UK gilts fall after October services PMI touch the 50-point neutral mark; BoE in focus

The United Kingdom’s gilts fell during European trading hours Tuesday after the country’s services PMI for the month of October touched the 50-point neutral mark, which separates expansion from contraction, a sign that the sector shall now start witnessing further expansion in the near-term.

Investors will now keep a close eye on the Bank of England’s (BoE) monetary policy meeting, scheduled to be concluded on November 7 by 12:00GMT for further direction in the debt market.

The yield on the benchmark 10-year gilts, gained nearly 1-1/2 basis points to 0.677 percent, the 30-year yield surged 2-1/2 basis points to 1.187 percent while the yield on the short-term 2-year hovered around 0.515 percent by 10:50GMT.

The seasonally adjusted IHS Markit/CIPS UK Services PMI Business Activity Index ticked up to 50.0 in October, from September's 49.5, signalling no change in service sector output. The latest figure was among the lowest registered in the past ten-and-a-half years, and below each of the trend levels for the first, second and third quarters of 2019 (50.1, 50.5 and 50.5 respectively).

The 12-month outlook for service sector activity improved to a three-month high in October, as some firms mentioned that uncertainty would be reduced following any resolution to Brexit in early-2020. That said, overall sentiment remained historically weak, with only 39 percent of firms expecting growth at their units and 16 percent forecasting a decline.

"The PMIs suggest there is a downside risk to our forecast that GDP growth will only slow to +0.2 percent q/q following a +0.4 percent q/q expansion in Q3. The Monetary Policy Committee will sit on its hands this Thursday, but unless the drag of Brexit uncertainty can be removed in the next few months, we expect interest rates to be cut," Capital Economics commented in one of its latest reports.

Meanwhile, the FTSE 100 surged over 1 percent to 7,377.79 by 10:55GMT.