How Did the Markets React?
Economic
data out of the UK was
broadly negative today, as the Nationwide measure of consumer confidence plunged
to 83 – matching August’s all-time low – while the visible trade balance hit a
six-month low of -7.193 billion pounds. The drop in sentiment came just after
the Bank of England hiked rates to 5.00 percent – the highest level since 2001.
The jump in benchmark rates likely made homeowners wary of increasing mortgage
payments while consumers may have worried that it would be more expensive to pay
off record levels of debt. Meanwhile, the widening of the trade deficit came
from a variety of factors. First, the balance has been distorted in 2006 due to
value-added tax fraud, which totaled 200 million pounds in November. However,
this was the lowest recorded impact for the year as law enforcement officials
have been clamping down. Nevertheless, exports continue to be stifled by a
strong British pound, which makes products out of the UK more
expensive and thus, less attractive. Additionally, UK manufacturers
have remained fragile, especially as the sector has generally had a hard time
taking advantage of demand from the Euro-zone. Overall, the trade data was not
completely surprising as exports are not exactly the backbone of the
UK economy. FX and fixed income
markets responded similarly to the UK economic data, as both gilts and Cable saw
bumps in price action immediately upon release (or when the market opened).
Equities, on the other hand, were more concerned with overnight declines in
Asia.
Bonds – UK 10-Year Gilts
Following days of declines, 10-year
gilts spiked higher this morning as the Nationwide consumer confidence report
was released before the opening of the UK bond markets. Shortly after, gilts
got another boost from the disappointing trade balance reading, though price
topped out just below 94.05. Sellers immediately took over and brought price
nearly even with yesterday’s close at 96.93 with a yield of 4.792 percent. The
BRC shop price report likely pushed gilts lower, as the annual rate hit a 33
month high of 2.28 percent, raising speculation of a Q1 hike by the Bank of
England. Gilts could see another spike in prices Thursday, however, as the BOE
is widely anticipated to keep rates on hold at 5.00 percent, and thus, will not
be releasing a statement on their decision. Traders will have to wait until the
minutes are made available on January 24th in order to gauge where
the monetary policy committee’s bias lies.
FX –
GBP/USD
While Cable price action was
relatively tame in Asian and early European trading, the respective releases of
Nationwide consumer confidence and the visible trade balance left the British
pound to spike lower. The sentiment figure brought GBP/USD down nearly 50 points
to a low of 1.9348, where price stabilized for a few hours. Subsequently, the
pair worked its way higher as European traders entered the market, bringing
Cable to a high of 1.9421. However, the unexpected widening of the trade deficit
dragged the pair back down to 1.9363. Although price has edged slightly higher,
it will likely hold just below the 1.9400 level ahead of the US trade balance
at 13:30GMT.
Equities – FTSE 100
Index
UK equities lost ground on Wednesday
following overnight falls in Asian markets as energy and financial stocks
weighed heavily. Additionally, disappointing Nationwide consumer confidence hurt
investor sentiment as well. By mid-day, the FTSE 100 was down 0.5 percent to
6,163.0. Energy stocks were lower, with Scottish & Southern Energy down 2.1
percent to 14.48 pounds while financials fell following a strong showing in the
previous session. Northern Rock fell 2.4 percent to 11.67 pounds and Legal &
General eased 2.3 percent to 156½ pence. However, Wm Morrison shares gained 3.2
percent at 278½ pence - an all-time high - after the supermarkets group said
sales in the period between Christmas and the New Year rose 6 percent, including
fuel.
