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The quarter was characterised by two distinct periods. During
April and early May markets continued on a positive note, particularly
in Asia, where equities reached a 16-year high by mid-April.
In the commodity markets, Copper and Gold continued to rise,
reaching levels not seen since the early 1980s. However, towards
the end of April, China unexpectedly raised interest rates. This,
in combination with the Chairman of the Federal Reserve, Ben
Bernanke, voicing concerns over inflation, saw markets quickly
reverse those gains as investors took profits, in turn leading
to growing risk aversion and a flight from equity markets.
Despite staging a late rally UK equities ended the period
lower, with the mid and small-cap stocks taking the brunt of
selling pressure, closing down by 5.2% and 6.2% respectively.
The FTSE-100 index of leading shares fell by 3.5%. Notwithstanding
those declines, the indices remain higher by 27.9%, 14.5% and
14.1% respectively over the last 12 months. With global M&A
activity at an all time high, the UK market continued to benefit
from involvement in deals across a broad spectrum of sectors.
In the US the Dow Jones Industrial Average rose to within
0.5% of its all time closing-high, reached in January 2000. Over
the quarter the index was lower by just 0.8%, with the S&P
500 faring slightly worse, closing down 3.2%. However, acting
in reverse to prior quarters, the technology-led NASDAQ and smaller
company Russell 2000 indices underperformed, falling by 8.0%
and 5.4% respectively.
European markets responded well to economic data affirming
the recovery in Germany, reflecting an improvement in the outlook
for manufacturers, despite a strengthening Euro and higher energy
prices. GDP growth published for Q1 was 0.6%, leading to the
European Commission to raise its forecast for the Eurozone this
year to 2.1% (against 1.4% in 2005). However, European markets
were not immune from the global sell-off and by the close the
EuroFirst 300, having reached a 5-year high in early May, finished
down by 6.0%. The German DAX and French CAC-40 fell by 5.7% and
4.9% respectively over the quarter.
Asian markets performed poorly as foreign investors sought
to lock in gains from prior quarters, selling equities aggressively.
In Japan economic data releases re-affirmed the outlook with
GDP growth providing a positive surprise, while domestic demand
and corporate spending continued to expand. Nevertheless the
market, as measured by the Nikkei 225 index, closed 10.1% lower;
the smaller cap stocks (as measured by the TSE 2nd Section) fell
14.3%. Emerging markets suffered their worst weekly performance
in late May since the Russian debt crisis in 1998; however, despite
a fall of 7.9% over the quarter, the MSCI Emerging Markets index
closed some 32.3% higher than a year earlier.
Global monetary tightening continues, with the Federal Fund
rate increasing, placing further pressure on bond markets. Chairman
Bernanke's rhetoric over the period did little to appease market
concerns of further rises in the Fed Funds rate and the 10-year
Treasury yield rose sharply to close at 5.14% (from 4.85%), the
highest level in four years. Two further rises of 0.25% over
the quarter lifted the rates to 5.25% (against 3.25% a year earlier).
In the UK, despite no change in rates since August 2005, rising
global inflation alongside continued buoyancy from the housing
market led to a gradual change in the outlook. Rates are now
expected to remain on hold and may even rise, resulting in the
yield of the 10-year Gilt rising from 4.39% to 4.71%. Rate rises
in the Eurozone led to a decline in European bond markets, with
the German 10-year Bund yield rising from 3.31% to 4.06%.
Commodity prices, having risen considerably over the past
year, corrected and the overall aversion to risk and unwinding
of recent speculative excesses led to substantial falls across
Base Metals from peak levels in mid-May. However, when measured
over the quarter, the performance of commodities was relatively
flat, as measured by the CRB index, closing up 3.1%. The volatility
surrounding the Gold price persisted over the quarter, closing
up 4.7% at $615.85 having touched $730 in May. Gains were once
again made in the Oil markets where 3 month Brent closed at $73.28,
a rise of 9.1%, as supply concerns and the relationship between
Iran and the US continued to cause uncertainty.
Currency markets were volatile over the quarter and despite
the further rises in the Federal Funds rate concern over the
burgeoning twin deficits led to pressure upon the Dollar. Sterling
strengthened by 5.4% to close at $1.8484 against the US currency,
whilst the Euro rallied 4.1% to $1.2790. Acting in tandem the
Japanese Yen rose marginally to close at _114.42 versus the Dollar,
as the expectation of rate rises (possibly as early as July or
August) led to gains after weakness in the two prior quarters.
(Data source: Bloomberg)
NB: All returns in local currency terms
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