What economic future are markets currently pricing in Essay

What economic future are markets currently pricing in - Essay Example Consistent actions such as quantitative easing in money market, though helped to control the money supply in the market, but it also hinted at the weakening of major currencies of the world also specially dollar. UK’s current debt situation and the debate on it during recent past indicated that there are subtle doubts within the minds of investors that countries like UK can default too. This was mostly due to higher budget deficit and faltering in the credit ratings of the country itself. It has been reported in the Bank of England (BoE) financial stability report that the markets have started to put strain on different markets including the sovereign markets. This clearly indicates the overall sentiments in the market and how market actually perceives the future risks. It has been discussed in the financial stability review of the BoE that the overall conditions are improving for the economy as a whole and the financial system of the country has been able to manage its essential activities. This signifies the slow recovery and stability which is emerging in the financial markets of the country and a such the sign of stability in the financial markets can also serve as one of the important indicators for the improved investor confidence and hence the correct pricing of risk of the assets. Financial stability review also indicates that the financial institutions have been able to cushion themselves against the losses which can erode their capital with the systematic increase of their capital base to meet the Basel II requirements. Thus the overall risk faced due to higher sovereign risk in cases of Greece and Ireland may be easily absorbed by the larger UK firms. (Bank of England, 2010) A closer look at the discussion and data presented in the financial stability report would suggest that the overall market sentiments are not good enough. The increasing level of sovereign risk especially in the wake