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The U.K Gilts plunged on Tuesday as Brexit fear eased after ORB for The Telegraph newspaper revealed an increasing support among all respondents to remain in European Union. Also, rallying crude drove-out investors from safe-haven buying. The yield on the benchmark 10-year bonds rose 2bps to 1.415 pct and the yield on 2-year bonds jumped 2bps to 0.401 pct by 1015 GMT.
The recent European Union referendum survey by the ORB for the Telegraph newspaper uncovered an increase in support among all respondents to stay in the Union at 55 pct whilst those in the leave camp has tumbled to 40 pct. In the April survey the voting was 51-43 pct individually. However, among only those who say they will definitely vote the share narrows to 51-45 pct in favour of remain.
Moreover, the British gilts have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of England's target. Today, the crude oil prices jumped more than 3 pct after long-time bear Goldman Sachs said the market had ended almost 2-years of oversupply following global oil disruptions and flipped to a deficit. Reuters in its recent report said that supply disruptions from Nigeria, Venezuela, the United States and China triggered a U-turn in the oil outlook of Goldman Sachs, which long warned of overflowing storage and another looming crash in prices. Venezuela's oil production has already fallen by at least 188,000 barrel per day (bpd) since the start of the year as PDVSA struggles to make the investment needed to keep output steady. In the United States, crude production has fallen to 8.8 million bpd, 8.4 pct below 2015 peaks as the sector suffers a wave of bankruptcies. And in China, output fell 5.6 pct to 4.04 million bpd in April, compared with the same time last year. Meanwhile, the International benchmark Brent futures rose 0.51 pct to $49.22 and West Texas Intermediate (WTI) jumped 0.98 pct to $48.19 by 0630 GMT.
In addition, investors did not react to the weak CPI figure, which eased to 0.3 pct y/y, from 0.5 pct in March, against market expectations of 0.4 pct. The 'core' CPI (excluding energy, food, alcohol and tobacco) also fell back to 1.2 pct y/y from 1.5 pct y/y in March as the spike in airfares related to the timing of Easter unwound. The fall in April inflation came despite the net positive effect of energy price movements. April saw a 3.4 pct rise in forecourt fuel prices, largely as expected, with the rise exceeding the 1.5 pct increase seen in April 2015 and so pushing up on the annual rate. Similarly, April PPI input rose 0.9 pct, lower than the market consensus of 1.1 pct, as compared to 2.2 pct previous revised up from 2.0 pct.
Last week, the Bank of England left its policy rate unchanged at 0.50 pct, as expected and this decision was made from MPC 9-0 votes. The Bank of England's Monetary Policy Committee (MPC) sets monetary policy to meet the 2 pct inflation target and in a way that helps to sustain growth and employment. At its meeting ending on 11 May 2016 the MPC voted unanimously to maintain Bank Rate at 0.5 pct. The Committee also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion. Twelve-month CPI inflation increased to 0.5% in March but remains well below the 2% inflation target. This shortfall is due predominantly to unusually large drags from energy and food prices, which are expected to fade over the next year. Core inflation also remains subdued, largely as a result of weak global price pressures, the past appreciation of sterling and restrained domestic cost growth.
The markets will now focus on the March unemployment rate on Wednesday (0830 GMT), April Retail sales on Thursday (0830 GMT). Meanwhile, The FTSE 100 rose 0.81 pct or 49.60 points to 6,201 by 1015 GMT.
