Charles Sylvester of Charles Stanley & Co

OVER the last couple of months UK equities have enjoyed a pleasing rally, but fears about their future direction still remain and it seems likely that the market will face further tests in the coming weeks.

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Standard and Poors’s recently cut the triple A ratings of France and Austria, as well as reducing the ratings of Italy, Spain and Portugal.

This decision will place doubts on the credit guarantees supporting the European Financial Stability Facility (EFSF).

In addition the European Central Bank (ECB) has criticised the draft of the new fiscal treaty as being too lax and the Greek debt restructuring talks appear to be in a bit of a tangle.

Aside from the European problems there are also other challenges facing the equity markets.

The Unites States economy has recently shown more promising signs that it is recovering although, this being presidential election year, there is little likelihood of any action to reduce the public sector deficit.

The rate of growth in the Chinese economy has slowed, whilst its foreign reserves fell in the last three months, the first time this has happened for 10 years. Meanwhile the jury is still out as to whether their economy will enjoy a soft or hard landing.

Here in the UK, the most recent figures showed that the inflation rate has started to fall, but with retail sales experiencing mixed fortunes over the Christmas period there is still a possibility of our economy slipping back into recession.

Much will depend on timely action by the Bank of England with further Quantitative Easing (QE) expected to be announced later on this month.