FOXGROVE

GOVERNMENT BOND MARKET CAUGHT OUT BY BANK OF ENGLAND’S MESSAGE ON RATE RISES

  • GOVERNMENT BOND MARKET CAUGHT OUT BY BANK OF ENGLAND’S MESSAGE ON RATE RISES

    GOVERNMENT BOND MARKET CAUGHT OUT BY BANK OF ENGLAND’S MESSAGE ON RATE RISES

    Data Sourced from FE Analytics, and Bloomberg Finance LP

    GOVERNMENT BOND MARKET CAUGHT OUT BY BANK OF ENGLAND’S MESSAGE ON RATE RISES

    This week the Bank of England caught a lot of people by surprise when it left interest rates unchanged. The reason this was so surprising is that senior members of the bank, including governor Andrew Bailey, spent months telling people to expect a rate hike. Expectations are everything when it comes to monetary policy. The actual inflation and interest rates are less important than what people expect them to be in the future. It is possible that the dramatic change in expectations, driven in part by the bank’s media campaign, made a rate hike unnecessary. But given that hints of policy changes are used far more frequently than actual policy changes, the bank will be in difficulty if people stop listening.

    Elsewhere, the theme of saying one thing and doing the opposite continued in Glasgow at COP 26. While there were many impressive speeches and bold commitments, the real test will be if any of it is actually put into action. Many focused on the fact that China, the biggest emitter, didn’t show. But if the all the new policies and commitments aren’t followed up then at least the Chinese saved on carbon emissions from the flights.

    UK: BANK OF ENGLAND WRONG-FOOTS MARKET BY DELAYING RATE HIKE

    The Bank of England’s decision to leave interest rates unchanged at the record low of 0.1% caught traders by surprise resulting in a sharp rally in UK government bonds. The market had been widely expecting a rate rise of 0.15% after governor Andrew Bailey said the bank would have to act to counter rising prices. With inflation easing very slightly in September the bank has delayed its first interest rate increase, although it said rate hikes are likely in the next few months.

    The announcement caused sterling to fall 1.5% against the dollar and government bonds, particularly short-dated bonds, rose in value. Two-year gilt yields fell by 0.21 percentage points to stand at 0.48%, the biggest single day drop in yields since investors fled to the safety of government bonds at the start of the coronavirus pandemic. Although the FTSE All Share rose on Thursday, many financial stocks fell heavily with, banks such as Barclays, Natwest and Lloyds all falling by 4% or more.

    US: EQUITIES RISE AS FED CONFIRMS TAPERING OF BOND PURCHASES

    In contrast to the Bank of England’s decision, the US Federal Reserve’s announcement that it will begin slowing down its purchase of US government bonds was widely expected. The beginning of the tapering programme had been widely telegraphed to ensure there was no repeat of the ‘taper tantrum’ of 2013 when markets were surprised by the Fed’s decision to begin withdrawing quantitative easing after the financial crisis and investors dumped their Treasury holdings. The Fed said that from November it will reduce its $120bn a month bond buying programme by $10bn a month, with the aim of ending the bond buying in 2022.

    Fed chair Jerome Powell reassured markets that it is not going to rush to raise interest rates despite inflation remaining elevated. The news saw US Treasury yields rise as prices fell slightly on Wednesday. Equity markets reacted positively to the news with US technology stocks and smaller companies benefitting in particular.

    EQUITIES: COAL STOCKS UNMOVED BY CLIMATE INITIATIVES

    The contrast between long-term climate initiatives and short-term market reaction was thrown into sharp relief this week as politicians and policy makers gathered in Glasgow for the COP26 climate change summit. Most countries have agreed to sign up to new plans to end the use of coal, stop deforestation and curb methane emissions.

    Markets appear unphased by the rhetoric surrounding these additional political commitments. The oil price remains above $80 a barrel for Brent Crude after OPEC nations stuck to their plan to only gradually increase supply, while BP announced another round of share buybacks as it continues to benefit from oil’s recovery. The price of coal, a particularly out-of-favour commodity for the COP26 delegates, has fallen over the last month but remains far above pre-pandemic levels causing coal miners to perform particularly strongly. Glencore has seen its share price rise to its highest in three years and Thungela Resources has seen its price rise by 189% since it demerged from Anglo American in June.

    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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