Daily Brief – UK Markets

UK Markets

As widely expected, the Bank of England’s Monetary Policy Committee left interest rates unchanged. While of course closely watched by markets, the decision and subsequent Press Conference was overshadowed by the continuing political drama unfolding in nearby Westminster. With a 174-seat majority, it would have seemed unlikely or even inconceivable a few short months ago to have contemplated a change of Prime Minister but the calculation currently being made, is what degree of harm is tolerable to the Government and the UK of Sir Keir Starmer remaining as Prime Minister. Despite Governor Bailey’s attempt to give an upbeat message, there were the first signs in the markets yesterday that real damage is being sustained: UK Government Bond Yields are at their highest levels for some time and yesterday the 10 Year stood at 4.52% and the 30 Year at 5.33%, which means a real additional cost to the UK of servicing its substantial debt. The second indicator is that while USD has weakened against most currencies in the past 24 hours, GBP has performed worse and lost 0.5% of its value yesterday with the prospect of David Lammy acting as Prime Minister until a new permanent replacement is elected. That replacement is most likely to be Angela Rayner who, in the light of her known views and interventions, is viewed as someone who will encourage a looser monetary policy with increased government borrowing through the issue of yet more Gilts.

GBP/USD 1.3570.

EU Inflation

Again, as expected the European Central Bank also left EU interest rates unchanged. The background to that is that EU inflation for January is at 1.7% following falls in energy prices and the core Inflation rate which strips out volatile energy and food prices is at 2.2% year on year. While ostensibly good news for inflation hawks, it is not so good given that weakened growth has led inexorably to weakened demand in the EU. The current expectation is that the ECB will leave interest rates unchanged until mid-2026, but that lack of growth and demand could well mean that a case for a further cut could be made, especially given the strengthened EUR and the cost to the EU’s exports.

GBP/EUR 1.1505.

Brazil

The President of Embratur, Brazil’s tourism promotion agency is upbeat given that Brazil has assumed the mantle of becoming the Number One international tourist destination in 2025 although it should be noted by popularity rather than actual numbers of tourists. At 9.3 international visitors up 37% on 2024, the principal increase is due to the numbers of European visitors flocking to Brazil and that is down to there now being new direct air routes to Fortaleza, Recife, Salvador, and Campinas in addition to the well-worn routes to Sao Paulo and Rio de Janeiro. Brazil also offers the user-friendly tourist draw of the Brazil Air Pass that allows travellers to visit 8 domestic destinations for a single price. As Embratur said: “our principal export is joy.”

EUR/JPY 185.05.

EU-US Trade Deal

2 weeks after POTUS dropped his threat to impose punitive tariffs on any EU country that refused to support the USA’s acquisition of Greenland, the EU yesterday voted to re-start the July 2024 in principal trade agreement between the EU and the USA whereby the USA would impose 15% tariffs on EU goods and in return the EU would impose NO tariffs on US goods. Unsurprisingly, there is a distinct lack of unanimity in the EU camp with the Social Democrat and left leaning contingent insisting on a clause in the re-started agreement to reflect an immediate cessation of the agreement should POTUS return to his Greenland acquisition policy. More concerningly for Ursula Von Der Leyen, there is a belated but strengthening EU school of thought that is highly critical of the rushed 2024 framework terms of the EU-US Trade Deal, especially in the light of the recent POTUS anti EU rhetoric.

EUR/USD 1.1806.

Computer Love

This day in 1982 German band Kraftwerke stood at number One in the UK charts which was generally thought to be remarkable given that they were the first ever German band to have won that accolade. Still more surprisingly it remained in the charts for 21 weeks given the far from sophisticated lyrics not to mention the well-deserved reputation that Germany has for gamma minus standard pop music:

Computer love, computer love
Computer love, computer love
Computer love, computer love

Another lonely night
Another lonely night
Stare at the TV screen
Stare at the TV screen
I don’t know what to do
I don’t know what to do
I need a rendezvous
I need a rendezvous

Computer love
Computer love
Computer love
Computer love

I call this number
I call this number
For a data date
For a data date
I don’t know what to do
I don’t know what to do
I need a rendezvous

Have a Great Weekend!

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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