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The investor optimism resulting from positive economic releases
in Q1 turned negative over the second quarter of 2002. A further
wave of financial scandals has dealt a significant blow to investor
confidence and the resultant degree of scepticism will take some
time to rebuild, particularly in the US. As a result the equity
markets performed poorly with most of the key indices declining
over the period. In the UK, the FTSE 100 and FTSE All Share indices
fell by 10.49% and 10.39% respectively. Once again the Mid-Cap
FTSE 250 index performed marginally better but still fell 10.33%
over the quarter. In the US markets flirted with the lows reached
after the September 11th terrorist attacks and the Dow Jones
Industrial Average and S&P 500 indices fell 9.59% and 11.51%
over the quarter. However, the technology laden Nasdaq index
once again led the decline, falling by 17.26%, reflecting the
caution toward higher valuations in the light of more general
market concerns. European and Far Eastern equities were not immune
from this negative US sentiment with the Eurotop 300 falling
by 13.67% and the Nikkei 225 by 6.27% over the quarter.
The period of US Dollar strength stretching back over the
last few years has come to an abrupt end, culminating in Central
Bank intervention by the Bank of Japan at the end of June. In
a turnaround from the late 1990s when investors poured money
into the US, the reverse is now happening and with it we are
experiencing a decline in the currency. At the end of the quarter
the Dollar had fallen against the Yen, Euro and Sterling by 9.1%,
12.9% and 7.1% respectively.
The strength of the Euro is positive news for the long-suffering
UK manufacturing sector. Having lagged the rest of the UK economy
for several years this may provide the long needed catalyst for
growth in UK manufacturing.
Developments in the UK housing market appear to have reached
a point where both the Bank of England and, more recently, the
Council of Mortgage Lenders feel there is a need to take action.
Markets remain concerned about the level of consumer borrowing
and in particular the sensitivity toward a tightening of monetary
policy by the MPC. Notwithstanding these concerns the forward
interest rate expectations have reduced over the quarter as markets
have adjusted to a more subdued recovery in 2002.
The tensions between India and Pakistan placed the world on
a heightened state of alert as the nuclear powers edged closer
to war before subsiding towards the end of the quarter. During
this period the safe haven of Gold led to a further increase
in the price of the precious metal, reaching a high of over $330
before ending the quarter at just below $320. This takes the
gain to over 10% for the first half of the year.
Elsewhere the Oil price remained well over the $22/barrel
level (the bottom of the OPEC price range of $22-28). However,
key non-OPEC members Russia and Norway who both trimmed production
in January after the September 11th slump (when prices fell to
$18), have indicated that this co-operation is likely to come
to an end after six months.
Interest rates remain unchanged over the quarter. Despite
the expectation that they will begin to rise before the year
end, bond prices, which started the quarter flat, firmed over
the period. This was in part due to equity market weakness and
a consequent flight to perceived safety, and partly to more modest
expectations towards monetary tightening over the second half
of 2002.
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