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The quarter began with the news dominated by the progress
of the invasion of Iraq which started in mid-March and ended
at the beginning of May. After a lengthy build up of troops and
much political debate during the previous quarter, the main combat
phase ended within a matter of weeks; the 'Baghdad Bounce,' which
started towards the end of the first quarter, continued, reflecting
relief that the damage to the Iraqi oil fields was limited and
that coalition casualties were relatively light. The ending of
formal hostilities was accompanied by more bullish press coverage
and the removal of the uncertainty created by the Iraqi situation
continued to lift markets. From the levels at which indices bottomed
in mid-March, major equity markets have rallied by around 25%,
although ending the quarter slightly off their recent highs.
The outbreak of the SARS virus in China impacted into the
performance of Asian markets in April and May. As the virus spread,
the World Health Organisation warned tourists not to travel to
Hong Kong, Singapore, China and Canada. Luckily the virus was
brought under control quickly and thus the economic damage was
limited. Asian markets have subsequently rallied strongly and
the epidemic has now been officially declared under control.
With the substantial easing of geopolitical tensions, investors
have focussed their attention on the economic front. It was widely
anticipated that once the situation in Iraq had been resolved,
the macro-economic situation would start to improve. In his 9th
April budget, the Chancellor revised the Government's forecast
for UK gross domestic product (GDP) growth in 2003 from 2.5%
- 3% to 2% - 2.5%. This resulted in an increase in the forecast
for the public sector borrowing requirement (PSBR) to £25bn,
substantially up from forecasts issued eighteen months ago. In
the US, GDP growth is forecast at between 2% - 2.5%. In Europe
the European Central Bank has continued to cut its growth forecast
for the region with a further reduction from 1% to 0.4% for 2003.
Asia is still widely expected to experience the highest level
of GDP growth this year at around 4% - 5%, reflecting in part
the massive influence of China where growth is anticipated to
be 6%.
With the global economic outlook still uncertain, monetary
policy has continued to ease during the quarter. The ECB cut
interest rates for the second quarter in succession by 0.5% to
2%. The US Federal Reserve followed suit by slicing a further
0.25% from their rate to 1%, the lowest level for 45 years. In
the UK there was no change in interest rates, reflecting fears
over the inflationary impact of rising house prices. Whereas
we have seen an easing of fiscal policy in the States, in the
UK the Government increased taxation by raising National Insurance
contributions by 1%. Generally speaking, bond markets had anticipated
the cuts that were seen in interest rates and there was in fact
a sell-off in bonds towards the end of the quarter reflecting
a partial shift in funds from bonds to equities. The yield on
ten year government bonds closed the quarter at 4.18% in the
UK and 3.50% in the US. Currency markets had a more volatile
quarter, led by conflicting messages from the US over the administration's
policy towards a weakening dollar. As the dollar weakened, the
euro made ground, closing the quarter at $1.1511, a rise of 7.22%,
making exports to the US materially less attractive. Sterling
also rallied by 5.99% to end the period at $1.6546.
Equity markets performed well during the quarter. Broadly,
those indices that had fallen furthest in the preceding quarters
produced the largest gains. In the UK, all the main indices rose,
although the greatest returns were seen outside the FTSE 100,
which rose by 6.43%. The Mid-Cap 250 and Small-Cap indices closed
higher by 23.75% and 27.05% respectively. In the US, Nasdaq led
markets, closing the period up 17.40%. The Dow Jones Industrial
Average and broader S&P 500 Index posted gains of 9.19% and
11.34% respectively. In Europe, bourses reflected the strength
of the American market, particularly in Germany and France, where
the Dax and CAC 40 indices rose by 21.34% and 11.27% respectively.
The strong performance by Germany reflected the recovery from
a very poor performance during the previous year. Across the
Eurozone as a whole, the Eurotop 300 (ex UK) rose by 8.57% over
the quarter. Asian markets were less buoyant as they were still
recovering, to some extent, from the fall prompted by the SARS
virus. Japan rose by 12.53% as measured by the Nikkei 225 and,
in Hong Kong, the Hang Seng Index rose by 9.86%.
Oil prices remained significantly higher than anticipated
closing the quarter at $28.16 (Brent crude), 10.74% higher over
the quarter. It was widely expected that oil prices would decline
sharply if the Iraqi oil fields suffered little damage; however
a combination of a poor North American summer, low inventory
levels and delays in bringing Iraqi oil onstream has helped to
underpin both oil and gas prices. This is likely to prove to
be a negative influence on economic growth.
Finally gold, which is so often perceived to be a safe haven
in times of political and economic uncertainty, rose 6.4% on
the quarter to close at $346.4 per oz.
Datasource: Bloomberg
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