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European stocks hover around record highs after Bank of England rate decision

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European stocks wavered around record highs on Friday and UK government bonds continued to rise after a surprise decision by the Bank of England to keep interest rates ultra low.

The regional Stoxx 600, which has closed higher for nine of the last 10 sessions, was flat in early dealings. London’s FTSE 100 gained 0.4 per cent.

Futures contracts on Wall Street’s S&P 500 index, which like its European counterpart has risen to an all-time high, were also flat ahead of US jobs data that will provide clues as to the progress of the world’s largest economy.

In UK debt markets, the yield on the two-year gilt, which moves inversely to the price of the debt and tracks interest rate expectations, dropped 0.05 percentage points to 0.461 per cent after falling by its largest amount since March last year on Thursday.

The 10-year gilt yield dropped 0.04 percentage points to 0.906 per cent, having traded above 1.07 per cent in advance of the BoE’s decision.

Sterling fell 0.4 per cent against the dollar to $1.35, taking its two-day drop to about 1.8 per cent.

On Thursday, the Bank of England’s Monetary Policy Committee voted overwhelmingly to hold interest rates at 0.1 per cent despite governor Andrew Bailey having said last month that the central bank would “have to act” to curb inflation.

The decision wrongfooted traders who had expected the UK to be in the vanguard of rate rises by major central banks, even causing ripples in US Treasury markets despite the Federal Reserve having said on Wednesday that it would take a patient stance towards raising borrowing costs.

The yield on the two-year US Treasury, which tracks monetary policy expectations, fell by its most since March 2020 on Thursday. On Friday morning in London, it ticked 0.02 percentage points higher to 0.435 per cent.

The 10-year Treasury yield, the benchmark for global government debt prices, was steady at 1.525 per cent on Friday after approaching 1.7 per cent late last month.

“We had debt markets working themselves into a bit of a frenzy trying to price rate hikes,” said Hani Redha, managing director at PineBridge Investments.

“They were partly egged on by comments by the BoE,” he added, referring to Bailey’s statement last month. “The BoE has a lot of credibility.”

In a BBC radio interview on Friday, Bailey commented that neither he nor the bank’s Monetary Policy Committee had said interest rates would rise.

“Where we have to use interest rates is where we see the potential for demand to rise,” he said, speaking on the Today programme. The BoE expects UK inflation to hit 5 per cent next spring, but it has largely been driven by supply-side factors including Covid-19 disruptions to the production and movement of goods and higher energy prices.

European and US equities have mostly shrugged off concerns that built up in bond markets over the autumn that central banks would hike borrowing costs too early, choking off the economic recovery from the pandemic.

During the ongoing quarterly earnings season, US companies on aggregate have increased earnings per share by 43 per cent from the same period last year, beating analysts’ estimates for 13 per cent growth, according to research by Barclays.

European companies have also widely beaten estimates, suggesting large businesses have managed inflation by passing price rises to customers.

“Earnings fundamentals remain on the right track and should be supportive of further grind higher in equities, while central banks stay put,” Barclays strategists said in a note to clients on Friday.

Other market moves:

  • In Asia, Tokyo’s Topix share index fell 0.7 per cent. Hong Kong’s Hang Seng index lost 1.4 per cent after Chinese property developer Kaisa Group said it had missed an interest payment on a wealth management product.

  • Brent crude, the oil benchmark, rose 0.5 per cent to $80.97 a barrel, supported by producer group Opec+ on Thursday sticking with a plan for gradual output increases.

  • The dollar index, which measures the US currency against six others, was flat.

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