Financial conditions in the UK have settled into a groove that would be rivaled only by the late Charlie Watts.
As a result of this stability, the RSM UK Financial Conditions Index has moved to its highest level since 2014, reaching 1.1 standard deviations above levels of risk that are normally priced into financial assets.
Volatility in both the equity and currency markets has subsided, returns in the equity market are doing well, and the bond market is pricing in reduced risk of corporate default. That all ties in with the increase in the spread between 10-year gilt yields and three-month money market rates, which have returned to non-crisis norms and suggest a positive outlook for the UK economy.
You could say that the Bank of England has provided the economy with the same stability needed to recover from the joint shock of Brexit and the pandemic that Watts gave to the Rolling Stones since 'Gimme Shelter' in 1969.
This suggests that the high level of monetary policy accommodation and government efforts to maintain income streams have been successful. And it’s the market’s vote of confidence in the bank’s commitment to see the recovery through.
The resurgent coronavirus
Nevertheless, the world is still in a health crisis. Newly reported cases of infections in the UK increased over the past month, reaching more than 33,000 per day, according to data compiled by Worldometers.
According to the government, 88 per cent of eligible people have received one shot, and 78 per cent are fully vaccinated. Still, the number of people in hospital jumped by about 5 per cent on the last day in August and deaths are rising.