The last quarter has seen UK markets respond to signs that the economic recovery is slowing as well as fears that policymakers are relatively powerless to provide additional monetary or fiscal stimulus to the economy. The turnaround in view has been particularly prominent in the equity market, where prices plummeted in early August. As a result, the equity market now seems to share the downbeat view of the government bond market, which had already incrementally scaled back its expectations for interest rates and for the likely strength of the economic recovery during this year. As both markets now broadly share our expectation that the economic recovery will be very sluggish, we therefore see little reason to change our view that gilt yields are likely to remain very low for a prolonged period, while equity prices will struggle to rise significantly any time soon.
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