David Morris
OVER the past two weeks, stock markets across Europe and the US have stabilised following a nasty New Year sell-off. The US fourth quarter earnings season began badly and this seemed to be the catalyst for an aggressive bout of profit-taking.

Even as it became apparent that the vast majority of companies would end up beating estimates, these better-than-expected numbers were viewed with a great deal of scepticism. Many said that the bar for earnings had been set far too low.

But what looked like developing into a painful correction ended with a sharp upward reversal. A number of major stock indices are now within a single percentage point of their 2009 closes.

Looking at the UK, the FTSE 100 rose over 4 per cent last week in spite of some truly dismal data which showed the dire state of the UK’s public finances, a pick-up in inflation and a fall in both retail sales and bank lending to businesses. This Friday sees revised GDP data, which will show us whether the UK did come out of recession in the fourth quarter or not.

But the FTSE 100 is not the best barometer of how investors view the UK. The index is heavily weighted towards multinationals, which have a worldwide presence and so are not dependent on the health of the UK economy alone.

The gilt market is looking far less positive, however. Although gilts rose immediately following the Bank of England’s decision to pause its QE programme, they have been falling steadily ever since and they are now back below levels seen at the end of last year.

Issuance is set to increase as the government struggles to plug its budget deficit and a hung parliament looking more and more likely, so the likelihood is that yields will continue to rise. Meanwhile, further losses in sterling make an investment in UK debt even less attractive.