European equity markets, as measured by the MSCI Europe index, fell by 14.8% in USD terms during the second quarter of 2010. Despite generally strong earnings results, the multi-month rally in equities ended as investor sentiment deteriorated on reports of further stress in the Eurozone bond markets and a poorly received earnings report from Nokia. The mood was further soured by another fierce plunge in the price of Greek sovereign bonds. The yield on 2-year bonds at one point rose above 10 per cent after rating agency Moody's downgraded Greek government debt for the second time. Fears of a possible default outweighed the theme of supportive macroeconomic data for the region. The April Purchasing Managers' Survey demonstrated that Eurozone manufacturers were expanding production at the highest pace for a decade.

Equity markets rallied sharply in May as the European Union and the International Monetary Fund agreed a €750bn emergency funding facility. It was the largest financial package since the G20 move to support the financial system was announced in the wake of the Lehman Brothers collapse in 2008. The move caught many market participants by surprise, prompting huge relief rallies in equity, credit and peripheral eurozone government bond markets. The coordinated move by EU Finance Ministers was later supported by Portugal, who joined Spain and Greece in announcing tough austerity measures to reduce their budget deficits. However, concerns that the European policy response may suffocate economic growth in the region were compounded by news that Germany was temporarily banning naked short-selling on German financial shares and credit-default swaps. Uncertainties in Europe combined with poor US macro data and rising tension in the Korean peninsula lead to the VIX index, Wall Street's volatility measure, reaching a 12-month high.

Indexes rebounded from lows in June following a series of positive macroeconomic data points from Asia. However, markets remained range bound as mixed US retail sales and ongoing fiscal concerns left investors searching for clear direction. Towards the end of the month the main story became the political confrontation between BP and the US President Obama. Sentiment was supported by hopes that 'stress-tests' on European banks would finally draw a line under concern about the region's financial sector. Reinforcing this optimism was the announcement that European banks sought €132bn from the ECB support mechanism, an amount much lower than the €300bn speculated by the market and easing fears of future funding requirements.

European equity markets, as measured by the MSCI Europe index, fell by 14.8% in USD terms during the second quarter of 2010. Despite generally strong earnings results, the multi-month rally in equities ended as investor sentiment deteriorated on reports of further stressin the Eurozone bond markets and a poorly received earnings report from Nokia. The mood was further soured by another fierce plunge in the price of Greek sovereign bonds. The yield on 2-year bonds at one point rose above 10 per cent after rating agency Moody's downgraded Greek government debt for the second time. Fears of a possible default outweighed the theme of supportive macroeconomic data for the region. The April Purchasing Managers' Survey demonstrated that Eurozone manufacturers were expanding production at the highest pace for a decade.

Equity markets rallied sharply in May as the European Union and the International Monetary Fund agreed a €750bn emergency funding facility. It was the largest financial package since the G20 move to support the financial system was announced in the wake of the Lehman Brothers collapse in 2008. The move caught many market participants by surprise, prompting huge relief rallies in equity, credit and peripheral eurozone government bond markets. The coordinated move by EU Finance Ministers was later supported by Portugal, who joined Spain and Greece in announcing tough austerity measures to reduce their budget deficits. However, concerns that the European policy response may suffocate economic growth in the region were compounded by news that Germany was temporarily banning naked short-selling on German financial shares and credit-default swaps.Uncertainties in Europe combined with poor US macro data and rising tension in the Korean peninsula lead to the VIX index, Wall Street's volatility measure, reaching a 12-month high.

Indexes rebounded from lows in June following a series of positive macroeconomic data points from Asia. However, markets remained range bound as mixed US retail sales and ongoing fiscal concerns left investors searching for clear direction. Towards the end of the month themain story became the political confrontation between BP and the US President Obama. Sentiment was supported by hopes that 'stress-tests' on European banks would finally draw a line under concern about the region's financial sector. Reinforcing this optimism was the announcement that European banks sought €132bn from the ECB support mechanism, an amount much lower than the €300bn speculated by the market and easing fears of future funding requirements.

It has been an unusually tense start to the year for European equities. The issue of sovereign debt of a large number of European countries, including the UK, has become a major focal point within the debt and currency markets. The same concerns have spilt over into the equity markets - often for protracted periods of time during which investor sentiment has been seriously tested. European sovereign debt concerns were brought to the fore following the shock announcement of the Dubai World financial difficulties in October 2009. Ever since Greece has remained in the spotlight, closely followed by Spain and Portugal. Indeed, the 'PIGS' acronym is once again in vogue. Tremendous energy has been devoted to worst case scenarios the implications of which are far deeper and wider than the shorter term issues confronting those southern Europeans countries. It appears the cynics' background murmuring continuously aims at destabilizing or even "dismembering" the Euro. The ultimate prize for those speculators having already taken a view would be the 'break-up' of the Euro. Under this scenario investors with extensive short positions in government bonds and financial shares in Greece, Spain, Portugal, Italy and even the UK stand to make considerable gains. Against this the major stumbling block is that such a decision is essentially a political decision - it cannot simply be brought about by market forces.

To illustrate the complexity of the situation further, Greece will need to refinance circa €30bn of debt in the next two to three months. At current interest rates of circa 7.5% this would negate the benefits of the recently announced austerity package designed to steer the country's finances back on course. The European package ultimately hinges on providing emergency financing. If required by Greece - at an agreed materially lower interest rate. If passed, there is no justification for Greek bond yields remaining at present levels. Greek bonds and equities will rally significantly. It is in nobody's interest for Greece to default whatsoever. It is estimated that the total value of Greece's sovereign debt is €300bn of which 85% is owned by foreign (predominantly European) institutions A Greek default would undoubtedly lead to an exit from the Greece s €300bn, institutions. Euro and subsequent devaluation of 30% of the "new" Drachma. Additionally, it will encourage the Greek authorities to write down their debt by 30% as per the recent experiences of Argentina and Russia. The implied loss to non-Greek bond holders would thus range between €76bn and €153bn. It is in nobody's interest that this scenario should therefore unfold.

It is interesting to note in the period under review the Euro has weakened against the US Dollar by 5.7% to Euro/US $1.33, whilst against the Sterling the exchange rate is barely changed. Ironically, this is broadly positive for European companies and European based producers given the competitive boost they receive from such pronounced currency movements. This positive development has been overshadowed by other macro-economic considerations. Equally, the positive developments within the corporate sector have equally been sidelined. The extent to which corporations continue to make breathtaking strides in terms of operating margins, return on equity, and free cashflow generation. This has continued to underpin European equity markets.

Global equity markets continued to rise in the fourth quarter of 2009 but at a much more modest pace than in the second and third quarters of 2009, with the MSCI World (Developed Markets) Index up 4.07%. During October, markets drifted down slightly, only to rebound strongly in November and then extend these gains during December.

Looking at the year as a whole, the MSCI World Index rose by 29.99% - the best year for global equity markets since 2003. However, this masks an even more impressive rebound in stock market of their first quarter lows, with the market having risen by around 60% since then! The strength of this market recovery is an indication of both how much fear there was in the market towards the end of 2008 and early in 2009 and, more recently, the confidence that an economic recovery is underway.

The European region's performance did lag the rest of the developed world's, gaining more than 3% over the quarter. A concern in the UK was that lower interest rates have not translated in increased lending. Also, the Euro region seems to be experiencing a large disparity in economic performance, with statistics released during the third quarter of 2009 reflecting performance ranging from 4% growth quarter-on-quarter in Austria and Portugal and more than 1% contractions in Spain and Greece. This certainly complicates the European Central Bank's task of adopting a central monetary policy for all its member countries as some continue to recover more quickly than others.

All performance figures are quoted in US dollar terms unless stated otherwise.