Risk Markets Insights After UK Election and 'Phase One' Trade Deal

Expect gilts to underperform rates globally on an unwind of safe-haven inflows
Gilt curve could also steepen on fiscal expectations
Do not expect the Bank of England to turn hawkish
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Risk Market Insights


Mohammed Kazmi, Portfolio Manager for UBP's Global & Absolute Return Fixed Income team, breaks down the UK election and 'Phase One' trade deal market risks.

Expect Gilts To Underperform Rates Globally

“I would expect gilts to underperform rates globally on an unwind of safe-haven inflows and as investors play for fiscal spending in Johnson’s budget. Many of the constituencies that the Conservative Party won from Labour are expecting spending on public services, and this is what could keep them supporting the Tories over the medium term and beyond just this “Brexit election”. The Gilt curve could also steepen on fiscal expectations, with the front end likely to hold steady as we do not expect the Bank of England to turn hawkish as we still have a trade deal to be agreed. We think that the yield spike on the back of the trade deal and UK elections does provide a good opportunity to start adding back to duration outside of Gilts given that central banks are set to remain accommodative in 2020.

 

Risk Markets and Credit Rally Into Year-End

“With the Phase One trade deal seemingly agreed and UK election fears having now passed, risk markets can continue to perform well into year-end. There is probably more room for UK credit to squeeze as investors who have been structurally underweight UK risk due to the Brexit uncertainty may be forced back into the market and cover these positions. Furthermore, the sentiment and growth boost from the likely passage of the Brexit Bill through parliament could also be beneficial for UK risk.”

 

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