The UK gilts plunged on Thursday as the FTSE 100 has surged to highest level since April 21 today as investors hope Mark Carney's speech will calm Brexit fears. The Bank of England Governor Mark Carney will speak on monetary policy at 15:00 GMT and his speech will be watched closely for clues on interest rates.
The yield on the benchmark 10-year gilts rose more than 3 basis points to 0.981 percent, yield on super-long 30-year bonds jumped 2-1/2 basis points to 1.797 percent and the yield on short-term 2-year note bounced 2 basis points to 0.225 percent by 10:50 GMT.
Despite the rebound in the FTSE, the 10 year UK yield eased on Wednesday to close to Monday's low of 0.93 percent, revealing a divergence between the country's fixed income and equity markets' outlooks (with GBP in between).
We see the yield ranging between 0.93 percent and Tuesday's high of 1.00 percent until breaking to new lows on the next wave of risk aversion. As the realisation develops that the UK would be lucky to escape a recession amidst Brexit uncertainty, Gilts will be in demand.
Moreover, the Office for National Statistics released the third estimate of the UK’s first quarter GDP, which was confirmed at 0.4 percent for the first quarter of 2016 from 0.7 percent in the fourth quarter of 2015, which was in line with market expectations and was the 13th successive quarterly gain. On the annual basis, GDP growth was confirmed at 2.0 percent, also in line with expectations.
The UK current account balance of -32.6 billion pounds is not too far off from our sub-consensus prediction of -33.5 billion pounds, the market sought a narrowing to -27.1 billion pounds and follows a downwardly revised -34.0 billion pounds in the last quarter of 2015 (previous was -32.7 billion pounds).
This latest outturn, which shows that the external current account position is in very bad shape, for a developed nation, is equivalent to -6.9 percent of GDP, and should be interpreted as a GBP negative development.
Moreover, 71 percent of economists expect the UK economy to experience a recession during 2016 or 2017, following the EU referendum, according to a new Bloomberg poll of 35 respondents. 82 percent foresee BoE stimulus, 73 percent expecting a rate cut, 60 percent a QE expansion and 47 percent credit easing measures. This compares with the market placing a 55 percent chance on the BoE cutting rates by 25 basis points i.e. taking the Bank rate to +0.25 percent by August, based on OIS pricing.
On Tuesday, the UK finance minister Osborne said that it is crucial to provide fiscal stability and the UK is in prolonged period of economic adjustment. Said decisions on taxes, spending to come under new PM and absolutely going to have to cut spending and raise taxes.
He further added that he stands by decision to hold referendum and pro-Remain candidate can become PM, not backing any runners for the moment. Own role in next government depends on new leader, he said.
The UK's rating downgrades from S&P's and Fitch didn't have any effect, as the moves were surprising only by their speed. The S&P an American financial services company late Monday downgraded the UK's credit rating following its ‘Brexit’ vote by two notices from AAA to AA, with a negative outlook.
The Fitch rating agency also made a one-notch downgrade to AA from AA+, again with a negative outlook. The latter agency referred to the negative impact of leaving the EU on the UK's economy, public finances and political continuity.
It said the uncertainty will induce an 'abrupt slowdown' in short-term GDP growth and cut its GDP forecast to 1.6 percent for this year, from previous forecast of 1.9 percent and to 0.9 percent in 2017, from earlier forecast of 2 percent. The S&P slashed its GDP forecast for 2016-19 to 1.1 percent per year from previous 2.1 percent.
Interestingly, Moody's has not changed its UK rating of Aa1. These downgrades are no surprise due to previous warnings about such an eventuality.
The FTSE 100 trading up 0.34 percent at 6,382 by 10:50 GMT.
The material has been provided by InstaForex Company – www.instaforex.com