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S&P 500 surges after inflation-induced sell-off

New York Stock Exchange, Wall st, New York, USA

Markets swing 5% on stubbornly high inflation figures.

The stock market has had a stunning reversal on Thursday, crashing on news inflation hasn't peaked, before rallying late.

On what was a strange day of trading, the market sold, as inflation hit another 40-year high.

In response, the S&P 500 and Dow Jones were down 2% during the morning's trading, while the Nasdaq 100 fell over 3%, continuing its rough trading over the last month.

As such, now 2 in 3 shares are cheap.

However, the market turned.

In the end the Dow was up 2.8%, the broad-based S&P 500 rose by 2.6% and the Nasdaq 100 advanced by 2.2%.

The futures market in Australia rose sharply on the news.

How bad is inflation in the US?

Even with repeated rate rises, inflation in the US continues to remain stubbornly high.

Data released by the US Labor Department's consumer price index (CPI) shows headline CPI gaining 8.2% annually as rents surge by the most since 1990 and food prices rose.

Core CPI, which excludes some of the more volatile commodities such as food and fuel prices, beat forecasts at 6.6%.

US president Joe Biden said the price of goods remains "too high".

"Americans are squeezed by the cost of living: that's been true for years, and they didn't need today's report to tell them that," he said in a statement.

However, the White House points out that progress is being made in fighting inflation.

"But even with this progress, prices are still too high. Fighting the global inflation that is affecting countries around the world and working families here at home is my top priority," Biden said.

So why are markets rallying?

Strangely enough, even with core inflation rising, investors bought in.

Liz Ann Sonders, chief investment strategist for Charles Schwab & Co points to mechanics of the markets, short-sellers and quantitative strategies.

"It's the nature of the beast these days where sometimes you get these intraday big swings. We can all speculate on what might be behind it," Sonders said.

Saxo Bank's market strategist Jessica Amir largely agrees.

"Short selling covering would have played a huge role in the reason markets whipsawed higher," Amir said.

She said markets are now predicting another 75 basis point rise from the US Federal Reserve that will have to be priced in.

"We also believe markets will be driven by a 'peak hawkishness' narrative, essential where growth assets typically continue to face pressure and value strengthen. Also recall, amid the energy crisis, there are the most rising free cash flows in energy markets, which offer value," she said.

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