On the surface the second quarter of 2014 looks like everything was rosy with global equity markets moving up noticeably over the quarter. However, this masks a number of issues beneath the surface. The geopolitical tensions arising from Ukraine during the first quarter continued into the second quarter, and before the end of the quarter tensions in the Middle East, focused around the uprising of ISIS (The Islamic State in Iraq and the Levant) in Iraq and neighbouring countries, had become the new focus of geopolitical tension. The former remains an issue, but the later is receiving more significant headlines, and could more directly impact the global economic environment through supply pressures on oil and consequences for the oil price. However, despite these concerns markets have remained optimistic and shrugged off more fundamental issues of very weak US first quarter GDP growth, and the challenges to Chinese authorities to maintain economic growth at or above the 7% level. On a positive front Japan continued to push through with reforms, though the success of these remains to be seen, while the European Central Bank took further measures in early June to provide additional stimulus to the euro-zone economy.

For the quarter global equity markets, as measured by the MSCI World Index, rose by 4.86%. The rise in markets was also fairly steady, with all three months posting positive absolute returns of more than 1%. April, saw equity markets move down slightly, before rebounding and delivering a return of 1.02% for the month. In May markets moved relatively smoothly upwards rising 1.97%, while in June the pattern continued and markets gained 1.79%. This means that markets have risen by over 6% in 2014 so far, and are up by over 24% in the last 12 months. The pace of these rises is expected to moderate unless corporate earnings growth is delivered, otherwise valuation metrics will look increasingly stretched.

The optimistic market environment was not solely confined to equity markets as global bond markets delivered their second successive positive quarter. Fixed income markets, as measured by the Barclays Capital Global Aggregate Index, rose 2.47%, and hence produced a marginally superior quarter compared to the first quarter of 2014. Global bond markets therefore have risen nearly 5% in 2014 so far. In a similar fashion to equity markets global fixed income markets rose in all three months of the quarter, with gains of 1.13%, 0.59% and 0.73% in April, May and June respectively. The strong performance of fixed income markets year-to-date has been somewhat of a surprise to many investors, but has been supported by an underlying demand for yield, and also reluctance by some investors to allocate further to equities due to risk aversion perspectives. However, to other investors, given the low absolute level of yields, certain fixed income investments are perceived to be even riskier than equities.

The second quarter of 2013 started with the continuation of the positive sentiment from the first quarter, and this was maintained for much of the quarter. However, a speech by the US Federal Reserve towards the end of May spooked investors. The speech, which recognised that the US economy was healing and recovering, described that there would be a tapering to the extensive quantitative easing and then subsequently a withdrawal of that before the rising of US interest rates (over the medium to long-term).

At a broad level this was not new news, but it somewhat surprised markets, leading to a substantial sell-off in equities and an even more dramatic movement in fixed income markets. The equity market did start to rebound relatively quickly in the knowledge that an end to quantitative easing and the recovery of the US economy, were actually good things overall - certainly from the perspective of a long-term investor. The withdrawal of 'cheap money' from the quantitative easing program was the underlying cause of the market's short-term concern. For the second quarter world equity markets as measured by the MSCI World (Developed Markets) Index returned almost a flat return of 0.65% .

As hinted above this disguised the intra-quarter volatility, which saw markets rise by 3.15% in April, produce an almost pan-flat return of 0.04% in May and then decline by -2.46% in June. At the market's peak on 21st May the market was just over 6.5% higher than at the start of the quarter and up over 14.75% to that point in 2013.

The general market sell-off persisted for almost a month, but with investors having taken profits, the market rebounded sharply in the last week of June, although this only somewhat mitigated the market decline in June. And despite all this intra-quarter activity the market overall made negligible headway over the period. In global fixed income markets the quarter started well with the Barclays Capital Global Aggregate Bond Index producing its first positive monthly return in April since September 2012.

This was more than overshadowed by the returns in May and June when global bond markets declined by -2.97% and - 1.18% respectively. May was the worst month for global bond markets since November 2010. For the quarter as a whole global bond markets fell -2.79% and are now down -4.83% for 2013 as a whole.

The reason for the sharp decline in May was directly attributable to the US Federal Reserve's comments and can be illustrated through the yield on the US 10-year Treasury bond. This declined during April and reached 1.63% in early May, but then gradually it started rising in a consistent upward trend till almost the very end of the quarter, where it finished at around 2.49%.

This was a substantial movement and a reflection of the fixed income market's concern about the downward pressure on interest rates that would be removed once quantitative easing came to an end.