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Recent economic data releases imply that the efforts of Central
Bankers to fend off recession have been successful, with investor
optimism making headway despite concerns over equity market valuations
and corporate accounting scandals. Global attention has focussed
on the US economy and the ability of the consumer to fuel a recovery.
In the US, Q4 GDP rose by 1.5% indicating that the States has
avoided recession as defined by two consecutive quarters of negative
GDP growth. On the back of this improving economic outlook, equity
markets have generally responded positively, albeit with performance
skewed towards the latter part of the quarter; generally speaking,
indices traded within a fairly narrow range. In the UK, the FTSE
100 increased by 1.39%, the FT All Share index by 1.78%, while
the Mid-Cap FT-250 index fared slightly better, returning 4.78%
over the period. In the US the Dow Jones Industrial Average rose
by 2.96% while the broader S&P 500 fell by 1.86%. The Technology
laden Nasdaq index fell by 9.16%, reflecting a continuation of
the derating of telecom and technology shares from the speculative
bubble of the late '90s. European markets were broadly in line
with the UK and US and the Eurotop 300 rose by 0.44% (in ¤).
A number of Far Eastern markets performed particularly well over
the quarter, recovering from substantial falls over 2000/1 and
Japan enjoyed another March rally ahead of the fiscal year end
with the Nikkei 225 rising by 4.67%, although gains were eroded
in part by the continued weakness of the Yen.
As economic conditions begin to improve, attention has focussed
increasingly on the outlook for global interest rates and the
prospect of monetary tightening. This has been evidenced by the
recent decision of the FOMC to move from an Easing bias to a
Neutral stance. Interest rate futures in the US and Europe have
edged up by between 20 and 50 basis points; in the UK, the likelihood
that taxes will be increased in the April budget may delay an
increase in UK interest rates by the Bank of England if consumer
demand is reduced by the increased tax burden. However the expectation
of higher rates this year is being priced into bond markets,
with 10 year Gilt yields rising by 13.9 basis points and 10 year
US Treasuries by 15.5bp.
The currency markets were dominated by the continued weakness
of the Yen against the US Dollar, which reached a two-and-a-half
year low before staging a small rally ahead of Japan's fiscal
year end. The Euro appreciated marginally against Sterling but
continued its weakness versus the Dollar by falling a further
1.3% resulting in a depreciation since inception at the start
of 1999 of 24.7%. The precarious state of the Japanese economy
and fears regarding the solvency of Japanese banks has led to
renewed interest in gold from Japanese investors, leading to
the gold price reaching a two year high in excess of $300/oz.
A further feature over the quarter was the strengthening Oil
price which reflected the heightened tension in the Middle East
despite an unusually mild Winter, which dampened demand. If the
situation in the Middle East continues to deteriorate then higher
oil prices cannot be ruled out. However, longer term, the Oil
price is more likely to trade towards the bottom end of the OPEC
price range of $22pb - $28pb.
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