U.K Gilts plunge on rallying crude, despite weak retail sales

The British 10-year bond yield jumped on Thursday as crude oil prices recovered after Energy Information Administration's (EIA) showed that crude stock rose lower than the market expectation, has helped shore up concerns about a slowdown in the global economy and the outlook for inflation. The yield on the benchmark 10-year bonds, which moves inversely to its price, moved higher 5.59 pct to 1.567 pct and the yield on the 2-year bonds rose 6.51 pct to 0.509 pct by 0950 GMT.

The United Kingdom 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, Crude oil prices jumped to 5-month high as Energy Information Administration's (EIA) showed that crude stock rose lower than the market expectation last week. The crude inventories rose 2.1 million barrels, from prior build of +6.6 million barrels for the week ending 15 April. This came alongside a decreases seen in gasoline inventories of -0.1million barrel, from prior -4.2 million barrel and distillate inventories of -3.6 million barrel, as compared to a build of +0.5 million barrel seen prior. Moreover, Market speculation that Petroleum Exporting Countries (OPEC) and Russia will meet in Moscow next month to again strike a deal on oil output freeze, boosted crude oil investors confidence. But, Russian Energy Minister Alexander Novak denied about any such meeting happening in Russia in May. On Sunday, the negotiations between Petroleum Exporting Countries (OPEC) and Russia failed to reach an agreement in the Doha round of talks to strike a deal on oil output freeze. The International benchmark for crude oil prices, Brent futures rose 0.07 pct to $45.82, while West Texas Intermediate crude oil jumped 0.20 pct to $44.27 by 0820 GMT.

On the other hand, investors did not react to the weak March retail sales figure, which tumbled 1.3 m/m pct, against market expectation of 0.1 pct m/m fall, from down 0.4 pct m/m in February. On annually basis, it rose 2.7 pct, lower than the consensus of 4.4 pct, as compared to prior 3.8 pct. After wave of disappointing economic data like weak Industrial Production and high unemployment rate, this may increase worries that development in the U.K economy is easing off ahead of a referendum on membership of the European Union planned for June.

The investors will now focus on the ECB governing council meeting on Thursday (1145 GMT), which is expected to culminate in the decision to leave policy unchanged.

We foresee that the BOE will also be wary of increasing interest rates until after a June referendum on Britain’s membership of the European Union, one of several uncertainties they say are weighing on the prospects for the global economy.

Meanwhile, The FTSE 100 fell 0.58 pct or 37.26 points to 6,373 by 0950 GMT.