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Equity markets were mixed during the quarter, trading within
a fairly tight range, with a lack of catalysts to steer markets
decisively in either direction. Economic releases continued to
confirm a strengthening of the recovery both in the UK, US and
Asia, with tentative signs also emerging from Continental Europe.
As investors adopted a greater degree of caution towards the
pace of future growth in China, those economies perceived to
be most closely allied to Chinese demand came under pressure,
with the Korean and Hong Kong markets providing notably lower
returns over the period.
In the UK, the larger capitalised stocks led the main indices
with the FTSE-100 returning -0.4% over the period. The Mid 250
fell by -0.7% and the Smaller Cap index by -2.2% during the quarter.
Returns were boosted from both a recovery in the Oil stocks and
strength from the Retail sector, the latter being buoyed by the
bid approach for Marks and Spencer in late May from Philip Green.
Rising interest rates in the UK weighed heavily on Financials,
due to growing concerns over the impact of higher funding costs
on margins in what remains a fiercely competitive environment.
US equities ended broadly unchanged during the period with
the Dow Jones Industrial Average closing down -1.2% and the S&P
500 lower by -0.9%. The Nasdaq index fell by -1.5% whilst the
Russell 2000 smaller companies index declined by -2.45%. The
previously released GDP estimate for Q1 was revised down from
an annualised rate of 4.4% to 3.9% toward the end of the period,
although this was offset by news of the continued expansion of
the labour market and confidence from company management in the
economic outlook. European stocks fell by by -2.1% as measured
by the EuroTop 300 index and in Germany, where signs of potential
structural reform in the labour market began to emerge, the Dax
index rose by 0.1%.
As highlighted above Asian markets were mixed over the quarter
as investors considered the impact of higher US interest rates,
Oil prices and inflation upon the region. Optimism for China's
economic growth turned increasingly cautious as higher interest
rates and the successful execution of an engineered slowdown
began to weigh on investors. In Japan the outlook continued to
improve as growth in consumer spending and corporate investment
provided evidence of a further strengthening in the economy.
Despite the improved economic conditions the headline Nikkei
225 index fell by -0.83%. Notwithstanding declines in Commodities
over the period and falls of over 12% within certain areas of
the residential housing market, the Australian market reached
all time highs during the period and closed the quarter up 2.3%.
The MPC, having become increasingly hawkish regarding the
growth rate of UK residential property prices and levels of UK
indebtedness, raised rates by 0.25% in both May and June, ending
the quarter at 4.5%. Sterling remained largely unchanged at 1.82
versus the US Dollar over the quarter; the currency was also
stable at 1.49 against the Euro by the quarter end. On the final
day of the quarter and in a widely anticipated move, the Federal
Reserve raised rates in the US by 0.25% to 1.25%, the first increase
in four years. The bond markets were pleased to note that the
comments accompanying the Fed's decision referred to "a
pace that is likely to be measured" with regard to future
rate rises. Having risen significantly during the previous quarter,
bond yields increased further during the period closing at 5.1%
and 4.6% for the UK and US 10 Year notes respectively.
The continued instability in Iraq and tensions in Saudi Arabia
helped to push the price of Oil higher over the quarter, breaking
through the levels reached at the time of the 1990 invasion of
Kuwait, before settling back to close the quarter at $33.51.
The inflationary effect of the higher Oil price was of particular
note in the UK as prices of petrol at the pumps reached over
£1 per litre in certain parts of the country, prompting
concerns of a repeat of the petrol refinery blockades last seen
in 2000. Other commodity prices retreated over the quarter as
investors looked for more subdued demand from China going forward.
The Gold price, having closed at over $425 in the previous quarter,
closed lower by 5.2% at $394.25, in part reflecting the unwinding
of long positions by hedge fund managers.
Data Source: Bloomberg
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