UK gilts sag as construction PMI beat expectations; service PMI in focus

The UK gilts traded lower Tuesday after recent data showed that country’s construction sector PMI grew better than expected in September.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 2 basis points to 0.750 percent, the super-long 40-year bond yield climbed 2 basis points to 1.373 percent and the yield on short-term 2-year bond bounced 2 basis points to 0.116 percent by 09:00 GMT.

As was the case with the September manufacturing sector PMI, the UK construction sector PMI for the same month rises to 52.3, exceeding our above-consensus prediction of 50.6 (with the market consensus having predicted a still-contractionary 49.0). This builds on the improvement to 49.2 seen in Aug, following the post-'Brexit' vote slump to 45.9 in July.

So it appears that construction sector activity is now back into moderately expansive territory although it would take much stronger PMI readings for positive construction quarterly output growth data to be generated. Whilst this should be viewed as a positive development for GBP, the currency's fate continues to lie with lingering market uncertainty surrounding the impending triggering of Article 50 of the Lisbon Treaty. So a move to 1.2500 on Cable remains on the cards.

On Sunday, Prime Minister Theresa May said that the UK will trigger Article 50 'before the end of March' next year, implying that the UK will officially leave the EU in April 2019. May hinted that she wants to start informal negotiations before but Donald Tusk, the EU council President, refused this implicitly on Twitter, reported Danske Bank in a Reserch note.

In connection with the Queen's next speech, May will introduce a Great Repeal Act to remove the European Communities Act from 1972 (stating that EU laws have primacy over UK laws). The new act will convert all existing EU laws into UK laws when the UK officially leaves the EU. The idea is that this should reduce uncertainty and that the UK can remove or change laws afterwards. The act will also end the jurisdiction of the EU court, they added.

It seems as if we are heading for a 'hard Brexit', as Theresa May revealed that control of immigration is the most important issue. She said that the UK is 'not leaving the EU only to give up control of immigration again'. Interpreted literally, this implies the UK leaving the single market, as EU leaders have said that access to the single market means that the UK has to accept free movement of labour. This is likely to imply that UK financial institutions would lose the current passport access to the European internal market for financial services, Danske Bank reported.

Lastly, investors remained keen to focus on the series of upcoming economic data, highlighted by service PMI, BoE MPC member Broadbent speech, 30-year Gilt Auction, industrail production, trade balance and 10-year Treasury action.

Meanwhile, the FTSE 100 traded 1.58 percent higher at 6,093.90 by 09:30 GMT.