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London Markets: A strange story is unfolding Europe as U.K. yield curve flattens while Germany’s steepens

The front-end of yield curves are rising globally, as central banks react to stubbornly high inflation by hiking interest rates and promising more action to come.

But a key difference is emerging in the bond market. In the U.K., the yield curve is flattening, while in Germany, it’s steepening.

“As a general rule, steeper yield curve means ‘good hikes’ or the central bank is hiking into a strong, reflationary economy. Flattening means the market does not think the hikes will persist and it’s more likely the central bank is hiking into weakness,” says Brett Donnelly, president of Spectra Markets.

He says the development should be bullish for the euro versus the pound EURGBP, +0.18%, as the shared currency has usually climbed since 2015 when the German curve has steepened relative to the U.K. curve. He says the chart of the euro vs. the pound has “plenty of open air” above the 200-day average of 0.8511. Donnelly said March calls are a way to play it, given it’s the Friday after the next Bank of England, and Federal Open Market Committee, meeting.

In the stock market, shares of airport services company John Menzies MNZS, +38.66% jumped 34% to 449 pence after rejecting its second takeover attempt from National Aviation Services, a unit of Kuwait’s Agility Public Warehousing Company.

John Menzies, which operates at more than 200 airports in 37 countries, said it rejected a 510 pence per share cash offer, after previously rejected a bid worth 460 pence per share. That would value the company at £469 million ($635 million).

John Menzies called the bid “highly opportunistic” as its valuation, and underlying volumes, have not returned to prepandemic levels.

The FTSE 100 index UKX, +1.18% gained 0.8% in afternoon trade to 7630.05. Recovery plays including International Airlines Group IAG, +4.21%, Whitbread WTB, +3.26% and Compass Group CPG, +2.41% advanced, while GlaxoSmithKline GSK, -0.96% edged 2% lower after its fourth-quarter results.

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