Global equities fell sharply at the end of the quarter. This saw a number of dramatic events unfold in the financial sector, including the bankruptcy of Lehman Brothers and a struggle to agree to a financial rescue plan in the US which would see banks' "toxic" assets passing to government ownership. The MSCI World Index closed 15.2% down in dollar terms.

All equity markets fell sharply, with the US proving considerably more resilient than the rest, with a decline of 9.0%. In dollar terms, Asia Pacific ex UK fell by 23.8%, the UK by 21.0%, Europe ex UK by 20.6% and Japan by 16.9%.

All global sectors except one posted negative returns, with underperformers including materials (-35.6%), energy (-27.8%) and semiconductors &semiconductor equipment (-19.8%). Outperformers were household & personal products (+8.7%), healthcare equipment & services (-2.2%) and food beverage & tobacco (-2.3%).

The European Central Bank raised its main refinancing rate at the beginning of the period by 25 basis points to 4.25% in an attempt to address rising inflation. The European economy has stalled in the second quarter of 2008for the first time since the inception of the euro.

The weakening of the European economy has led to a recovery of the US dollar after a long period of falls, in turn triggering a sharp decline in the price of oil. The Japanese economy also shrank over the quarter, which witnessed the resignation of Prime Minister Fukuda. Equity markets globally went through a powerful sector reversion as positions in oil and commodity stocks were unwound into financials.

High volatility returned by the end of the quarter as the huge resources mobilised by the US Federal Reserve for the rescue of Fannie Mae, Freddie Mac and AIG did little to restore investor confidence. Following the bankruptcy of Lehman Brothers, a number of European banks had also to be rescued, such as Bradford & Bingley, Fortis, Hypo and Dexia.

Global equities posted a slight negative return over the quarter, with the MSCI World (Free) Index declining by 1.4% in dollar terms. The final return masks some significant market moves during the three months, when the initial recovery peaked at the end of May and was followed by further falls later in the quarter.

The overwhelming majority of the largest global markets ended in negative territory. Norway (+14.4%), Canada (+11.1%), Australia (+4.3%) and Japan (+2.5%) outperformed, whilst some of the weakest performance came from Switzerland (-5.1%), France (-3.2%), the US (-2.1%) and the UK (-0.8%).

From a global sector perspective, most of the MSCI World sectors declined during the quarter, with the worst underperformance coming from diversified financials (-16.1%), banks (-12.0%) and household & personal products (-11.1%). In contrast, strong performance was seen in energy (+18.7%), materials (+10.5%) and software & services (+4.4%).

The US Federal Reserve (Fed) has cut the fed funds rate to 2.0%, sending the dollar further downwards and giving additional support to the rising prices of oil and other commodities. However, growing inflationary concerns have led the world's most powerful central banks to signal their willingness to end interest rate cuts. As business surveys ruled out a possibility of recession in the US, the Fed has indicated a monetary policy shift from the credit crunch to inflation. Commodities continued to advance as the oil price exceeded $141 a barrel.

In Europe, inflation accelerated at the fastest pace for almost 16 years and has peaked at 3.7% in May, driven by surging energy and food costs. However, the European Central Bank (ECB) has left its benchmark rate at a six-year high of 4%. There are growing expectations in the markets that the ECB will raise its interest rate by a quarter percentage point in the first week of July. However, the Bank will have to deal with the deteriorating slowdown which has recently seen sharp falls in consumer confidence and retail sales across Europe.

Inflation hit emerging markets worst as local indices plunged to the lowest levels in over a decade. Following a prolonged period of weakness, the US dollar received a boost from US authorities' efforts to support the currency, making the biggest weekly gain in almost three years.

Global equities declined during the quarter, with the MSCI World Index closingdown 8.9% in dollar terms. US shares staged a recovery at the end of theperiod on a bigger than expected rise in consumer spending during the lastquarter of 2007.

All major markets except Denmark (+0.3%) ended the quarter in negativeterritory, with Greece (-15.8%) and New Zealand (-14.4%) performingparticularly badly and other underperformers including most equity marketsin Europe, such as Portugal (-13.2%), Italy (-11.7%), Germany (-11.7%)and the UK (-10.5%). The US (-9.3%) proved more resilient, as have someof the smaller European markets, such as Ireland (-1.0%) and Switzerland(-1.8%).
From a global sector perspective, all of the MSCI World sectors suffered losses during the quarter, with the worst underperformance coming fromdiversified financials (-16.1%), software & services (-15.8%) and telecommunication services (-15.1%). Better performance was seen intransportation (unchanged), commercial services & supplies (-1.8%), materials(-2.4%) and food, beverage & tobacco (-2.7%).

At the end of January the MSCI World Index suffered the biggest daily declinesince 9/11 on US recession fears and news that French bank Société Généralehad lost $7.2bn in transactions by a single rogue trader. The US Federal Reserve responded with an emergency cut in its benchmark interest rate by0.75% to 3.5% spurring a market rally, and by another half percentage point to 3% later in the month.The benchmark US fed funds target rate was lowered further by 0.75% at the end of March, following an emergency cut to the Fed discount rate to3.25%. This prompted the biggest weekly drop in the gold price in 25 years.The Fed's commitment to lend money to investment banks, and the rescueof Bear Stearns, led to improved sentiment towards financials. Commodity prices fell, as concerns mounted that a US-led slowdown in the global economy would inevitably lead to a fall in consumption of raw materials.

However, the weakening US dollar supported high oil prices, which pushed annual inflation up to a record 3.2% in Europe.

Global equities declined during the quarter, with the MSCI World Index closing down 2.7% in dollar terms. However, the gains over the twelve months to the end of December were still positive at 7.1%.

In dollar terms, while most major markets ended the quarter in negative territory, most major European markets produced positive returns, such as Spain (+7.6%), Portugal (+7.2%), Germany (+5.1%) and France (+0.5%). Hong Kong shares (+6.6%) also performed well. The US (-3.7%) and the UK (-3.0%) underperformed.

From a global sector perspective, the majority of the MSCI World sectors suffered losses during the quarter, with the worst performance coming from diversified financials (-10.6%) and banks (-9.3%), real estate (-9.9%) and retailing (-9.8%). The best performers were software and services (+7.8%), utilities (+7.2%) and food, beverage & tobacco (+5.1%).

Central banks intensified their intervention as the sub-prime loans crisis maintained its pressure on global equity markets. The US Federal Reserve imposed new rules on sub-prime lending as the property market continued to experience the deepest housing slump since 1991.

In the meantime, an easing of interest rates continued across global economies as the Fed made two quarter-point cuts, in October and December, to 4.25%. The Bank of England (BoE) reduced its rates by a quarter point to 5.5% in December, with expectations now that UK rates will fall further in the coming months.

In a further preventative measure against the economic impact of deteriorating credit market conditions and falling property prices, the BoE joined the Fed, the European Central Bank and three other central banks in a decision to ease liquidity conditions by providing significant reciprocal currency-swap facilities. This should support global equity markets.