One minute markets special: Gilt yields plunge and stocks jump after historic rate cut
The Bank of England today sent fresh shockwaves through markets after announcing a cut in the base rate to 0.25% and a further £70bn of quantitative easing, £10bn of which will be specifically focused on corporate bonds for the first time.
The impact was immediate, with the pound falling back in reaction, 10-year gilt yields tumbling to a new record low, and blue chip stocks climbing back near to record highs.
While the historic rate cut – the lowest level for the base rate in the Bank’s history – had been priced in following the drop-off in activity post-Brexit, the additional stimulus measures prompted a surge for stocks and a sharp move down for gilt yields.
In equity markets the FTSE 100, which had been treading water prior to the noon announcement from the Monetary Policy Committee, jumped more than 1.5%, closing up more than 100 points at 6,740 points. It was led higher by insurers which were boosted by upbeat results from Aviva this morning, with both Aviva and peer Prudential up 6.95% and 3.1% respectively.
Looking across the market in general, Viktor Nossek, director of research at WisdomTree Europe, said equity income stocks would likely get a lift long-term from the latest monetary policy decision. “Collapsing yields across the UK fixed income market will give UK dividend payers another boost in terms of their relative appeal versus fixed income assets,” he said.
Meanwhile, the FTSE 250 also jumped, closing up 1.5% at 17,244 points, having been boosted not only by the rate cut but also some positive updates from companies including Pets at Home. Shares in the firm stood out amid a sea of positive moves, up 9.1%, after providing an update ahead of expectations.
While shares charged higher, government bond yields tumbled, with ten year gilts yielding just 0.64% as London closed, having dived from 0.8% prior to the midday announcement. The move to a fresh low followed the expansion of the asset purchase programme, and the decision to include corporate bonds within the scheme.
Meanwhile gold edged higher, up 0.4% to $1,361, while sterling retreated from around $1.332 this morning to $1.313 by close of play, although the currency was spared a sharper fall thanks to the Bank’s decision to clearly flag today’s rate cut over the past month.