Financials lead gains as interest rate curves steepen, pound pops higher

Financials led gains in London, over on the Continent and across the Pond too, as interest rate futures continued to progressively - albeit only modestly - price-in a higher probability of a US central bank rate hike in the very near-term, perhaps as soon as the next month.

As of 18:51 the Chicago Mercantile Exchange’s Fed Watch tool was pegging the probability of a 25 basis point increase in the range for the Federal Reserve’s main policy rate at its 15 June meeting at 18.8%, up from nearly zero just a few weeks ago.

The critical spark for that change came on 12 May when Boston Fed president Eric Rosengren explicitly stated that a June rate hike was possible. Aside from being known for being of a more ‘dovish’ slant, which in itself made his remarks noteworthy, he was also a voting member on the US Federal Open Market Committee in 2016.

Not only were market interest rates rising on both side of the Atlantic, interest rate curves also steepened.

As of 19:16 BST the yield on the benchmark two-year Gilt was higher by five basis points to 0.43% and that on the 10-year bond by seven basis points to 1.44%.

Yields in the UK were also higher as the pound strengthened on the back of more positive poll results regarding the upcoming 23 June referendum on EU membership.

The key level of technical resistance to watch for on daily price charts for cable was 1.48, Digital Look technical analyst Jose Maria Rodriguez said.

In and of themselves, reduced (for now at least) odds for Brexit were considered a ‘plus’ for banks shares by many market commentators.

Shares in RBS picked up 4.29% to 223.7p, with Barclays (3.74% to 170.4p) and Standard Life (4.12% to 333.3p) also to be seen near the top of the leaderboard.

The likes of Lloyds, Aviva, St.James’s Place and Prudential were not far behind.

Stability is important

Commodities were generally lower as the spot US dollar index firmed a little, although iron ore futures bounced back a little following recent sharp drops.

Bloomberg’s commodity index was down by 0.37% to 85.40, while three-month copper futures on the LME gave back 0.50% to end at $4,618.00 per metric tonne.

To take note of, in a research report dated 16 March analysts at Macquarie hiked their 2017 iron ore price forecast by 11.1% to $50 per metric tonne and that for 2016 by 1.5%.

'Stability' would be key in the Asian giant going forward, the Australian broker said, ahead of next year's political changes in Beijing, when half of the current Politburo's mandarins were set to step down, they added in another report published on the next day.

However, the Australian broker downgraded its forecasts for the price of iron-ore in 2018 and beyond by approximately 20%, arguing that 100 metric tonnes of seaborne supplies still needed to be taken out of the market by 2018-19 for the market to rebalance, on top of another 150 metric tonne per annum reduction in domestic Chinese supplies in 2018.

It also singled out Antofagasta as its preferred short in the base metals space.

Top performing sectors so far today

Life Insurance 6,745.59 +2.01%
Technology Hardware & Equipment 1,164.39 +1.79%
Banks 3,223.97 +1.70%
Industrial Transportation 2,847.62 +1.11%
General Retailers 2,783.73 +1.09%

Bottom performing sectors so far today
Mining 9,037.47 -2.27%
Forestry & Paper 14,250.51 -1.56%
Electricity 8,919.27 -1.31%
Automobiles & Parts 6,417.99 -1.26%
Aerospace and Defence 4,066.74 -1.15%