UK recession risks weigh on markets

While the twists and turns of the euro-zone debt crisis have continued to have a key bearing on UK market movements, markets also appear to be concerned that the UK economy is on the brink of recession. A strong rally in equities in October was partly undone in early November, coinciding with the release of activity surveys that suggested that the economy contracted in October. Corporate bond spreads have narrowed, but the market still seems to be pricing in a minor recession. And gilt yields have fallen sharply in recent days, perhaps reflecting sharp downward revisions to expectations of GDP growth in 2012. Given this backdrop, it is unsurprising that there is little evidence to suggest that the onset of QE2 has had a substantial positive effect on risky asset values.