More from the trading days:
10 July 2014
Strong risk off rally today. We opened up better bid following last night’s FOMC; it wasn’t overly dovish but the market had got itself revved up positioned short and we saw a strong short covering rally post release. This caused gilts to open up 20 cents but the real panic was still to come as the markets started to focus on developments in Portugal. With the fall (and suspension) of BES, old style peripheral tensions sparked a proper flight to quality in quiet summer markets. Gilts were up 90 cents at one point and short sterling up as much as 9bp as equities tumbled. It took until the US open for some calm to descend (probably amidst shouts of who the h*ll are BES!) and with equities coming back somewhat, core bonds eased off and we closed up 35 cents in gilts and up 4bp in short sterling. Markets are likely to remain jittery until the situation is dealt with (properly) but we feel the risks of contagion are limited and would expect a shift to more panic off levels in the coming days.
19 June 2014
The price action today pretty much summed up the year. Global markets (in general) very well bid with equities and bond markets soaring – again boosted by a central bank. This time the FOMC. For me the statement, projections and press conference were not overly dovish but again indicate no rush to begin tightening policy. Of course the market has reacted to the recent stronger data and gotten itself short bonds (and in truth no one can be long at these levels) and we have seen the typical short squeeze grinding rally in the aftermath. Over in the UK, of course we have been dragged higher, with gilts up half a point at one point and the strip up 4-5bp. All this changed by early afternoon however with (rapidly progressing) events seemingly catching up with the market. Overnight we had some hawkish comments by new MPC member Andy Haldane who said (seemingly following in Mervyn Kings footsteps using cricketing metaphors) that the odds at present favour a front foot response (ie a hike this year), this was followed by a strong CBI trends survey (retail sales earlier on was about in line) and then further hawkish comments from McCafferty, who said the bank shouldn’t hold back rate hikes for too long. All this seemed to start gradually weighing on the market, at first stalling out the rally and then seeing prices collapse with short sterling closing down 3bp and gilts back to unchanged (way under a turbo charged bund which took out recent highs in a 70 cent rally). We think the prospect of hikes now being on the table is finally starting to register and barring any breakdown in the data we feel it will be hard to see lower yields in the UK from here…
16 June 2014
Consolidation session in the UK with little or no news hitting the sterling market. Some overnight comments by BoE’s Bean highlighting the known fact that ‘higher rates are a welcomed sign that the UK economy is returning to normal’ only continued to show the shift in opinion within the MPC. The belly of the curve failed to launch any relevant move, with 10y gilt hovering around the 2.75 yield level. The front end of the curve suffered some stronger losses as the fixings continued their upward path (£3m +0.6bps and 6m +1.2bps) pushing the reds down another 4bps after Friday’s 20bps drop whilst cable broke through the 1.70 level for the first time since august 2009. Worries surrounding the difficult geopolitical situations in Iraq (which pushed Oil to a 3-year high) and Ukraine (rumours of a missed gas payment and reduction of Russian supply) provided some support to the European market and could push into a squeeze if things were to materially deteriorate from here. As for now, the UK seems to be excluded from such support. We look for tomorrow’s CPI print and Wednesday’s MPC minutes as the most relevant pieces of data…