Week Ahead on Wall Street: Poor sentiment leads to new lows, but is October set up for a bear market rally?

• Wild swings in sterling create a risk of contagion.
• Apple suffers a massive meltdown, and Tesla misses deliveries.
• Credit Suisse in turmoil as bank moves to reassure investors.

It was an incredible week in financial markets, which is something we seem to be saying every week lately. This one truly was,however, due to the sudden risk of a mini-Lehman event in the UK spreading havoc across global markets. The big news was in the UK where sterling reacted negatively to the UK borrowing a bucket load of money to basically cut taxes for the top 10%. By eliminating bankers' bonus restrictions and also eliminating the top rate of tax, the new UK Prime Minister and Chancellor set out on a very shaky path.

Sterling markets reacted with fury over plans to increase borrowing, sending sterling and UK gilts into free fall. The Bank of England then intervened in gilt markets to try and stem the damage. Later we learned the reason was a near meltdown in the pension industy, which would have led to a mini-Lehman moment. This sent risk assets into a tailspin and put the dollar once again on the charge. Sterling fell to a record low versus the dollar before correcting on the Bank of England intervention. This Bank of England intervention was basically a pivot and so risk assets took off higher on the news. Investors have been hoping for a Fed pivot to put a floor under risk assets all year.

Soon it became clear that this may be a case of being careful with what you wish for. The Fed is only likely to pivot if we are entering another financial crisis. However, we do notice some stress in the messaging from Fed officials. They have been pretty uniform in their hawkish assessment of late, but on Friday we heard from Lael Brainard who mentioned financial stability worries. This was a noted divergence from the latest Fed missives and indicative of a potential pivot. 

The macro environment remains challenging, and we have already gotten close to a major (or perhaps formerly major) economy in the UK reaching a breaking point. That increases the risk of a system breakdown, and Bank of America is out with a timely warning on the US Treasury market. Sober reading!