UK Markets Jolted Back to Life by Rate Cut Hopes, Election Buzz

• Traders upped bets for a Bank of England (BoE) rate cut in August, helping to underpin a pre-election rally for UK stocks and government bonds even though the central bank left rates on hold at a 16-year high on Thursday. After the BoE delivered its widely expected decision, it hinted that it was edging closer to cuts, prompting money markets to place a 44.0% probability on a move in August, up from around 32.0% a day earlier.
• Wednesday's data showing UK inflation has dropped to the BoE's 2% target have encouraged those bets. Investors now widely see rate cuts boosting the UK economy alongside a predicted landslide in the July 4 general election for the opposition Labour Party, which claims it can rebuild growth and run the country's debt-laden finances cautiously.
• "Rate cuts are definitely coming, and we have a stable outlook for government for the next few years," Morningstar European strategist Michael Field said.
• James Briggs, a portfolio manager at Janus Henderson, said he had a "relatively upbeat" stance towards UK stocks, corporate credit, and government bonds, known as gilts. He said UK equity and credit valuations did not yet reflect the economy's improving prospects and that gilts would benefit because "that tail risk of unorthodox fiscal policy is off the table. "Two-year gilt yields dropped to their lowest since March after the BoE's decision, LSEG data showed.
• Economists polled by Reuters expect the UK economy to grow by 0.7% this year, in an upgrade to earlier forecasts that had placed Britain at the bottom of the league table for predicted growth among advanced economies in 2024. Overall, the mood among investors towards the UK was buoyant as rate cut hopes added to the pre-election buzz.

(Source: Reuters)