Fiscal worries weigh on markets

The combination of a sluggish recovery in the economy and concerns over the UK’s fiscal position and credit rating has weighed on UK asset markets over recent weeks. The rally in the equity market has lost steam, while UK bonds have underperformed their overseas counterparts and the sterling exchange rate has fallen sharply. Such concerns seem unlikely to dissipate this side of the forthcoming general election. Nonetheless, the prospect of a major fiscal squeeze - whatever the election result - and a prolonged period of low inflation and low interest rates should eventually prove more favourable for bonds markets at least, and perhaps for the pound too. But equities may continue to find the going rather tougher.