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U.K Gilts climb on weak risk sentiments amid Brexit angst

The U.K Gilts were trading higher on Friday as weak risk sentiments among investors drove them towards safe-haven assets. Also, rising worries about the up-coming June referendum supported the cause. The yield on the benchmark 10-year bonds fell 2bps to 1.380 pct and the yield on 2-year bonds dipped 1bps to 0.376 pct by 0945 GMT.

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, the crude oil prices fell in early trading on Friday as a stronger USD weighed and Russia warned that a global crude supply overhang could last into next year. In Canada, crude production outages from oil sand fields following forced closures due to wildfires still stood around 1 million bpd as of Wednesday, although operators said they were gradually ramping up output. The International benchmark Brent futures fell 0.98 pct to $47.61 and West Texas Intermediate (WTI) tumbled 1.11 pct to $46.18 by 0945 GMT.

The International Monetary Fund (IMF) in its recent report concluded that the Brexit may hit equity, home prices and raise borrowing costs as largest risks to UK surround referendum vote. Said growth to rebound in second half of 2016 if Britain votes to stay in and Brexit uncertainty is hitting UK investment and hiring. They further lowered the forecast for 2016 Gross Domestic Product (GDP) to below 2 pct then back to 2.25 pct in med-term. Said the Brexit trade negotiations could take years, Brexit may cause contagion and the BoE should wait for clear signals on inflation pressure before raising rates. The BOE may need to cut rates and do more QE if risks of protracted weak growth and inflation undershooting materialise, they added. In addition, the IMF head Lagarde said that thay have not seen anything positive in possible UK exit from the EU and UK interest rates could rise sharply after a leave vote.

Yesterday, the Bank of England left its policy rate unchanged at 0.50 pct, as expected and this decision was made from MPC 9-0 votes. The Bank of England's Monetary Policy Committee (MPC) sets monetary policy to meet the 2 pct inflation target and in a way that helps to sustain growth and employment. At its meeting ending on 11 May 2016 the MPC voted unanimously to maintain Bank Rate at 0.5 pct.  The Committee also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion. Twelve-month CPI inflation increased to 0.5% in March but remains well below the 2% inflation target.  This shortfall is due predominantly to unusually large drags from energy and food prices, which are expected to fade over the next year.  Core inflation also remains subdued, largely as a result of weak global price pressures, the past appreciation of sterling and restrained domestic cost growth.

Lastly, the BoE Governor Mark Carney said in the press conference after the policy decision that around half of 9% move in sterling is Brexit related and we have factored that out of forecasts and rate increase is more likely than not by the end of the forecast period and. Said uncertainty measures have picked up sharply in February and they could be over or underestimating the effects of Brexit. He further added that Brexit could lead to higher path of inflation and lower path of growth and monetary policy cannot immediately offset all the effects of a shock from Brexit.

The markets will now focus on the next week’s April consumer price index on Tuesday (0830 GMT), March unemployment rate on Wednesday (0830 GMT), April Retail sales on Thursday (0830 GMT). Meanwhile, The FTSE 100 fell 0.51 pct or 31.19 points to 6,073 by 0945 GMT.

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