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Equity market returns were mixed over the quarter as investors
digested the prospect of rising inflationary pressures and the
impact upon interest rates, particularly in the US. A cold winter
in both the US and Europe, and a major explosion at a key US
refinery later in the quarter compounded to push the price of
oil higher. The corollary of the sustained high oil price was
the continuation of monetary tightening by the Federal Reserve
and growing expectations of a further rise in rates in the UK.
Corporate activity remained buoyant during the period with a
number of significant deals announced, including a $1.85bn all-paper
bid for Internet search engine AskJeeves and the second largest
private equity deal in history, an $11.3bn buyout of SunGard
Data Systems of the US. In the UK, larger deals were restricted
more to market rumour, although toward the end of the period
Aviva announced a £1.1bn bid for the RAC.
UK equity markets rose during the quarter, returning 2.7%,
3.3% and 4.9% as measured by the FTSE-100, Mid 250 and Small
Cap indices. Performance from the Oil & Gas and Mining sectors
led the market gains, whilst a stream of IPOs within the AIM
market fed the prolific appetite for resources stocks from investors
keen to participate at the more speculative end of the commodities
market. Banks, Information Technology and Retailers were among
those sectors posting negative returns over the period, the latter
having reported a poor Christmas and New Year trading period
together with continued evidence of margin pressure.
US markets posted negative returns over the quarter although
in a reversal from prior periods it was the NASDAQ and smaller
companies' Russell 2000 indices that posted the greatest losses.
By the quarter end the Dow Jones Industrial Average and S&P
500 indices had fallen by 3.0% and 2.5% respectively, as compared
to the technology and smaller company indices declines of 8.1%
and 5.7%. Within the larger-cap indices the relatively muted
declines masked a period of volatility during which the Dow fell
300 points before rising 600 only to then retreat back toward
the lows seen earlier. This pattern was replicated by the S&P
500 index.
European markets performed relatively well over the period
with a positive return of 4.8% posted by the EuroFirst 300 index.
Within the key markets, the French CAC-40 rose by 7.0% and even
the German DAX index displayed a positive return, despite announcing
record unemployment of 5.2m in February or 12.6% of the workforce.
Asian markets generally performed well over the quarter. Despite
another massive earthquake just off the coast of Indonesia at
the end of March, markets remained focussed once again on the
superior GDP growth relative to other economies. In Japan equities
rose by 2.5% as measured by the Nikkei 225 index, closing at
11,774, having reached almost 12,000 in mid-March. Elsewhere
in the region, gains were posted in South Korea, Singapore and
Australia. However it was the Hong Kong market that remained
the notable laggard of the region, closing down by 5.0% as investors
adjusted to lowered profit forecasts.
Globally, bond yields rose as expectations grew of further
monetary tightening, coupled with rising inflationary expectations
on the back of buoyant commodity prices. The Federal Reserve
raised rates by 0.25% at both of their meetings during the period
to close the quarter at 2.75%, against 1% a year previously,
and the yield on 10 year Treasuries rose from 4.22% to close
at 4.47%. In the UK the decision remained more finely balanced
and the MPC refrained from changing policy although it was notable
that two out of the nine members voted for a rise at their March
meeting. The 10-year Gilt yield rose from 4.54% to close at 4.72%.
Interest rates in Euroland and Japan remained unchanged over
the period.
The oil price was once again the point of focus within the
commodities, rising by a significant 34.0% to close the period
at $53.93, as measured by 3-month Brent Crude. The broader CRB
Commodities index rose by 8.8% reflecting continuing strong Chinese
demand. Following rallies during previous quarters the Gold price
fell, closing at $425.35, a fall of 3.0%.
After a seesaw period earlier in the quarter, the US Dollar
strengthened against both the Euro and Sterling to close the
period higher by 5.1% and 1.9%, ending at $1.2868 and $1.8812
respectively. Against the Japanese Yen however, the Dollar weakened
by 5.4% to close at ¥108.17, providing a boost to the shares
of Japanese exporters.
Datasource: Bloomberg
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