UK gilts gain on weak risk appetite

June 1, 2016

The UK gilts strengthened on Wednesday as Brexit fears and global growth angst continue to weigh on the markets. The yield on the benchmark 10-year bonds, which moves inversely to its price fell 3 basis points to 1.405 percent and the yield on the short-term 2-year bonds dipped 2 basis points to 0.410 percent by 10:00 GMT.

According to the latest YouGov/Times EU referendum poll 41 percent voted to 'Remain' and similar percentage of participants supported for 'Leave.' In the Earlier ORB phone poll, 51 percent voted to stay in the European Union while 46 percent voted in favour of an exit. The remaining were however, indecisive. Earlier poll by Betfair Group PLC published on WSJ, opinion polls show Britain leaning toward a vote to stay in the EU in the June 23 referendum. Bookmakers have cut the odds on a vote to “leave” to 19 percent from 37 percent in April.

Moreover, the EU referendum poll by BMG 44 percent favoured to 'remain', 45 percent voted for leave and remaining were inconclusive. The U.K public opinion poll released by Opinium over the weekend showed 44 percent of the voters favoured remaining in the EU and 40 percent supported leaving the European Union. However, this is similar to most recent surveys showing a modest balance against Brexit.

In addition, 88 percent of UK-based economists believe that Brexit, along with leaving the single EU market, would be damaging to the country's economic prospects over the next 5 years, according to a survey of over 600 professionals in the business, academic and public sectors carried out by Ipsos/Mori for the Observer.

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 fell more than 1 percent to below $50 mark after UAE Oil Minister Suhail Mohammed Al Mazrouei said the market will fix itself to a fair price for consumers and producers, adding that the rules of supply and demand are working. The remarks pour cold water on the probability that OPEC will agree to an output freeze to buoy prices. The International benchmark Brent futures fell 1.80 percent to $49.00 and West Texas Intermediate (WTI) dipped 1.24 percent to $48.49 by 09:20 GMT.

In addition, the second estimate of UK’s first quarter GDP growth was unrevised from the earlier estimate of 0.4 percent q/q, on par with consensus projections. The annual growth was slightly lowered to 2 percent y/y, the slowest growth since Q1 2013. The construction output and industrial production data after the release of first estimate of GDP was weak, but it did not provide much reason to anticipate a downward revision in the second estimate of GDP. Private consumption was revised up to 0.7 percent q/q, from 0.6 percent, as was government spending, to 0.4 percent, and fixed investment, to +0.5 percent q/q (a major upgrade from -1.1 percent). On the other hand, exports were revised down sharply to -0.3 percent (from +0.1 percent previously), while imports were trimmed to 0.8 percent q/q.

Meanwhile, The FTSE 100 trading lower 0.70 at 6,186 by 10:00 GMT.

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