HALISTER1: Financials May Lag, Gilt Curve to Flatten on Further BOE QE: UBS

Financials May Lag, Gilt Curve to Flatten on Further BOE QE: UBS

(Bloomberg) -- If U.K. economic activity slows more beyond the end of 2Q, the market is likely to rapidly start considering how the BOE could ease further, UBS analysts including John Wraith and David Tinsley write in research note.
  • MPC could cut rates to zero, possibly in two stages; the questionable success of negative-rate policies elsewhere means such a strategy seems unlikely, at least in the first instance
  • Markets would start to factor in a possible resumption of QE once rates have been cut, leading gilts to richen and bull- flatten; expect gilts to outperform EGBs and USTs as they did in the run-up to previous QE
    • Favor 2s10s flatteners, selling 5Y-30Y breakevens, buying 5Y-30Y gilts on asset swap; expect narrowing spread between bunds and gilts
  • While the FTSE 100 would be relatively well isolated, the FTSE 250 would be more exposed
    • Pharma, food producers and tobacco would likely be the winners, while banks and insurers likely to underperform on any easing other than an enlarged Funding for Lending scheme
  • UBS’s central case is for a U.K. economy rebound in 2H
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
David Tinsley (UBS Asset Management Japan Ltd)
John Wraith (UBS Global Asset Management Japan Ltd)

To de-activate this alert, click here

UUID: 7947283