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Equity markets suffered globally in the quarter ending 5th
April, with all major indices falling. The FTSE 100 Index fell
by 8.8% in absolute terms, while the Small Cap Index fell by
10.5% over the period. It was the fifth consecutive quarter that
the FTSE 100 Index underperformed the All Share (down by 8.6%).
In the US, the S&P 500 Index fell 8.4% and the Nasdaq
Index which is heavily weighted towards Technology, fell a further
24.3% (both in sterling terms). The Dow Jones Industrial Average,
which comprises a greater proportion of 'Old Economy' stocks
fell by 3.3%. Europe ex UK fell 12.1%, while Japan showed little
correlation with the other major markets, falling heavily during
the first two months of the quarter to finish (after rising slightly
over March) down by 5.9%.
The principal factors behind these market moves emanated from
the US. Newsflow from major companies provided growing evidence
of a further slowdown in the US economy. This coupled with the
concern that this may further weaken domestic confidence, led
investors to conclude that, in order to avoid an outright recession,
a 0.75% cut in US interest rates at the March meeting of the
Federal Reserve's Open Markets Committee was necessary. However,
this was not forthcoming and a further 0.5% cut to 5.0% (a cumulative
cut of 1.5% over the quarter) was received very badly. In the
UK, the reduction in the Base Rate was a more modest 0.25% (to
5.75%) and the first change since February 2000.
Key government bond yields remained relatively unchanged despite
volatility within the quarter. They finished the period at 4.8%,
5.0% and 4.8% for the UK, US and Europe respectively. Despite
continued signs of a slowdown in the US economy, the Dollar firmed
against leading currencies, (affirming its status as a 'safe-haven'
in times of market uncertainty) particularly against the Yen
which fell 8.4% over the quarter. Sterling also fared badly against
the dollar falling by 4.4% and the Euro showed a decline of 4.9%
over the period.
The price of oil experienced a rollercoaster quarter, with
Brent Crude rising 20% over January and February before giving
up those gains in March. While oil prices have eased from the
US$30 per barrel level seen late last year, we should see prices
remain within the OPEC range of US$22-28 per barrel. This will
ease cost pressures, particularly for traditional heavy users
(Engineers and Chemicals stocks, for example).
Looking forward, global equity markets will now seek clarity
on expected growth levels within the US and the likely shape
of economic recovery before genuine stability can return. The
major indices appear fundamentally undervalued, but with rate
cuts so far failing to impress, the true value will only become
apparent when companies can provide greater visibility of earnings.
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