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Over the quarter, equities generally performed well and bond
markets reversed some of the losses that occurred in the first
half of the year. Commodities remained under pressure although
the closing levels masked a volatile period during which the
Oil price, for example, traded between $59.05 and $78.63 per
barrel. Political tensions in the Middle East forced the Oil
price to threaten $80 per barrel at the beginning of August,
raising fears that inflationary pressures would persuade Central
Bankers to increase interest rates at a time when signs of a
slowdown in the US economy were becoming increasingly evident.
However, a fragile truce in Lebanon, an ongoing dialogue between
Europe and Iran and a benign hurricane season have resulted in
the Oil price retreating to around $60 per barrel. Bids for companies,
both rumoured and actual, coupled with corporate restructuring,
remained a feature of global equity markets during the quarter.
In the UK, the weakness in mining (-5.09%) and oil stocks (-6.02%)
hindered the relative performance of the large cap stock indices.
By the close of the quarter, the FTSE 100 index was up by just
2.18% versus gains of 6.09% and 4.72% from the mid and small
cap indices respectively. The FTSE 100 and the FT ASI index remain
significantly exposed to these two sectors which account for
over 20% of their value at the period end.
US markets performed well over the quarter; the Dow Jones
rose by 4.74%, its best third quarterly performance for 9 years
and the more broadly based S&P 500 rose by 5.17%. Technology
stocks continued to remain out of favour, with the NASDAQ index
rising by a more modest 3.97%. This trend was also reflected
in the small cap market with the Russell 2000 improving by just
0.13%. As the quarter progressed, the effect of rising interest
rates began to impact on consumers with retail sales down and
signs of weakness emerging in the housing market. Nevertheless
second quarter earnings for the S&P 500 exceeded expectations
with a growth rate of just over 18%.
European markets produced solid gains over the quarter as
the outlook for economic growth in the Eurozone showed signs
of further improvement. The EU's index of economic sentiment
rose to a five year high amidst upgrades to GDP expectations
for 2006. The growth in money supply raised concerns within the
ECB policymaking committee over the outlook for higher inflation
and consequently the decision was taken to increase interest
rates for the second time this year to 3%. Both France and Germany
performed well with the CAC-40 and DAX indices rising 5.72% and
5.65% respectively, whilst the more broadly based Eurofirst 300
closed up 6.31%.
Japanese, Asian and Emerging markets recovered some of the
losses evident in Q2. In Japan, stronger signs of economic recovery
and an end to the extended period of deflation led the Bank of
Japan to raise interest rates to 0.25%, the first positive nominal
interest rate since March 2001. The GDP forecast for Japan for
2006 remains above that of the EU. The Nikkei 225 index rose
4.01% but smaller companies continued to lag, falling by 4.19%.
Across Asia, equity returns were generally positive with the
Korean market rising by 5.89%, Singapore by 5.48% and Hong Kong
rose by 7.84% to a record high. The more broadly based MSCI Emerging
Markets index rose by a respectable 4.1% over the period.
Surprisingly, bonds rallied during the quarter despite rate
rises in both the UK and EU. The yield on 10-year Gilts fell
from 4.71% to 4.52% and the comparable Bund declined from 4.07%
to 3.71%. In the US 10-year Treasuries were buoyant, with the
yield falling from 5.14% to 4.63% as signs of a slowing in the
US economy gathered pace.
Commodities lagged in performance over the quarter. Oil fell
by 16.25% during the quarter although the decline from the high
on the 7th August was just under 22%. Precious metals remained
volatile and below the 25 year highs reached in May. Gold was
down by 2.85%, but Silver rose 3.06% over the quarter. The more
diversified CRB index, incorporating both soft and hard commodities,
fell by 11.78% to its lowest level for over a year.
Currency markets closed virtually unchanged over the period
despite some volatility in the value of the US Dollar against
other major currencies. Generally speaking, the Dollar and Yen
were slightly easier and Sterling and the Euro somewhat stronger.
This reflected a growing feeling that US interest rates were
either at or near their peak whereas further rate rises are anticipated
in the UK and the Eurozone.
(Data source: Bloomberg) - All returns
in local currency terms
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