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BANK OF ENGLAND GOVERNOR SPARKS SELL-OFF IN SHORT DATED GOVERNMENT BONDS

  • BANK OF ENGLAND GOVERNOR SPARKS SELL-OFF IN SHORT DATED GOVERNMENT BONDS

    BANK OF ENGLAND GOVERNOR SPARKS SELL-OFF IN SHORT DATED GOVERNMENT BONDS

    Data Sourced from FE Analytics, and Bloomberg Finance LP

    BANK OF ENGLAND GOVERNOR SPARKS SELL-OFF IN SHORT DATED GOVERNMENT BONDS

    This week we saw Bank of England Governor Andrew Bailey tell a conference of central bankers that the bank “will have to act” to address energy- driven inflation. The bond market took this to mean that the Bank is going to act now, and short-term bonds sold off heavily in anticipation of an interest rate rise as soon as next month. But listening to Bailey’s comments it is clear that he is talking about medium-term inflation and inflation expectations and, as he points out, interest rates rises do nothing to solve supply side problems. Bailey’s main intention was to signal, once again, the bank’s willingness to act as it tries to prevent expectations of inflation becoming self-fulfilling.

    Meanwhile we received a reminder that the Covid pandemic has not gone away. Infections in the UK are back to levels seen in July and climbing fast, Russia has introduced a work from home mandate and infection rates in the EU are climbing also. When the government says there is no need for a plan B it feels like the chance of another Christmas under Covid restrictions is now more likely than an interest rate hike in 2021.

    UK: BOE GOVERNOR’S COMMENT RATTLE BOND MARKETS

    Prices of short-dated gilts fell dramatically at the start of the week, sending yields up sharply, after Bank of England Governor Andrew Bailey appeared to announce an imminent increase in interest rates. Bailey was reported as saying the bank “will have to act” to address rising inflation. Despite his comments referring to medium-term inflation, rather than current spike in energy cost and supply chain disruption, short-dated gilt yields rose to their highest levels since 2019.

    Pressure on the Bank of England eased slightly mid-week with the latest monthly inflation figures which saw CPI fall by 0.1% to 3.1%. Fuel costs and second-hand car prices continued to rise but were offset by falling restaurant and hotel prices after the Eat Out to Help Out scheme in August last year dropped out of the calculation. The new Bank of England economist Huw Pill said inflation is likely to hit 5% later this year or early in 2022 but UK retail sales and consumer confidence appear to be slowing – further clouding the outlook.

    CHINA: GROWTH SLOWS AS EVERGRANDE AVOIDS DEFAULT

    Disappointing Chinese GDP figures show growth has slowed considerably this year. Annual growth to the end of Q3 was 4.9%, down from 7.9% for the three months to the end of June as global trade disruption and a domestic energy crisis hit production. This week also saw evidence that the residential property market is slowing down as the price of new homes experienced the first monthly fall since April 2015.

    Problems in China’s property market have been noticeable this week. Heavily indebted property developer Evergrande narrowly avoided being declared in default after it reportedly paid the interest on an offshore bond just days before the final deadline to make the payment. Its shares tumbled again during the week after a plan to sell its property services business collapsed. Sinic Holdings failed to pay $246m on a bond which matured this week while a third developer, Modern Land, was downgraded by rating agency Fitch after it tried to unilaterally extend the maturity date on one of its bonds due to mature next week.

    EQUITIES: PHARMACEUTICALS EYE FURTHER GAINS FROM COVID DRUGS

    The rate of daily coronavirus infections in the UK passed 50,000 for the first time since July. The UK is not the only country experiencing a rise in cases. While some countries, such as the US and India, have brought their large outbreaks under control, others like Russia and many countries in Europe are also seeing infection rates rise sharply. To avoid resorting to further lockdowns governments in countries with high vaccination rates are looking to booster jabs to help limit serious illness.

    The large pharmaceutical companies are continuing to develop their coronavirus vaccines and treatments. This week Pfizer reported very strong results for its vaccine when used as a booster, while French company Valneva reported very strong clinical trial results causing its shares to jump 39%. In addition to vaccines, Pfizer and Merck continue to develop their anti-viral pills to alleviate Covid symptoms. Even without any further innovation Pfizer and Moderna are forecasting their vaccine sales to double in 2020.

    For more information regarding our weekly market reports, we encourage you to give us a call on 01732 746188 or send us an email at enquiries@foxgroveassociates.co.uk.

    This document has been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. Financial Express Investments Ltd, registration number 03110696, is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit https://www.fefundinfo.com/en-gb/about/legal-and-policies/.

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