Outlook - February 2011

World

Focus of concern shifting from Europe to Emerging markets

Markets are juggling with a series of separate issues. In the UK the Monetary Policy Committee (MPC) has been under intense pressure to begin raising interest rates in order to restore their tarnished inflation fighting credentials. Although the futures market has discounted a reversalin monetary policy by this summer, the weak 2010 Q4 GDP report vindicates the view held by Mervyn King, that the UK economy is currently too fragile to absorb higher rates. Consequently, we expect UK interest rates to remain unchanged for the foreseeable future. Sterling initially rallied in response to the shift in interest rate expectations but could now be vulnerable to a move back to the 2010 year end level as the timing of rate hikes gets extended.