 Good morning and welcome to CMC Markets on Monday the 17th of October in this quick look at the week ahead and today I'm going to focus on bomb markets in particular because we've heard an awful lot of Narrative in the past few days about the significant decline that we've seen in UK guilt prices relative to the decline that we've seen in German tenure prices and UST bond prices I'm going to have a look at that in the context of this Bloomberg chart that I've got up here in front of me and we can see here the spread between UK 10 year and US 10 year and you can certainly see that the Differentials have come in quite considerably in the past few days But you also have to put it in the context of where they were At the end of June But I'm pre the Brexit vote the reason this this gap widened out to the extent that it did Was as a large result of the fact that obviously the UK voted for Brexit that then The Bank of England Signaled that it was going to ease monetary policy quite considerably to try and offset The shock that the Brexit vote could conceivably cause and as a result you saw the Differentials between UK guilt yields and US Treasury yields widen out to well over 1% now These differentials have started to come back But they are still well beyond the levels that we saw At the beginning of June prior to the Brexit vote So what does that essentially mean does that mean that people are losing confidence in UK guilt or is there an increased probability that ultimately UK inflation could actually start To come in an awful lot higher. I would argue that the former is probably less likely than the latter I think UK inflation expectations have risen quite markedly over the course of the past few months That's certainly not any surprise when you consider that UK inflation at the end of November was at minus 0.1 And in August it came in at plus 0.6 The significant decline in the pound is inevitably going to push up Inflationary pressures in the UK economy and I think that is what is being reflected in this particular chart for UK guilt prices We've seen them coming quite considerably This is where the Bank of England eased monetary policy here by 25 basis points It also instituted an extra 60 to 70 billion pounds worth of QE Since then we've topped out and started to ratchet a little bit lower. So ultimately this this move higher has been pretty much Written off or been negated on the basis that ultimately it's very unlikely that the Bank of England is likely To ease monetary policy further. In fact, some UK policymakers have come out and suggested that ultimately the risks of acting Further to ease monetary policy could actually be Counterproductive Kristen Forbes on the MPC has suggested that ultimately further easing carries significant risks that inflation will run away and That's certainly been reflected in bomb markets elsewhere. Certainly in the US as well And Germany where bond yields are actually starting to move higher now if we look at If we if we look at the UK guilt yield here We have broken down from these trend from this trend line support from the April lows We are now heading towards the 200 day moving average So this break lower would appear to suggest that potentially there is further downside in UK guilt prices towards this trend line Support down here, but that will only bring us back to the levels that we saw in mid-June So still fairly fairly low in historical terms and let's not forget that in June UK guilt yields dropped from 1.4 percent to 0.86 percent in the space of a month now Most of that decline in the bond yields is has has been reversed We've gone up to around about 1.1 percent now as as reflected by this decline in prices here Let's also look at US treasuries because they also do appear to be breaking down as well they've broken below their 200 day moving average and Look as if they could well correct lower on the basis that Ultimately the Fed could well raise rates As soon as the end of this year now while Janet Yellen has Raised expectations that the Fed might actually look through a slightly higher rate of inflation I still don't think that really changes the narrative or the calculus with respect to a US rate rise And ultimately the decline in US Treasury prices has has been no less Has been no Hasn't really been that different in terms of where we were from the peaks in July Or be it's been slightly more gradual than the move in UK guilt It's a similar sort of story as well on German bonds where we've Also broken below the 200 day moving average on prices and yields are now well into positive territory and almost almost back above the levels that we saw Prior to the Brexit vote I'm Paying particular attention to these June lows here for any further indication as to whether or not we get higher yields on German tenure now one of the key I think one of the key drivers of Whether or not we'll see higher German yields will be not only the ECB rate meeting Later this week, but also what happens with EU CPI. I don't expect the EU CPI to come in Particularly hot. We've already seen that we've got that And we've got that number out later today around about 0.4% if that comes in slightly weaker or slightly higher I don't think it's really gonna alter the narrative that much It'll be particularly interesting I think in terms of the tone of mr. Draghi's press conference and whether or not he gives any indication as to whether or not he will extend the current QE program beyond its expiry in March 2017 so I think that is going to be particularly important This week. We've got UK inflation data and that's likely to come in Well in excess of the numbers that we saw in August Expecting CPI to come in around about naught point nine percent from the naught point six percent that we saw in August also retail prices are expected to come in around about two percent and that's up from one point eight percent in August as well so slightly hotter inflation Could well exacerbate the decline that we've seen in UK guilt prices the biggest problem that we've got at the moment is the value of the pound and That has that does look to be carving out a little bit of a base around about 121 21 I think how that reacts going forward will be very very key I think the key level to watch for on the upside on the pound is this level between 124 and 125 on the upside and obviously these these combined lows around about 120 90 and 121 on the downside certainly keeping an eye on those numbers We've also got UK retail sales out later this week any indication that the UK economy is showing some any form of deterioration Could well be negative for the pound, but the big question is how much of that is priced in So keeping an eye on the inflation data out of the UK the US and the EU for later this week That could be a key determinant I think on whether or not the pound is able to push higher back towards the 125 area So that's it for today. Thanks very much for listening Michael Houston talking to you from CMC markets