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Equity market sentiment remained profoundly negative over
the period as the mixed economic news ensured falling markets
dominated the headlines once again. Whilst global GDP is still
growing, the fragility of the US economic recovery, coupled with
concerns over Iraq, has led to expectations of a sustained improvement
in corporate profitability being deferred. Analysts have revised
their forecasts downward against the background of cautious company
trading statements. Following on from the US accounting scandals,
the consequence has been a continued decline in equity markets.
In the UK both large and small companies alike suffered similar
declines. The FTSE All Share index fell by 19.6%, the FTSE 100
by 19.2%, whilst the Mid-Cap FTSE 250 and Small Cap indices fell
by 21.2% and 22.4% respectively. It was another poor quarter
in the United States too, as the Dow Jones Industrial Average
experienced its worst quarterly performance since 1987, falling
17.5%. Across the broader US market the S&P 500 fell by 17.3%
and the Nasdaq dropped by a further 19.8%. Declines in two successive
quarters of this magnitude have not been seen in the US since
the 1930s. Significant falls were seen across European bourses
and the Eurotop 300 index fell by 23.2%. Within the Eurozone,
France and Germany experienced declines of 28.7% and 36.8%, bringing
their performance for the year to date to -39.9% and -46.3% respectively.
The Far Eastern markets, which had been fairly resilient in the
first half of the year, finally succumbed to the selling pressure
and in Japan the Nikkei 225 fell by 11.4% whilst the Hang Seng
index in Hong Kong retreated by 13.5%. Toward the end of September
the Bank of Japan announced plans to spend between 6 and 8 trillion-Yen
on buying domestic equities, with the aim of providing some support
to the beleaguered banking sector.
Financials were amongst the weakest performing sectors in
the UK over the quarter. The Insurance sector was impacted by
concerns that falling equity markets would undermine company's
capital adequacy ratios; Composite and Life companies fell by
36.2% and 33.8% respectively. Concerns over a poor outlook for
investment banking operations, fears about the rising level of
consumer debt and worries about the unsustainable rise of the
housing market all contributed to a decline of 24.2% by the Banks.
In the closing days of the quarter, a lowering of profit guidance
from global investment banks JP Morgan and Lehman Brothers, provided
a further catalyst for selling across the sector.
Against the background of falling stockmarkets and anaemic
economic growth, the outlook for interest rates has reversed
during the quarter. At the end of June the market was still anticipating
a modest rise in UK rates of around 75 basis points by the year-end;
expectations now imply a higher probability that rates may fall
by a quarter point in the next few months. Accordingly bond markets
rose over the period, with the yield on UK 10 year Gilts ending
the quarter at 4.37%. In the US the move by Treasuries was more
pronounced, as the 10-year note fell from 4.8% to 3.60% - the
lowest level for 44 years. The move in both equities and bonds
over the quarter has resulted in the Gilt: Equity yield ratio
falling significantly to close at 1.18x. This is also the lowest
level for almost a generation.
The political climate remains volatile with world attention
focused upon the increasing tensions between the US and the UN
over Iraq, and the military operations that may result from the
stand off over the United States' demands. Accordingly the Oil
price (partially supported by the lowest stock levels for six
years) rose by 13.4% to close the quarter at $28.87. In a move
synonymous with political conflicts, the Gold price also rose
modestly to close the period at $323.55.
Data source: Bloomberg
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