The U.K Gilts plunged on Friday as investors cooled on safe-haven assets amid gains in riskier instruments including crude oil futures and equities. The yield on the benchmark 10-year bonds rose 3bps to 1.470 pct and the yield on short-term 2-year bonds jumped 2bps to 0.457 pct by 1030 GMT.
Yesterday, the U.K retail sales rose 1.3 pct m/m in April, higher than the market consensus of 0.5 pct increase, from down 0.5 pct in March. On annual basis, it climbed 4.3 pct y/y, more than the expectations of 2.5 pct y/y, as compared to prior 3 pct. Similarly, excluding sales of road fuel, the rise in sales volumes is an even more robust 1.5 pct m/m, from revised -0.7 pct m/m in March (previous was -1.6 pct).
The FOMC in its April 26-27 meeting minutes showed quite a hawkish view of Fed officials. This indicates that several participants believed in April that it is appropriate to raise rates in June if the incoming data indicated a rebound in the economy. On balance, these minutes go a long way in uncovering sentiment not very much reflected in the April FOMC statement. On balance, this release should go a long way in making the June meeting a live event, something that was seen as less likely in the wake of the April meeting. However, given the need for data to cooperate as the meeting approaches, nothing is certain. Nevertheless, we continue to expect only 50bps worth of tightening from the FOMC in 2016, regardless of whether or not they choose to act in June.
The decline in bonds prices were also driven by the ease in ‘Brexit’ fear. In the latest YouGov EU referendum poll for the Times newspaper support to 'Remain' is on 44% and to 'Leave' is on 40%. Also, the survey by the ORB for the Telegraph newspaper uncovered an increase in support among all respondents to stay in the Union at 55 pct whilst those in the leave camp have tumbled to 40 pct. In the April survey the voting was 51-43 pct individually. However, among only those who say they will definitely vote the share narrows to 51-45 pct in favour of remain.
On the other hand, the British gilts have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of England's target. Today, crude oil prices rebounded as turmoil in Nigeria, shale bankruptcies in the United States and crisis in Venezuela all contributed to tightening supplies. Meanwhile, the International benchmark Brent futures rose 0.70 pct to $49.16 and West Texas Intermediate (WTI) jumped 0.73 pct to $48.51 by 0900 GMT.
Meanwhile, The FTSE 100 rose 1.30 pct or 78.65 points to 6,132 by 1030 GMT on tacking firm crude oil prices.
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