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Sunrise Market Commentary

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Sterling hammered by dovish Bank of England inflation report

Thu, Aug 14 2008, 06:52 GMT
by KBC Market Research Desk

KBC Bank

tomorrow, friday the 15th of august, there will be no report

• Markets now expect UK rates to fall by the end of the year

• Rally in short-term Gilts supports European bonds too

• US Treasuries fall prey to a late profit-taking move after failed test of the July highs

• US equities close session lower, but off the day lows. Asia mixed this morning

• Commodities rebound, oil (Brent) back up to 114 USD/barrel

• Greenspan sees US home prices bottom in the first half of 2009

• Conflict between Georgia and Russia not over yet, as US launches an aid mission to Georgia

• German Q2 GDP falls a less than expected 0.5% Q/Q ahead of the euro zone data later this morning

• US CPI expected to rise further above the 5% mark in July

Markets

Yesterday, Sterling plunged both against the dollar and the euro, as the Bank of England inflation report offered a very bleak outlook for the UK economy and forecasted inflation to fall back sharply to a little below the 2% target at the end of its 2- year period. The more dovish than expected inflation report raised market expectations that the Bank would start cutting rates sooner rather than later and pushed short-term Gilt yields sharply lower. 2-year yields dropped 16.6 bps lower. As a result, Sterling fell further below the 1.90 mark against the dollar to 1.8660 at the moment of writing, while the euro recouped its recent losses and is back up well into its previous sideways range against sterling. Against the dollar, the euro however remains close to the recent lows at the 1.48 area.

The drop in short-term UK yields also supported the European bond market, where yields declined between 4 bps at the short end and 0.5 bps at the 30-year segment. In the US, yields declined first too, but recouped these losses at the end of the session in a technical inspired move, as the July lows proved too difficult to break below for now and equities rebounded off the day lows in spite of the rebound in the oil price. At the end of the day, US yields rose 5 bps at the short end compared to 2.5 at the 30-year segment. As a result, the spread between German and US yields continued its recent narrowing trend.

Today, the euro zone Q2 GDP are expected to provide some fresh evidence of the slowdown in Europe, while in the US the headline CPI is expected to rise still further.

Sterling hammered both against the dollar…

… and the euro, …

… as markets discount a rate cut for the end of this year following the Bank of England inflation report. (2-year yields sharply lower).

German 2-yields move lower too.

But in the US, 2-year yields remain more sideways oriented.

On the commodity markets, oil rebounds slightly.

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Published on  Thu, Aug 14 2008, 07:13 GMT