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26 January 2011

The Pound Gyrates on Hawkish BOE Minutes

Written by dslmpartners
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Global equities are higher, having recovered their poise, after Wall Street recovered all its initial losses on Tuesday. Asian stocks rose, buoyed by well received corporate earnings, with the MSCI Asia Pacific index up 0.2%. The Nikkei gave back two days of gains, falling 0.6%, as the drop in the dollar versus the yen weighed on sentiment and hobbled exporters, while emerging market stocks rose the most in two weeks. In Europe stocks rose, with the Europe Stoxx 600 rallying over 1% to a new weekly high with car manufactures performing well after analyst upgrades of Porsche and Renault. The FTSE erased yesterday’s losses with the index advancing .87%, led by materials. The US markets were higher lead by the Russell Small Cap Index.

Global bonds are mostly lower as stock market’s rally, with gilts underperforming after the BoE’s minutes. In Europe, the successful EFSF bond auction yesterday had little carry over today as peripheral spreads continued to widen amid surveys predicting a euro zone break up, while the pressure is building on the short-end of the curve as well. Both 10- and 2-year yields are up on periphery debt with Ireland’s leading the way increasing by 10bps, while the Portuguese 10-year increased 15basis points.

For the second consecutive session, the UK has surprised the market. The impact of yesterday's shocking 0.5% Q4 contraction has been blunted by the unexpected BOE vote 7-2 in favor of steady interest rate policy, as the newest member (Weale) joined Sentance's dissent for a 25 basis points rate hike. Given that the MPC would not have known that the economy contracted, suggested that the minutes might be too historical to be of much interest to the markets. Instead, the news and the somewhat hawkish tone to the overall minutes has prompted a sharp sell-off in UK debt, with implied yields on the short sterling futures give back the lion's share of yesterday's gains. The Pound bounced back on the news.