UK stockmarket Higher interest rates and the recent rebound in sterling has increased the risk that corporate profit growth will disappoint. This has led to under-performance of small and mid-cap stocks, reversing the current trend. There has been a move towards defensive sectors such as utilities, telecoms and food retailers as the fear of an economic slowdown increases. Overseas equities The smaller Asian markets continue to fall as the recession deepens across the region. A further round of currency devaluations in Asia, inspired by yen weakness, was averted by US intervention. The Japanese market has now stabilised. In Europe, companies are benefiting from economic recovery, a low interest rate environment and corporate restructuring. Interest rates Unexpectedly, interest rates rose in the UK following strong RPI and average earnings data. However, signs of a slowdown in UK growth suggest that base rates have now peaked. In the US, despite a strong economy, inflationary pressures are muted while the crisis in Asia continues to keep Fed interest rate policy on hold. In fact, the deflationary impact of the Asian recession continues to put downward pressure on bond yields.
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