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London Quick Take - Tuesday - Gilt yields hit highest since 2008 as pound selloff gathers pace and FTSE dips
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Today's the day: Sterling is under pressure and gilt yields leapt sharply as Prime Minister Keir Starmer faces mounting pressure to resign. Almost 80 Labour MPs have called on the PM to step down. It now appears inevitable that the PM will step down either now, or set a timetable to do so in the coming months. This is a dynamic situation but it looks like this morning's cabinet meeting could be the end and we are expecting volatility in gilts and sterling to continue.
Having risen about 10bps yesterday this morning the 10yr gilt yield jumped a further 12bps to clear 5.10% at the open as investors ditched UK bonds. The 30yr yield also rose 13bps to hit a fresh 28-year high above 5.8%. I can't believe this won't be broken. We could see a blowout in longer-dated gilts if this turns into a dogfight– political, fiscal and inflationary risks will rise. Markets tend to dislike a lack of certainty over who runs a government; the fiscal position is already fragile and likely to become worse should a left-leaning ticket prioritise spending; and that this makes inflation stickier.
Sterling was also offered as GBPUSD started to crack at the 20-day SMA at 1.3540 in early trading to test 1.350. A move back to 1.34 seems very possible in the near-term and longer-term we could easily retest 1.30. Yesterday, gilt yields continued to tick up as the afternoon wore on as the number of MPs calling on Prime Minister Keir Starmer to quit climbed above the 50 mark. Stalking horse Catherine West blinked and said she won’t trigger a leadership contest immediately, but a couple of cabinet ministers cracked, and the momentum seems to be with the rebellion. UK 10yr gilt yields rose about 10bps to clear the 5% mark again yesterday, near the highest since 2008, while the 30yr yield ticked up 11bps to touch 5.7%, near last week’s 28-year high. If a leadership challenge is lodged, then we’d expect further selling in sterling in gilts and a period of volatility in UK assets.
The working assumption is a new leadership ticket moves the party to the left. Right on cue, Louise Haigh, leader of the influential Tribune group of Labour MPs, is today calling for a reset of the fiscal framework to set longer-term borrowing horizons. Whilst there are some admirable attempts within this proposal to refocus our growth ambitions I would think that recalibrating fiscal rules is not the sort of thing the market likes to hear.
A leftwards lurch would raise hackles among bond vigilantes at a time when the fiscal position is already fragile, and risks are rising due to rising inflation from soaring energy prices and weaker growth outlook for the economy. In the event of a new leadership ticket there is a risk of additional government spending on cost-of-living measures such support for rising energy bills, increased minimum wage, benefit uprating and a rental freeze, among a range of potential help mechanisms. It would be a toxic combination for gilts – higher spending, lower growth and inflation becoming embedded.
Sterling was also offered as GBPUSD started to crack at the 20-day SMA at 1.3540 in early trading to test 1.350. A move back to 1.34 seems very possible in the near-term and longer-term we could easily retest 1.30. Yesterday, gilt yields continued to tick up as the afternoon wore on as the number of MPs calling on Prime Minister Keir Starmer to quit climbed above the 50 mark. Stalking horse Catherine West blinked and said she won’t trigger a leadership contest immediately, but a couple of cabinet ministers cracked, and the momentum seems to be with the rebellion. UK 10yr gilt yields rose about 10bps to clear the 5% mark again yesterday, near the highest since 2008, while the 30yr yield ticked up 11bps to touch 5.7%, near last week’s 28-year high. If a leadership challenge is lodged, then we’d expect further selling in sterling in gilts and a period of volatility in UK assets.
The working assumption is a new leadership ticket moves the party to the left. Right on cue, Louise Haigh, leader of the influential Tribune group of Labour MPs, is today calling for a reset of the fiscal framework to set longer-term borrowing horizons. Whilst there are some admirable attempts within this proposal to refocus our growth ambitions I would think that recalibrating fiscal rules is not the sort of thing the market likes to hear.
A leftwards lurch would raise hackles among bond vigilantes at a time when the fiscal position is already fragile, and risks are rising due to rising inflation from soaring energy prices and weaker growth outlook for the economy. In the event of a new leadership ticket there is a risk of additional government spending on cost-of-living measures such support for rising energy bills, increased minimum wage, benefit uprating and a rental freeze, among a range of potential help mechanisms. It would be a toxic combination for gilts – higher spending, lower growth and inflation becoming embedded.
The bond market may eventually enforce fiscal discipline on any new leadership, however this would not come without first a lurch higher in yields and potential dislocations. Ultimately the outlook for inflation and gilt yields will be dependent on the outcome of the situation in the Middle East and the persistence of the energy shock, as well as the reaction function of the Bank of England to higher prices, as well as the fiscal and political outlook.
Elsewhere, Brent crude prices are higher again after President Trump said the Iran ceasefire is on “life support”. Brent rose about 2% to above $106. It didn’t matter much for Wall Street as the S&P 500 and Nasdaq both edged out fresh record highs. By contrast European indices are down close to 1% as fears of re-escalation resurface, deepening inflationary worries.
Chipmakers continued their advance with Intel extending its post-earnings rally on reports it’s near a packaging deal with memory giant SK Hynix. The AI boom is driving demand for CPUs due to astronomical expected compute needs of AI agents. Intel is up 100% since its 23 April earnings, +220% YTD, +470% in the last 12 months.
Precious metals kicked back into life somewhat as technical momentum kicked in for silver as it breached $82.70, which dragged gold along for the ride. This came after India’s Prime Minister asked consumers to pause gold purchases for at least a year to ease pressure on foreign-exchange reserves and the currency.
Post-pandemic: Moderna shares rallied further as an American citizen tested positive for hantavirus - last week the company announced it’s in the early-stage development of a vaccine for the disease. MRNA has jumped 20% in the last five sessions.
Elsewhere, Brent crude prices are higher again after President Trump said the Iran ceasefire is on “life support”. Brent rose about 2% to above $106. It didn’t matter much for Wall Street as the S&P 500 and Nasdaq both edged out fresh record highs. By contrast European indices are down close to 1% as fears of re-escalation resurface, deepening inflationary worries.
Chipmakers continued their advance with Intel extending its post-earnings rally on reports it’s near a packaging deal with memory giant SK Hynix. The AI boom is driving demand for CPUs due to astronomical expected compute needs of AI agents. Intel is up 100% since its 23 April earnings, +220% YTD, +470% in the last 12 months.
Precious metals kicked back into life somewhat as technical momentum kicked in for silver as it breached $82.70, which dragged gold along for the ride. This came after India’s Prime Minister asked consumers to pause gold purchases for at least a year to ease pressure on foreign-exchange reserves and the currency.
Post-pandemic: Moderna shares rallied further as an American citizen tested positive for hantavirus - last week the company announced it’s in the early-stage development of a vaccine for the disease. MRNA has jumped 20% in the last five sessions.
Rigetti Computing – shares in the quantum computing name were all over the place in after-hours trading but settled flat after revenues beat expectations – super frothy and volatile. IonQalso fell after earnings despite hiking guidance last week. Quantum computing stocks had a very strong day on Monday, with Quantum Computing (QUBT) jumping +16% on soaring revenues.
AST SpaceMobile dropped after Q1 misses on earnings and revenues.
Bitcoin names CleanSpark and MARA were down after missing estimates, while stablecoin giant Circle ripped higher after reporting the earnings from its ARC token sale.
UK earnings are out aplenty this morning....
Vodafone shares –3% as total revenues rose +8% to €40.5bn while organic services revenues growth was +5.4%.
Greggs shares rose +3% on improved trading momentum as sales rose +7.5%. LFL sales were +2.5% but the uptick to 3.3% in the most recent 10 weeks was taken as a sign of recent improvement.
On The Beach –15% as its reinstated guidance fell short of market expectations. Not a big surprise that things are tough but the £18mn-£25mn target was short of the £36mn expected.
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