Weekly Market Update 2019 06 03

03/06/2019

Gilt Yields Fall

Continuing from the recent trend, Gilt yields fell last week, reaching their lowest level since shortly after the EU referendum in 2016. Lower gilt yields suggest that investors are increasingly cautious and more willing to forgo returns in favour of capital protection. Furthermore, investor expectations of interest rate rises from the Bank of England in the medium to long term have fallen, with a 10-year gilt suggesting that interest rates will not move significantly from their current level. The fall in gilt yields has been part of the broader global picture, led by US treasuries as fears over a potential economic slowdown and a change in the direction of major central banks away from interest rate rises has increased the attractiveness of government bonds. Since October last year, 10-year gilt yields have gone from a peak of 1.72% to their current level of 0.89%.

Italy-EU tension

The conflict between the populist coalition and the EU commission over the current level of the government deficit is set to increase over the coming weeks. Substantial support in Italy for higher spending and cuts to taxes has emboldened the government to follow more of its promised policies. However, such moves will open up the country to fines from the EU for breaking the bloc’s budgetary rules. Although, as no member state has been fined previously for such violations and many other countries are still in breach, the Italian government may have the courage to continue. Investors have priced in the higher risks by increasing the yield premium to be paid by Italian bonds over their Eurozone equivalents.

UK Mortgage Approvals Surge

There was a surprise jump in UK mortgage approvals last week, marking a change in direction from the persistently low readings over the last year. UK Finance reported that mortgage approvals for new home purchases jumped to 43,000 in April from 40,500 in March and higher than the 39,300 expected. Mortgage approvals are a leading indicator to house purchasing activity so such an increase in lending should provide a ray of light for the usually downbeat UK housing market. Lower mortgage costs and real household income growth should all provide upward pressure on house prices and may even overcome political uncertainties that have been holding back the market in many areas.

Market Data

Index Open Close Change % Change
FTSE 100 7277 7161 -116 -1.59%
S&P 500 2822 2752 -70 -2.48%
Dax 12011 11726 -285 -2.37%
Cac 40 5316 5207 -109 -2.05%
Nikkei 225 21117 20601 -516 -2.44%
UK 10 Year Gilt Yield 0.96 0.89 -0.07 -7.29%
Prydis

This article was written by Prydis

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