U.K Gilts gain on soft manufacturing output, focus on BoE policy decision

The U.K gilts gained on Wednesday as investors pour into safe-haven assets amid deepening economic growth fears after reading weaker-than-expected industrial and manufacturing production figures. Also, investors await for bank of England’s monetary policy meeting on Thursday. The yield on the benchmark 10-year bonds, which moves inversely to its price fell 3bps to 1.390 pct and the yield on the 2-year bonds dipped 1bp to 0.370 pct by 0910 GMT.

The British industrial production rose 0.3 pct m/m in March, softer than the 0.5% increase expected by the market, and reverses the revised 0.2% m/m decline in Feb (prev-0.3%). Similarly, the manufacturing output increased 0.1 pct in March, lower than the market consensus of 0.3 pct rise, however does little to dent February's revised 0.9 pct m/m drop (previous was -1.1 pct), pushing the industry into recession as it continues to act as a drag on Britain's economic performance.

Moreover, the Bank of England will announce its policy decision on Thursday, at 1100 GMT; markets largely expect that interest rates will be kept steady with a slim possibility of a surprise hike. But, the BoE has discussed with banks the prospect that it may cut interest rates in case of Brexit on the economy, which is slowing sharply ahead of the June vote. Meanwhile, this is consistent with rent poor economic growth which slowed to just 0.4 pct in the first quarter of 2016.

According to latest British Chambers of Commerce's (BCC) survey, conducted last month concluded that there is growing support amongst its members for a ‘Brexit’. They mentioned that its members to vote for Brexit increased to 37 pct, from 30 pct in the late January survey. Similarly, members in favour to stay in European Union fell to 54 pct, from 60 pct in the previous survey. Moreover, the IPSOS in its recent poll concluded most of the respondents believe that a Brexit would lead to a domino effect in the European Union. Mainly, 48 pct of respondent voted that other European nations would also leave if British votes for separation and Europeans think Brexit will harm the EU more than the U.K. Moreover, 4 out of 10 said that they see a reduced European Union in next 4 years and 49 pct of those polled voted in favour of Brexit. Furthermore, 60 pct of Italians, 58pct of French & 42 pct of Germans think the UK will leave and 45 pct said that their own country should also hold a referendum. On the other hand, In a latest EU referendum poll by ICM published in the Sunday Sun, the Brexit side leads by 46 pct to 43 pct and remaining 11 pct are still undecided. While 45 pct said that immigration in United Kingdom is the biggest factor in the vote.

In addition, the Bank of England Governor Mark Carney has already warned the nation's commercial banks and other financial institutions of a possible rate cut on prospects of Britain’s exit from the European Union. He had earlier reiterated the possible risks to growth and development that pose to the union in such an instance. Moreover, the banks have been informed to check their balance sheets, if at all they can withstand a rate cut, anytime soon. Britain’s possible exit, to be decided on Jun 23rd, represents the biggest risk that would nail down on the union’s future, Carney said in his speech.

Meanwhile, The FTSE 100 fell 0.21 pct or 12.65 points to 6,144 by 0955 GMT.