The pound weakened and bonds rallied after inflation in Britain slowed more than expected, reviving speculation about how many more times the Bank of England will increase interest rates. Stocks in the UK and Europe advanced.
(Bloomberg) — The pound weakened and bonds rallied after inflation in Britain slowed more than expected, reviving speculation about how many more times the Bank of England will increase interest rates. Stocks in the UK and Europe advanced.
The UK Consumer Prices Index was 7.9% higher than a year ago in June, a sharp drop from the 8.7% reading in May. It was the first downward surprise in five months and the biggest since July 2021, below the 8.2% expected by economists. The pound slid as much as 0.8% against the dollar, winding back recent gains, as traders pared bets on further BOE rate hikes.
The yield on two-year UK government bonds fell 20 basis points, set for the sharpest drop since March. Treasury yields retreated across the curve. A gauge of dollar strength rose.
Rate-sensitive real estate stocks led gains in Europe’s Stoxx 600 index, with UK homebuilders surging the most since 2008 on optimism about less-aggressive hikes.
“The strength in the pound was due to higher inflation pushing rates expectations up and growth expectations down,” said Barclays strategist Emmanuel Cau. “So today’s weaker-than-expected inflation print is arguably a relief, which should lift sentiment on the depressed domestic plays and rates plays. Investors are very bearish on the UK and under-exposed, so short covering may be powerful.”
In other individual stock moves, Kering SA soared after the luxury group announced the departure of the head of the Gucci brand. Swedish truck and bus maker Volvo Group declined as its cautious comments about demand outweighed a second-quarter earnings beat.
US futures were flat after Wall Street stocks closed near session highs on Tuesday, as results from Bank of America Corp. and Morgan Stanley bolstered bank shares and a rally in equities linked to artificial intelligence resumed.
After the encouraging news out of the UK, investors will be keeping a close eye on inflation data for the euro area due later Wednesday. European Central Bank Governing Council member Klaas Knot has said monetary tightening beyond next week’s meeting is anything but guaranteed.
The focus later returns to US earnings, with Goldman Sachs Group Inc., Netflix Inc. and Tesla Inc. all scheduled to release results.
China’s Slump
In Asia, shares in Hong Kong and mainland China were the worst performers Wednesday. The offshore yuan also fell to the weakest level in more than a week. Investors see no easy fix to China’s economic slump, with fresh signs of financial stress among the nation’s dollar-bond issuers. Economists say Beijing’s plan to boost consumption won’t meaningfully bolster the recovery and are shifting their focus to potential measures from the Politburo meeting later this month.
“The market pessimism around Chinese equities is probably at a level of extreme,” John Lin, chief investment officer of China equities at AllianceBernstein, said on Bloomberg Television. “At this point, little policies probably aren’t enough. You need something bigger, something to sort of shock people out of the slumber.”
Concerns over the outlook for China spread to Europe, with mining stocks the region’s biggest decliners after Rio Tinto Plc reported lower shipments of iron ore to the Asian giant as its faltering economic recovery continues to weigh on demand.
The yen weakened for a second day following Bank of Japan Governor Kazuo Ueda’s comment that it would maintain monetary easing unless there is a shift in its price goal view.
Key events this week:
- Eurozone CPI, Wednesday
- US housing starts, Wednesday
- China loan prime rates, Thursday
- US initial jobless claims, existing home sales, Conf. Board leading index, Thursday
- Japan CPI, Friday
Some of the main moves in markets:
Stocks
- The Stoxx Europe 600 rose 0.2% as of 9:19 a.m. London time
- S&P 500 futures were little changed
- Nasdaq 100 futures were little changed
- Futures on the Dow Jones Industrial Average rose 0.1%
- The MSCI Asia Pacific Index was little changed
- The MSCI Emerging Markets Index fell 0.3%
Currencies
- The Bloomberg Dollar Spot Index rose 0.2%
- The euro was little changed at $1.1226
- The Japanese yen fell 0.5% to 139.49 per dollar
- The offshore yuan fell 0.5% to 7.2261 per dollar
- The British pound fell 0.6% to $1.2954
Cryptocurrencies
- Bitcoin rose 0.7% to $29,990.54
- Ether rose 0.7% to $1,908.32
Bonds
- The yield on 10-year Treasuries declined four basis points to 3.74%
- Germany’s 10-year yield declined five basis points to 2.34%
- Britain’s 10-year yield declined 14 basis points to 4.19%
Commodities
- Brent crude rose 0.2% to $79.82 a barrel
- Spot gold was little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Tassia Sipahutar and Michael Msika.
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