Confidence knocked by renewed euro-zone fears

A reassessment of the likelihood of a default by a peripheral euro-zone sovereign, as well as some less encouraging news on the pace of the global economic recovery, has hit UK equities and prompted investors to revise back down their expectations for UK official interest rates. In the past, similar developments have also helped to squeeze the spread of gilt yields over risk-free interest rates. However, over the last month, this spread has widened, perhaps suggesting that investors think that the chance that the Monetary Policy Committee votes to do more quantitative easing at May’s meeting has fallen. Our view remains, though, that further extensions to QE are still likely, if not in May then later this year.