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The strengthening Oil price dominated market sentiment over
the period. An escalation of violence in Iraq and concerns over
supply problems emanating from political turmoil in Nigeria and
a series of hurricanes passing across the Gulf of Mexico contributed
to the rise. Having closed the previous quarter at $33.51, Brent
Crude soared by 40% to close the quarter at $47.08, a new all
time high in absolute terms and compared to a level of $34.93
just prior to the Iraqi conflict in March 2003. Despite economic
releases continuing the positive trend from previous quarters,
the impact of higher energy prices cast a cloud over economic
forecasts for 2005 and contributed to a more cautious tone across
most markets during the period.
In the UK equity market performance was mixed. The large weighting
of Oil and Mining stocks within the FTSE-100 helped push the
index into positive territory toward the end of the period to
close higher by 2.39%. A recommended approach for Abbey National
from the Spanish bank Grupo Santander and bid rumours surrounding
Barclays provided support to the banking sector - the largest
constituent sector of the index. Another poor quarter within
the Information Technology and Support Services sectors suppressed
the performance of the Mid (-0.14%) and Small Cap (-2.29%) stocks
during the period.
US equity indices closed broadly lower as forecasts for GDP
and corporate earnings growth were revised downwards for 2005
owing to the higher price of energy. The Dow Jones Industrial
Average of 30 largest companies fell by 3.40% over the period
whilst the wider S&P 500 closed lower by 2.30%. The Smaller
Company and Technology sectors underperformed their larger cap
peers once again, declining by 3.14% and 7.37% respectively,
as measured by the Russell 2000 and Nasdaq Composite indices,
reflecting an increased aversion to risk by investors over the
quarter.
Despite a relatively modest pace of recovery, forecasts for
Eurozone 2004 GDP growth were raised by the ECB late in the quarter
to 1.9% from 1.7% earlier in the year. Nevertheless, in line
with other markets, investors remained cautious over the outlook
and equities were generally flat to lower during the quarter.
The FTSEurofirst index of 300 leading pan-European stocks retreated
by 2.14% over the period. Accordingly, the bellwether German
and French markets also ended the quarter in negative territory,
returning 3.94% and 2.47% respectively.
The Asian picture was a little more mixed. In Japan, investors'
caution grew as the prospect of a stalling economy emerged due
to the release of data highlighting a slowing of domestic consumer
demand and weaker industrial production. These concerns, combined
with the rising price of Oil, led to a decline of 8.73% in the
Nikkei 225 index over the period. Elsewhere however, hopes of
a recovery in the property sector and an easing of the fears
over a sharp slowdown in the Chinese economy helped lift Hong
Kong by 6.79%, following the decline earlier in the year. Other
markets in the region were generally higher with positive returns
being generated in South Korea (6.27%), Singapore (7.98%) and
Australia (3.74%).
The Monetary Policy Committee continued to tighten monetary
policy as a means of slowing the rise in the UK housing market
and consumer debt, increasing interest rates for the fifth time
since November 2003 by 0.25% to 4.75%. Despite the increase British
Government Stocks rallied over the period (with yields falling
from 5.10% to close at 4.83%), as evidence started to emerge
of a slowdown in residential property values and expectations
of further tightening diminished. In the US the Federal Reserve
raised interest rates twice to close the quarter at 1.75% although
Treasuries also rallied, with yields falling from 4.58% to 4.12%
resulting from the concerns over a reduction in the outlook for
growth going forward.
Currencies were little changed by the quarter end. Sterling
rallied very slightly against the US dollar, closing the quarter
at $1.81. Elsewhere Dollar weakness persisted against the Yen
and the Euro, closing lower by 1.18% at ¤1.24 but rose
by 1.94% against the Yen to close at ?110.05. Commodity prices
firmed over the quarter, led by Oil. However the continued supply/demand
imbalances helped provide support to prices across a broader
measure over the period as illustrated by the CRB Commodities
Index which climbed 7.16% over the quarter, making a rise of
17% over the last year. Within precious metals the Gold price
reversed declines from the previous quarter to close at $418.25.
Data Source: Bloomberg
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