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Equity markets continued to defy the adage 'sell in May and
go away', posting good returns during the quarter. After a fairly
sluggish start to the year the strongest gains were made in Asian
markets, notably Japan, where the Prime Minister was returned
to office with a substantial majority, and a mandate to continue
business reformation. The price of oil continued to rise with
3-month Brent Crude closing higher by 14.1% despite declining
towards the end of the quarter, after US refining capacity evaded
serious damage from Hurricane Rita.
In the UK gains were led by the Mining sector as base metal
prices strengthened in response to the continuing demand: supply
imbalance, largely attributable to the expansion of the Chinese
economy. Elsewhere the Oil sector rallied once more as crude
touched new highs, whilst investors stayed away from consumer
cyclical stocks, as evidenced by the decline in the General Retail
sector over the period. The FTSE-100 index, fuelled by the dominant
Oil and Mining sectors and optimism over increased bid activity,
rose by 7.1%. The mid cap 250 index broke through its previous
high reached during the last quarter, closing up 7.9%. The small
cap stocks lagged their larger peers once again posting an increase
of 6.7%. Towards the quarter end a downgrade to the forecast
for GDP growth by the OECD further increased the gap between
official government forecasts and third party commentators, adding
to scepticism that the Chancellor's spending plans can be met
without increasing taxes within the present term.
US equity indices rose with the smaller cap stocks once again
leading gains. The Dow Jones Industrial Average and broader S&P
500 indices rose 2.9% and 3.2% respectively, whilst the NASDAQ
Composite and Russell 2000 indices posted gains of 4.6% and 4.4%.
Economic news flow remained broadly positive during the quarter.
The initial impact of Hurricane Katrina appears to have been
more damaging from a political rather than economic standpoint,
but consumer confidence surveys towards the end of the quarter
highlighted the pressure upon household income from sharply higher
gasoline pump prices.
European GDP growth forecasts were cut once again during the
quarter, but this failed to dampen investors' enthusiasm for
equities as measured by the large cap French, German and pan-European
EuroFirst 300 indices, which rose 8.8%, 9.9% and 8.1% respectively.
After weeks of uncertainty the German election ended in a stalemate
between the two leading parties, with talks over a formal coalition
between the two leaders remaining unresolved at the time of writing.
Asian markets, notably Japan, provided the greatest returns
over the period. Having stalled during the previous quarter over
concerns of a slowdown in global growth and moderating Chinese
exports, markets rose in reaction to both economic and political
news flow. Across the major markets gains were led by South Korea,
closing 21.1% higher as investors cheered the improving domestic
economic outlook and, importantly, the prospects for its beleaguered
banking system. In Japan the Nikkei 225 index rose by 17.2%,
both in response to the Koizumi re-election and economic data
re-affirming an improvement in the outlook for domestic demand.
Succumbing to US pressure the Chinese authorities widened the
trading band for the renminbi, effectively revaluing the currency
by just over 2%. Whilst somewhat lower than expectations, and
accompanied by a rather vague statement with regard to further
action, it was at least a move that relieved some of the pressure
regarding trade tariffs and import quotas, albeit for the time
being.
Bond yields rose marginally in the UK: the 10-year Gilt closed
at 4.29% up from 4.17% the previous quarter, despite interest
rates being cut by 0.25% to 4.50%. US rates continued to rise
during the quarter with the inflationary outlook still uncertain.
Having fallen sharply in the previous quarter the 10-year Treasury
yield rose from 3.92% to 4.33%. European yields fell further
over the quarter: the 10-year German Bund touched fresh lows
toward the end of the period before closing at 3.15%, up from
3.11% in June.
Supply concerns, particularly in respect of damage inflicted
by Hurricanes Katrina and Rita, provided a boost to the Oil price,
with new highs being reached at the end of August. Despite some
retreat by the quarter end, the price of Brent remains some 32.9%
higher than a year previously. Gold continued to rally, closing
at $469.3 and the broader CRB index measure of commodity prices
ended up by 11.0%.
The major currencies closed slightly weaker against the US
Dollar, with Sterling at 1.7643, the Euro at 1.2026 and the Yen
at 113.51 against levels of $1.7915, €1.2108 and ¥110.92
the previous quarter.
NB: All returns in local currency
terms
Datasource: Bloomberg
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