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Equity markets performed well over the period, responding
in part to a lead from the US following a conclusive result in
the Presidential election and from a reversal of the sharp rise
in commodity prices (led by Oil) over the prior quarter. In local
currency terms all the major equity market indices rose over
the period with the best returns once again from smaller company
and technology stocks. However, the enormity of the US current
account deficit continued to depress sentiment toward the US
dollar leading to somewhat diminished returns from US$-denominated
assets for non-US investors. Politics tended to dominate headlines
with the Presidential election campaign in October, followed
by the death of Yasser Arafat and the potential for a breakthrough
in the Middle East, ending with the disputed Ukrainian election
and increased tension between Moscow and the former Soviet Union
state. However, all were metaphorically buried by the Asian tsunami:
from this catastrophe has arisen a global humanitarian response
that has transcended politics, race and religion.
In the UK, equity markets led returns over the quarter with
the FTSE-100 index rising by 5.3% over the period. However, the
best gains were experienced by the mid and small cap stocks,
with rises of 10.7% and 8.0% respectively. Amongst sectors, the
best returns were made within the Speciality Finance, Property
and Tobacco stocks, the latter being driven by speculation of
sector consolidation. After rallying over previous quarters,
the Oil & Gas sector fell marginally during the period, as
the price of Brent Crude retreated from the high in late October
when it touched $52. The laggard within the UK market was the
Pharmaceutical sector, closing down 3.5%. Sentiment toward large-cap
pharmaceutical stocks was hit hard as companies on both sides
of the Atlantic issued cautionary statements, a possible precursor
to further regulatory moves by the FDA in the US. Over the course
of the year the global pharmaceutical sector (which by coincidence
was also lower by 3.5%) has lost more than $51bn in value.
US stocks performed well, rising by 7.0% and 8.7% as measured
by the Dow Jones Industrial Average and S&P 500 indices respectively.
Returns from technology stocks and smaller companies outweighed
the large-cap stocks, with the Nasdaq composite and Russell 2000
indices rising 14.7% and 13.7%. The strength of the rally in
smaller company stocks in the US was evident by the Russell 2000
index reaching a new all-time high toward the end of the period.
In Europe gains were made across the main indices with the
EuroFirst 300 rising 8.3%. Among individual markets, Germany
and France rose by 9.3% and 5.0%. During the quarter further
downward revisions were made to the outlook for Euroland GDP
in 2005, with just 2% expected on present forecasts, a small
rise on 2004.
Asian markets also posted positive returns over the quarter despite
continued debate over the durability of the Japanese recovery
in the face of mixed economic data and concerns of slower activity
from China in 2005. The Nikkei 225 index rose by 6.2% over the
period and the more broadly based Topix index grew by 4.3%. Elsewhere
in Asia rises of 7.3%, 4.1% and 8.5% were posted in South Korea,
Singapore and Hong Kong. In Australia the ASX 200 closed at 4,050.6,
a rise of 10.5% and just below the record high set in late December,
reflecting a year of substantial gains from the mining heavyweights
that constitute a large proportion of the index.
The rise in commodities was curtailed this quarter by the
decline in Oil, which (as measured by Brent crude) fell by 14.5%
to close the period at $40.24. The price fluctuated significantly
over the quarter with a trading range of between $36.54 and $52.
The broader CRB Commodities Index closed largely unchanged, down
by 0.4%, whilst gold continued its rally largely driven by a
weaker US dollar to close at $438.45, a rise of 4.8%.
Currency markets continued to de-rate the US dollar, and by
the close Sterling had risen by 5.9% to $1.9181 and the Euro
by 9.0% to $1.3554, a record high for the Eurozone currency against
the greenback. The dollar also fell by 6.7% against the Japanese
Yen to 102.6 by the close. The Euro rose against Sterling by
2.9% over the period, placing further downward pressure on Eurozone
economic forecasts and helping to underpin bond valuations.
Bond markets in the UK rallied as further evidence of the weakness
in the housing market provided support to the view that interest
rates may be near their peak. The 10-year Gilt yield fell from
4.83% to close at 4.54%. In the US yields rose over the quarter
to close at 4.22%, having fallen below 4% on concern over a slowdown
for the economy in late October as the Oil price reached its
peak during the quarter.
Datasource: Bloomberg
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