A quiet start to the week after the long bank holiday weekend in the UK and US. The TV appearance of Jeremy Corbyn and Theresa May did not appear to cause much activity in the domestic capital markets. UK 10 year gilt yields did fall below 1%, however sterling did recover some of the lost ground against the US dollar at the end of last week. The FTSE 100 drifted modestly but this was in line with major developed equity markets. As we stated last week buying UK gilts as a form of defence against any unexpected election result feels misguided. One would suspect with the tax and spend policies that the labour propose, should they come to power, this would not sit well with the bond market. We still believe that the best opinion poll into the election will be the gilt market.
It has been a newsworthy day in Europe as Mario Draghi reiterated his belief to MEP’s that low interest rates will continue, as he remains unsure as to the strength of the recovery in the economy. Interesting article in Tuesday’s Financial Times that Brussels is pressing for sovereign debt from across the eurozone to be bundled into a new financial instrument to strengthen the single currency. The plan could be a first step to the issuance of common bonds, which Germany has so far resisted as it does not want to be underwriting eurozone debt with its own credit strength. It always feels that Germany is happy to enjoy the benefits the euro gives its economy without taking some of the responsibility for it.
Instead of constantly battling with Greece over its unsustainable debt position it would make a lot more sense for Angela Merkel to encourage German manufacturing to set up production centres in Greece. If BMW started to build cars or Siemens wind turbines this would bring much needed employment and capital to the country, which would in turn boost the economy.
Remaining in Europe May’s decline in harmonised CPI inflation in Germany and Spain could suggest that the core inflation rate within the region will remain below the ECB’s 2 pct. Target. This news will support Mario Draghi’s wish to keep rates at current levels. Inflation rates across the globe have been picking up as economic activity has shown signs of improving, there is evidence that inflation rates may be dipping again. Along with the euro area inflation data the US PCE core Price Index for April was released. This is the preferred measure of inflation for the Federal Reserve. Compared with the same month of the previous year, the core PCE price index increased 1.5%. US inflation remains below the Fed’s 2% and below March’s 1.6%. Whether this report will influence the Fed in June is yet to be seen, however it did lead to a modest fall in US bond yields