Markets defy the economic gloom

The financial markets have largely shrugged off the stream of gloomy news on the outlook for the UK economy over recent weeks. Not only has the equity market remained pretty resilient, but money market rates and bond yields have soared and the sterling exchange rate has stabilised after previous sharp falls. But these developments have left the markets looking complacent and we expect further falls in equity prices, bond yields and the pound in time as the downturn in the economy deepens and it becomes clear that official interest rates will eventually have to fall significantly further.