MARKET NEWS
Inflation Sends a Shockwave Through U.K. Markets - BLOOMBERG
(Bloomberg) -- The hottest U.K. inflation in 30 years is reshaping the financial landscape and forcing investors to contend with a wide array of new risks.
An increasingly hawkish Bank of England, consumers reeling from sticker shock and the possibility of wage-price spirals and stagflation are all looming large on investors’ minds.
The impact on markets is clear. U.K. bond yields have surged to the highest since 2019 and are moving up faster than rates on Treasuries or German bunds.
“Inflation is the horrible 90s trend we didn’t want to see again, but it’s back,” said Sarah Coles, a personal finance analyst at Hargreaves Lansdown.
U.K. Inflation Surprises With Jump to Highest in 30 Years
U.K. data on Wednesday showed a broad increase in the cost of food, drink, restaurant meals and furniture, with consumer prices rising 5.4% in December from a year ago. The squeeze on British living standards means that investors are better off putting their money somewhere else, like the U.S. or Europe, said Jonathan Sparks, chief investment officer for U.K. and Channel Islands at HSBC Private Banking and Wealth Management.
Here’s a look at what it means for markets:
Rate Hikes Are Coming
Market Snapshot: Money markets have almost fully priced a hike in February to 0.5%, a level that could pave the way for the Bank of England to start reducing its balance sheet by stopping the reinvestment of expired bonds. Further out, they see the key rate rising as high as 1.5% in 18 months.
What people are saying: “Upside surprises are increasing the likelihood of steep rate hikes on a fragile economic backdrop,” said Matteo Cominetta, economist at Barings Investment Institute. “This is probably suggesting one ugly word in markets’ ears: stagflation.”
Gilt Yields Surge
Market snapshot: The yield on 10-year U.K. government bonds climbed six basis points to 1.3% on Wednesday.
What it means: Higher benchmark rates will feed through the economy, making it more expensive to borrow money and get mortgages.
Pound Strength Persists
Market snapshot: The pound rose 0.2% to $1.3626, hovering around the highest since November.
What it means: Higher rates usually translate to a stronger currency and that’s been true of the pound this year.
The move has been more pronounced against the euro because of a divergence in monetary policy. Traders expect the European Central Bank to keep its dovish stance, while the Federal Reserve and BOE will likely raise rates. Sterling trades around 83 pence per euro, close to the strongest since the Brexit aftermath of 2016.
What people are saying: “The prospect of further and more rapid monetary tightening should give the pound an immediate lift, but storm clouds are gathering over the wider economy,” said Paul Jackson, global head of asset allocation research at Invesco.
Commodities Boost the FTSE
Market snapshot: The FTSE 100 Index rose 0.2% to 7,580. The index has outperformed the U.S. this year, helped by a heavy weighting in oil and mining companies.
What people are saying: “U.K. equities have ignored the worsening inflation outlook and stronger currency as cheap valuations and the cyclicals-focus has driven one of the strongest starts to the year amongst global equity markets,” said Ben Laidler, global markets strategist at multi-asset investment platform eToro.