UK inflation falls to 3-year low

A larger than expected fall in the most widely followed gauge of inflation could lead to further calls for the Bank of England to lower interest rates, with the consumer price index for October dropping to its lowest level since 2016. Last week rate-setters from the bank surprised the markets when 2 of the 9 committee members voted for an interest rate cut and they will likely see this fall in price pressures as a justification for that stance. However, a closer look at the breakdown of the report will detract from this argument somewhat, as the decline is largely due to lower energy prices and a core reading which strips this out remained steady at 1.7%. 

Either way it is still highly unlikely that we get any movements in rates before the year is out, with the final policy decision due just 1 week after the general election. For the third day running we’ve had some news that could have caused some selling in the pound, but the currency has remained largely unperturbed with economic data still playing second fiddle to political developments in terms of moving the markets.       

Political events weigh on sentiment

Even though the political backdrop in the UK is unlikely to stray too far from the front of investors’ minds there’s several events around the globe that are having a more immediate impact on the markets this morning and weighing on equities in particular. The most significant of these comes from Hong Kong where tensions have flared up once more with protesters blocking roads and the metro system suspended for a third day. Stocks on the Hang Seng tumbled for a 3rd consecutive session overnight and the market is down by almost 4% on the week. 

Closer to home investors have seemingly taken a dim view of the outcome of the recent elections in Spain with the ruling Socialists striking a coalition deal with the left-wing Podemos party. Stocks in Madrid fell when the news broke yesterday afternoon and have continued lower this morning with the IBEX35 falling to its lowest level in a month and off by almost 3% from Tuesday’s high. 

Finally an eagerly awaited speech from Donald Trump failed to deliver on hopes for a  breakthrough in US-China trade, causing Wall Street to retreat from record highs to end the day with only marginal gains. A prolonged fall in the volatility index accompanied with the put-call ratio falling down near the lower bound of its range in recent years suggests that there is little appetite for downside protection at present. In addition, reports that US fund managers have the lowest levels of cash for the current month in over 6 years suggests that more money is chasing the recent gains and the prospect of a FOMO rally has increased.