezed household budgets, consumers are desperately looking for ways to reduce their monthly bills. This plays into the hands of Moneysupermarket.com which helps customers find cost saving on insurance, mortgages, and loans. Mortgage rates in particular have soared in the aftermath of the mini-budget prompting flexible-rate mortgage holders to quickly seek better deals.

Shares in Moneysupermarket.com are up this morning, extending recent gains with a more than 10% jump over the last month.