European Stocks and Bonds Rally as UK Inflation Falls
LONDON, SYDNEY, July 19 (Reuters) – European stocks and government bonds rallied on Wednesday after the release of surprising UK inflation data. The news added to a broader trend of cooling price pressures globally but had a negative impact on the sterling’s recent winning streak.
Headline British consumer price inflation fell to 7.9% year-on-year in June, against expectations for 8.2%, marking a downside surprise for a major economy that has seen interest rates rise steadily over the past 18 months.
As a result of the news, the sterling lost 0.6% and traded at $1.2961. However, the pound is still 4.75% higher for the last three months, driven by speculations that the U.S. Federal Reserve would end its rate hikes before the Bank of England.
The lower inflation numbers have given the Bank of England “the green light” for a 25 basis point (bps) rate rise next month, according to Pantheon Macroeconomics chief UK economist Samuel Tombs. Previously, markets had priced in a further 50 bps hike.
Kenneth Broux, head of FX and rates corporate research at Societe Generale in London, commented that profit-taking in sterling should not be a surprise given the recent surge in value.
The news of disinflation in the UK has also sparked optimism that euro-zone price increases may decelerate more rapidly than expected. As a result, the pan-European Stoxx 600 share index gained 0.5% in early trading. London’s FTSE 100 added 0.6%, while the domestically focused FTSE 250 rose 1.2%.
In bond markets, the yield on the two-year UK gilt dropped 25 bps to 5.083%, while Germany’s two-year bond yield fell 7 bps to 3.179%. The 10-year yield, a benchmark for debt costs in the Euro-zone, also dropped 5 bps to 2.35%.
Euro-zone bonds also benefited from comments made by European Central Bank (ECB) governing council member Klaas Knot, who stated that rate hikes beyond next week’s meeting were “by no means a certainty.” Chris Weston, head of research at broker Pepperstone, referred to Knot’s comments as the first time a known hawk within the ECB has backed the market’s view that the hiking cycle in Europe may be nearing its end.
Meanwhile, benchmark 10-year U.S. Treasuries yields dropped 5 basis points to 3.772%.
Futures trading indicated that Wall Street’s S&P 500 and Nasdaq 100 share indices would open steady later in the day.
The yen slipped to a one-week low of 139.43 per dollar, and Japanese government bonds rallied following the Bank of Japan’s governor’s remarks that policy shifts are still some time away.
Overall, the news of falling UK inflation has had significant impact on European stocks and bond markets, with hopes of central bank rate pauses and speculation about the end of the hiking cycle in Europe. These developments have created waves in the currency markets and created both opportunities and concerns for investors. It remains to be seen how these trends will continue in the coming weeks.