Stocks climb, sterling weighed down as UK inflation slows
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[July 19, 2023] By
Naomi Rovnick and Tom Westbrook
LONDON, SYDNEY (Reuters) - Global stocks and government bonds rallied on
Wednesday as good news on UK inflation added to a picture of cooling
price pressures, although the data slammed the brakes on sterling's
recent winning streak.
Headline British consumer price inflation fell to 7.9% year-on-year in
June, against expectations for 8.2%, in the latest downside surprise for
a major economy after more than 18 months of central banks cranking
interest rates higher.
Later in the day, final euro zone inflation data for June confirmed that
the annual rate of price increases in the region declined to 5.5%.
The trend signalled "those lagged effects of higher rates and tighter
monetary policy are coming home to roost," said Eren Osman, managing
director of wealth management at Arbuthnot Latham.
Sterling lost 0.8% to trade at $1.2961 as market bets that the Bank of
England would raise interest rates as high as 6%, from the current 5%,
faded out. Against the euro, the pound was 0.8% lower at 86.1 pence.
The BoE now had "the green light" for a 25 basis point (bps) rate rise
next month, Pantheon Macroeconomics chief UK economist Samuel Tombs
said, after markets had previously priced in a further 50-bps hike.
Sterling is still showing a 4% gain for the last three months, having
boomed on speculation the U.S. Federal Reserve would end its rate hikes
before the Bank of England does.
"Profit taking in sterling should not be a surprise," added Kenneth
Broux, head of FX and rates corporate research at Societe Generale in
London.
Signs of disinflation in the UK also generated optimism that global
price increases may decelerate more rapidly than economists had
forecast, pushing the MSCI index of world stocks 0.3% higher and towards
its eighth consecutive day of gains - its longest rally since mid-2021.
UK indices outperformed. London's blue-chip FTSE 100 added 1.5% and the
domestically focused FTSE 250 rose 2.7%, on track for its best daily
performance since February 2.
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A shopper checks her shopping list in a
supermarket in London, Britain April 11, 2017. REUTERS/Neil Hall
In bond markets, the yield on the two-year UK gilt, which tracks
interest rate expectations and moves inversely to the price of the
government debt security, dropped 27 bps to 4.811%, set for its
biggest fall since mid-March.
Germany's two-year bond yield dropped 6 bps to 3.189%. The 10-year
yield, a benchmark for debt costs in the euro zone, fell 4 bps to
2.35%.
Euro zone bonds also benefited from comments by European Central
Bank (ECB) governing council member Klaas Knot on Tuesday that rate
hikes beyond next week's meeting were "by no means a certainty."
"This is perhaps the first time a known hawk within the ECB has
backed the market’s view that we’re close to the end of the hiking
cycle in Europe," said Chris Weston, head of research at broker
Pepperstone in Melbourne.
Wall Street looked set for a quieter session, following U.S.
consumer data on Tuesday that indicated the economy was sluggish but
may have avoided a recession in the second quarter of this year.
Benchmark 10-year U.S. Treasuries yields were 3 basis points lower
at 3.789%.
Futures trading indicated the S&P 500 and Nasdaq 100 share indices
would hold steady at the market open.
The yen slipped to a one-week low of 139.43 per dollar and Japanese
government bonds rallied following the Bank of Japan's governor
sticking to his script that policy shifts are still some time away.
Asia's stock markets were mixed on Wednesday with economic growth
concerns dragging on China's equities while shares rose in Japan and
Australia.
(Editing by Sam Holmes, Bernadette Baum and Kim Coghill)
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