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After a mixed start equity markets generally ended the quarter
in positive territory. The implications of a French and Dutch
'no' vote to the EU constitution and the impact of potential
US-imposed trade tariffs upon China failed to deter the market
rally, with some indices closing at their best levels for over
two years. Many issues of note from prior quarters persisted
during the period including the continuing rise in the prices
of oil and gold which by the end of June were some 63.6% and
7.9% higher than a year previously.
The UK market rose over the quarter, led by large cap stocks.
The result of the General Election was as expected and the market
response was negligible, although the Labour government's majority
was lower than some had anticipated. The Oil sector performed
well, partly driven by the re-weighting of Shell within the index
after its unification with Royal Dutch Petroleum ended over 100
years of being run as a dual structure based in London and The
Hague. This helped the FTSE-100 move higher by 3.5% over the
quarter, although the rise in the Mid Cap 250 index of 2.9% helped
propel it to 7,368.7, just 13 points off the all-time high achieved
earlier in the month. In a reversal of the previous quarter small
caps lagged their larger peers declining by 0.1% over the period.
Defensive stocks performed well, led by Electricity and Tobacco,
with IT Hardware and Electronic Equipment the worst performing
sectors during the period. Despite the message conveyed by these
wider statistics, investors' exuberance for internet companies
re-surfaced towards the end of the quarter with the successful
IPO of Partygaming Plc, an online gaming business valued at £6.0bn,
in excess of both Hilton Group (owner of Ladbrokes) and William
Hill, which are capitalised at £4.6bn and £2.1bn
respectively.
US returns were mixed over the quarter. The debate over Chinese
trade intensified toward the end of the quarter, reflecting the
imbalances of the US current account, with Chairman Greenspan
of the Federal Reserve confirming that the imposition of trade
tariffs would make no discernible difference to US productivity
or job creation. The Dow Jones Industrial Average fell by 1.8%
held back by IBM and 3M, lower by 13% and 16% respectively, after
weak trading updates. In the broader market the S&P 500 rose
by 0.8%. Once again the NASDAQ and the smaller company Russell
2000 indices led the market, rising 2.9% and 4.1% respectively.
Despite the outlook for European growth being revised down
once more during the quarter, markets performed well. Across
Europe, the EuroFirst 300 index rose 4.0%. Opinion polls had
predicted a 'No' vote in France and, as with the UK election,
the reaction from equities was fairly benign. However the euro
continued to weaken after the result, which paradoxically helped
markets, as it makes exports more competitively priced. By the
end of June the French CAC-40 had risen 3.5% and in Germany the
DAX index was higher by 5.1%.
Asian market returns were mixed. Japanese stocks fell marginally
after a picture of slower growth in exports to China, their largest
trading partner, emerged during the period. Although this was
offset by an improvement in domestic consumption the Nikkei 225
index closed down 1.6%. Elsewhere equities fared somewhat better
with the Korean, Australian and Hong Kong markets showing gains
of 2.6%, 3.5% and 5.1% respectively.
Bond yields fell significantly over the quarter. In the UK,
the yield on the 10-year Gilt fell from 4.72% to 4.17%, reflecting
a growing expectation that the MPC will cut interest rates during
the coming quarter. The government issued a 50-year Gilt during
the period, the longest maturity since the Second World War,
which was well received by investors. Despite a period of volatility
during the quarter, and in an environment of rising interest
rates, US Treasuries also rose significantly during the period,
with the yield on their 10-year issue falling from 4.47% to 3.92%.
Towards the quarter end the yield on German 10 Year Bunds fell
to 3.11%, the lowest since records began in 1973.
As mentioned above, oil continued to rise during the quarter
in response to concerns over capacity constraints, strikes and
political rhetoric from the newly appointed Iranian president.
The price of 3-month Brent Crude closed at $54.85, a rise of
1.7% over the period. Gold ended higher by 2.4% at $435.50 whilst
the broader based CRB index fell by 2.8% in reaction to a slowdown
of the rate of imports to China.
Currency markets maintained some of the trends developed over
the previous quarter. The US Dollar continued to strengthen;
both Sterling and the Euro eased, closing at $1.7915 and $1.2108,
declines of 4.8% and 5.9% respectively. The Japanese Yen reversed
previous gains to close lower by 2.5% against the Dollar at ¥110.92.
Datasource: Bloomberg
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