U.k. Gilts Slump As Investors Shrug Off Possibility of Britain Leaving the Eu

The U.K gilts slumped on Friday as investors appear to have concluded that the U.K. will vote to stay in the European Union in June. Also, investors await Federal Reserve Chair Janet Yellen’s speech in an attempt to estimate the Fed's likely next step to raise interest rate. The yield on the benchmark 10-year bonds, which moves inversely to its price, moved higher 1bp to 1.428 pct and the yield on the short-term 2-year bonds also climbed 1bp to 0.462 pct by 1130 GMT.

According to latest poll by Betfair Group PLC published on WSJ, opinion polls show Britain leaning toward a vote to stay in the EU in the June 23 referendum. Bookmakers have cut the odds on a vote to “leave” to 19 percent from 37 percent in April.

According to the earlier EU referendum poll by BMG 44 percent favoured to 'remain', 45 percent voted for leave and remaining were inconclusive. Similarly, the U.K poll by YouGov shows the public evenly split on Brexit at 41-41 percent. This survey, conducted on 23-24 May, represents a net 4 percent swing against European Union membership since the organisation's poll last week. On Monday, the U.K public opinion poll released by Opinium over the weekend showed 44 percent of the voters favoured remaining in the EU and 40 percent supported leaving the European Union. However, this is similar to most recent surveys showing a modest balance against Brexit.

Moreover, the UK Chancellor of the Exchequer Osborne warned over the last weekend said that Brexit would cause a year-long recession. UK Treasury in its recent report on Brexit concluded that Brexit could cause the pound index to fall 12-15 percent and push up jobless rate by 520k-820k. Added this catastrophic event will lower real wages by 2.8-4.0 percent and could raise inflation by 2.3-2.7 percentage point. Budget deficit could increase 24-39 billion and a Brexit vote would result in a marked deterioration in the economic security and prosperity, they added further.

The British gilts have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of England's target. Today, crude oil prices fell more than 1 percent to below $50 mark after investors booked profit, as they considered whether higher prices could unlock more output in an already oversupplied market.  Yesterday, crude oil prices crossed $50 mark for first time in seven months after the U.S. government reported a larger-than-expected drop in crude inventories. According to the US DOE, crude inventories decreased 4.2 million barrels, as compared to a build of +1.3 million barrels seen prior for the week ending 20 May. This came alongside an increase seen in gasoline inventories of +2.0 million barrels, from a draw of -2.5 million barrels seen prior and a decrease in distillate inventories of -1.3 million barrels, against a draw of -3.2 million barrels. The International benchmark Brent futures fell 1.35 pct to $48.92 and West Texas Intermediate (WTI) dipped 0.63 pct to $49.17 by 0830 GMT.

In addition, the second estimate of UK’s first quarter GDP growth was unrevised from the earlier estimate of 0.4 percent q/q, on par with consensus projections. The annual growth was slightly lowered to 2 percent y/y, the slowest growth since Q1 2013. The construction output and industrial production data after the release of first estimate of GDP was weak, but it did not provide much reason to anticipate a downward revision in the second estimate of GDP. Private consumption was revised up to 0.7 percent q/q, from 0.6 percent, as was government spending, to 0.4 percent, and fixed investment, to +0.5 percent q/q (a major upgrade from -1.1 percent). On the other hand, exports were revised down sharply to -0.3 percent (from +0.1 percent previously), while imports were trimmed to 0.8 percent q/q. Meanwhile, The FTSE 100 trading flat at 6,266 by 1130 GMT.

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