Gilts gain as UK construction PMI contracts for 2nd straight month; risk of general election rises amid Brexit impasse

The United Kingdom’s gilts gained after the country’s March construction activity contracted for the second straight month, which pushed the 10-year yield down over 3 basis points. That was largely due to uncertainty over Brexit which is deterring investment.

The yield on the benchmark 10-year gilts, fell over 3 basis points to 1.017 percent, the super-long 30-year bond yields also dipped 3 basis points to 1.561 percent and the yield on the short-term 2-year traded 3 basis point lower at 0.643 percent by 09:10GMT.

The headline seasonally adjusted IHS Markit/CIPS construction Purchasing Managers’ Index (PMI) fell to 49.7 in March, from 49.5 in February. The PMI has remained below the 50.0 benchmark for the second straight month.

The sustained decline in total construction activity represented the first back-to-back fall in output levels since August 2016, although the rate of decline remained only marginal in March.

“Brexit-related uncertainty continued to generate indecisiveness, ultimately hitting order book volumes. Furthermore, strong competition for contracts was also reported by some panel members. The outlook was subsequently underwhelming by historical standards, with the unsettled political and economic environment keeping business confidence below its long-run average,” noted Joe Hayes, Economist at IHS Markit.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply noted that it is unlikely that next month will bring about any positive news given the challenges of a weaker UK economy, volatile pound and intense competition for new orders, as Brexit continues to cast a long shadow over the sector’s future.

Goldman said balance of risks tilted towards a softer, longer Brexit, but the company now foresee higher odds of a no Breixt outcome materialising. It also added that risk of a general election in the UK has intensified.

“Brexit, second referendum, General Election, no deal, Article 50 revocation or even eventual victory for a variant of May’s deal – remain possible. But the precise sequence of events, and the eventual outcome, between now and the all-important EU summit on 10 April remains unclear,” noted Daiwa Capital.

Meanwhile, the FTSE 100 remained tad 0.41 percent higher at 7,347.31 by 09:30GMT, while at 09:00GMT, the FxWirePro's Hourly Pound Strength Index remained neutral at -52.21 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex