British bonds and stocks surge as BoE keeps rates on hold

Reuters: British bonds were on track for their best day in more than a month on Thursday and stocks jumped after the Bank of England held interest rates steady for a second consecutive meeting. Bonds and stocks were already trading higher after the Federal Reserve kept interest rates on hold on Wednesday, with the BoE decision adding to a feeling among investors that the next move in borrowing costs will be down.

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BRITISH BONDS AND POUNDS

Yields on benchmark 10-year UK bonds, known as Gilts, fell as low as 4.318% and were last 12 basis points lower on the day at 4.381%, down around 2 bps from before the BoE decision. The drop put the yield on track for its biggest one-day fall since mid-September. Yields fall as prices rise and vice versa. The BoE left borrowing costs unchanged at 5.25% and published forecasts which showed the British economy was likely to skirt close to a recession and flat-line in the coming years.

A fall in global bond yields boosted stocks, with Britain’s FTSE 100 stock index last up 1.54%. The index was 1.2% higher before the BoE decision. Smaller companies, which are more sensitive to changes in borrowing rates, outperformed their bigger peers, with the UK’s FTSE 250 index up 3.15%. “The news over the last day, from both the Fed and the BoE, indicates that we are done with rate increases, and that decreases are the next item on the agenda,” said Michael Field, the Europe market strategist at Morningstar. “With this in mind, bond markets once again adjusted.” Yet Field said Thursday’s rally in bonds only went some way to undoing the sharp sell-off that has pushed yields to around their highest level in decades.

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The BoE’s Monetary Policy Committee voted 6-3 to keep the Bank Rate on hold, in line with economists’ expectations in a Reuters poll. Sterling climbed after the decision but later gave up some gains and was last up 0.24% at $1.2179, as the fall in U.S. yields was weighing on the dollar. It traded around 0.35% higher before the decision. “The momentum in the economy and future indicators point to lower activity,” said James Lynch, fixed income investment manager at Aegon Asset Management. “The question should now be when will the BoE cut.”

Traders in derivatives markets on Thursday briefly moved to fully price in a BoE rate cut in August 2024, although later dialled that bet back slightly. They see two rate cuts by the end of next year, according to LSEG data. Ed Hutchings, head of rates at Aviva Investors, said: “Medium-term … with weaker growth and past hikes yet to feed through, we are close to all but done with interest rate hikes, which is ultimately supportive for Gilts.” Britain’s 2-year gilt yield traded 7 bps lower at 4.723%, after hitting its lowest level since June 2023 at 4.655% after the BoE announcement.

Global bond yields have pushed higher over the last two months, driven by strong U.S. economic data, sending the 10-year Treasury yield above 5% last week for the first time since 2007. Yet that yield – which sets the tone for borrowing costs around the world – was last down 12 bps on Thursday at 4.657%. Before the U.S. central bank’s policy decision on Wednesday, the U.S. Treasury said it would slow the pace of increases in its longer-dated debt auctions in the next three months. Adding momentum to the fall in bond yields on Thursday was data showing U.S. weekly jobless claims rose moderately last week.

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U.S. DOLLAR

Reuters: The dollar stayed on the back foot on Friday and was on course for a weekly decline against a basket of currencies as traders wagered that the U.S. Federal Reserve was most likely done with rate increases, lifting risk sentiment. The dollar index, which measures the U.S. currency against six rivals, was at 106.22, not far from the one-week low of 105.80 it hit on Thursday. The index is on course to clock a 0.3% drop for the week, just its third week of losses since July. Markets are now pricing in a less than 20% chance of a rate increase in December compared with 39% a month earlier, CME FedWatch tool showed, in the wake of the U.S. central bank’s holding interest rates steady on Wednesday. The Fed, however, left the door open to a further increase in borrowing costs in a nod to the economy’s resilience.

Data on Thursday showed the number of Americans filing new claims for unemployment benefits increased moderately last week as the labour market continued to show few signs of a significant slowdown. “The dataflow was supportive for the notion of a soft landing and the end of the U.S. hiking cycle being nearer,” said Tapas Strickland, head of market economics at NAB. Investor focus will now be on October non-farm payrolls data later in the day, with consensus at 180,000 jobs, with a weaker result likely to put further pressure on the dollar.

Analysts said any pullback in the dollar will probably be temporary, pointing to the strength in U.S. economy compared with the rest of the world. “Global economy is going to slow down while the U.S. economy seems to be more resilient so Fed versus ECB, you might see more divergence and then the differential in real rates,” said Flavio Carpenzano, Investment Director for fixed income at Capital Group. “This is the reason why over the next few months, it’s difficult to see a big catalyst for the dollar to weaken.”

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The European Central Bank last week snapped a streak of 10 straight rate increases, with the discussion shifting to how long the rates would stay high. ECB board member Isabel Schnabel said on Thursday the central bank is on track to push inflation back down to 2% by 2025 but the “last mile” of disinflation may be the toughest, so the bank cannot yet close the door on further rate rises. The euro was down 0.03% to $1.0617, having risen 0.49% on Thursday. The single currency is set to clock a weekly gain of 0.5%.

The Japanese yen was 150.41 per dollar, keeping traders nervy and looking for signs of intervention from Japanese authorities. The yen has had a whirlwind week, touching a one-year low against the dollar and 15-year low against the euro on Tuesday after the Bank of Japan tweaked its yield curve control policy. Kazuo Ueda, the central bank’s governor, will continue to dismantle its ultra-loose monetary policy and look to exit the decade-long accommodative regime next year, Reuters reported on Thursday.

Ueda’s intentions are based on interviews with six sources familiar with the BOJ’s thinking, including government officials with direct interaction with the bank. Sterling was trading at $1.2189, down 0.10% on the day, having risen 0.4%, and was on course for a 0.5% weekly gain. The Bank of England joined other major central banks in holding rates steady and stressed that it did not expect to start cutting them any time soon. The Australian dollar eased 0.19% to $0.642, while the New Zealand dollar fell 0.24% to $0.588.

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SOUTH AFRICAN RAND

Reuters: The South African rand jumped on Thursday against a weaker U.S. dollar as risk sentiment improved after the Federal Reserve left interest rates unchanged, analysts said. At 1504 GMT, the rand traded at 18.4300 against the dollar, about 0.5% stronger than its previous close. The rand had gained as much as 1% earlier in the day. The dollar was last down about 0.38% against a basket of global currencies. On Wednesday, the Fed announced its decision to keep interest rates unchanged, weakening the dollar as investors perceived that the U.S. central bank may be done raising rates.

The risk-sensitive rand often takes cues from global factors like U.S. monetary policy in addition to local drivers. The rand rallied on Thursday as investors bought into riskier assets, said Casparus Treurnicht, portfolio manager at Gryphon Asset Management. “Since the Fed did not increase rates last night some investors were relieved, causing stocks and bonds to rally. The rand benefits from this as the dollar’s safe haven status is not needed for the time being,” Treurnicht said.

On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed up 2.43%, while the broader all-share index was 2.36% higher. South Africa’s benchmark 2030 government bond was stronger, with the yield down 2 basis points at 10.365%.

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GLOBAL MARKETS

Reuters: Stocks were headed for their biggest weekly rise in a year on Friday, while bonds rallied and the dollar was on the back foot as investors cheered a pause in U.S. interest rate hikes. U.S. jobs data due later in the day is the next major focus. Benchmark 10-year Treasury yields are down more than 20 basis points in two sessions since the U.S. Federal Reserve left rates on hold on Wednesday and Chair Jerome Powell said risks to the outlook for rates settings was balanced. Cash Treasuries were untraded in Asia as markets were closed in Tokyo due to a holiday, and 10-year futures held recent gains to imply yields were steady at 4.67%. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.9%. S&P 500 futures were 0.1% lower, weighed by a 3% fall for Apple shares in post-market trade after the tech giant’s sales forecast fell short of expectations.

World stocks are up 4.2% for the week so far, their largest weekly rise since November 2022. “Markets have become increasingly confident that rates in the U.S. have now peaked,” said ANZ analysts in a note. “As logical as that is Powell did warn that for higher bond yields to forestall another hike, they’d need to stay high, so markets can’t have their proverbial cake and eat it too.” The U.S. Treasury department had also said on Wednesday that it would sell less longer-dated debt at auction than had been expected and a softer-than-forecast manufacturing survey helped reinforce bets that no further hikes are necessary.

On Thursday, the Bank of England also left interest rates on hold and stressed it did not expect to cut them any time soon. Ten-year gilts had their sharpest rally in more than a month, sending yields almost 12 basis points lower to 4.39%. Ten-year German bund yields also fell on Thursday, though only by 4.6 bps to 2.71%. “It felt like there were a decent chunk of investors waiting on the sidelines and ready to play lower yields and yesterday removed a couple of potential stumbling blocks to enacting that view,” said Rabobank analysts.

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In foreign exchange markets the Australian dollar is leading gains among G10 currencies this week after a third-quarter inflation surprise had traders betting on a rate hike from the Reserve Bank of Australia on Tuesday. Australian retail sales stumbled in the September quarter, with sales-per-person posting the largest annual drop on record, data on Friday showed. The Australian dollar is up 1.5% to $0.6430 and has broken above its 50-day moving average. The New Zealand dollar is not far behind with a 1.4% gain to $0.5892.

“Money markets are more than fully priced for another RBA hike by Q1, eye-catching in the G10. So the Aussie has a degree of support from RBA expectations that it has rarely had since the pandemic,” said Westpac analyst Sean Callow. “But a run at $0.65 is likely to require either a notably weak U.S. jobs report or a hawkish hike from the RBA.” Economists polled by Reuters expect the U.S. to have added 180,000 jobs in October. The worst performing G10 currencies for the week have been the havens of Japanese yen and the Swiss franc as investors have sought out riskier assets.

The Bank of Japan will continue to dismantle its ultra-easy monetary policy next year, six sources familiar with the BOJ’s thinking told Reuters, though the slow progress has been cold comfort for a yen weighed down by Japan’s low interest rates. It traded at 150.44 per dollar on Friday. Brent crude futures are 4% lower on the week to $86.80 a barrel. Gold is down 1% at $1,983 an ounce. Bitcoin has surged 15% with the mood and looks to be reviving momentum that had collapsed along with exchange FTX in 2022. FTX founder Sam Bankman-Fried was found guilty of stealing from customers on Thursday. Bitcoin bought $34,600.

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Published by the Mercury Team on 3 November 2023

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