William John Market Report 25-06-21
William John Market Report 25-06-21Category: Reports
On Thursday, the Bank of England’s Monetary Policy Committee assessed that “the existing stance of monetary policy remained appropriate” to meet its 2% inflation target over the medium term.
The Monetary Policy Committee unanimously voted to keep its Bank Rate at 0.1% – likely sustaining low commercial interest rates for the foreseeable future. Additionally, the Committee voted to maintain its stock of sterling non-financial investment-grade corporate bond purchases at £20 billion, as well as maintaining its target of £875 billion worth of government bonds in asset purchases.
By holding the Bank rate where it is, holding pound sterling offers a relatively low rate of return causing outward capital flows and hence a depreciation in the currency. Consequently, the foreign exchange markets reacted negatively to the news, with the pound falling against both the euro and the dollar during the European Session:
Source: William John Analytics, Yahoo Finance
However, fixed-income investors did not seem to react negatively to the Bank’s announcement, despite concerns that inflation could erode the real returns on their investments if it perpetuates throughout the summer. The 10-year U.K. gilt yield fell 0.03 percentage points in early afternoon trading, brushing off the possibility of a sell-off of the securities:
On the contrary, the FTSE 100, which is full of companies heavily reliant on exports including British American Tobacco, Unilever, Burberry, and Rolls Royce (just to name a few) rose 0.51% by market close on the news, as a weaker pound makes their export prices more competitive relative to the world market:
As the markets enter July, it is likely that a trend of a weaker pound and fluctuating Gilt yields based on inflation expectations shall continue, as the Bank looks to absorb transitory inflation in the summer months. Conversely, the FTSE looks set to benefit from competitive exports, low borrowing costs and a weak pound, further propelling the U.K. economy into a post-pandemic recovery.
Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.