Monday, 2 July 2012

After volatile half year, most markets are back in black

The first half of 2012 saw fluctuating performances in global stock markets. Strong gains in the first quarter were reversed in the second.

However, the final month of the second quarter saw another reversal. Most stock markets managed to rebound in June, allowing them to reach the year's halfway mark in positive territory.

The Morgan Stanley Capital International All-Country World Index closed at 312.11 at the end of June, up 4.74 percent for the month and 4.21 percent for the year.

The following table shows the performances of the major developed stock markets based on their respective MSCI indices.

Stock market performances in 1H 2012
Major developed markets
 Local currency
(percent)
US dollars
(percent)
USA8.258.25
Japan5.741.97
UK0.131.06
Germany5.272.91
France2.00-0.29

However, for most of the European countries that have debt problems, stock markets finished the first half of the year in negative territory.

Stock market performances in 1H 2012
Eurozone markets with debt concerns
 Local currency
(percent)
US dollars
(percent)
Italy-4.66-6.80
Spain-16.79-18.65
Greece-19.67-21.47
Portugal-18.27-20.10
Ireland5.463.10

The performance of markets during the first half of the year was heavily influenced by developments relating to the European sovereign debt crisis. Most recently, the announcement of an agreement by European leaders on Friday to drop the preferred creditor status of the European Stability Mechanism over other bondholders in Spanish banks given government aid and to allow direct bank funding using bailout funds sent markets surging.

The evolution of the debt crisis will no doubt continue to influence markets in the second half of the year. The agreement announced on Friday provides a path for further progress in the resolution of the crisis but whether it actually leads to a lasting solution to the debt crisis remains to be seen. Previous agreements announced by European leaders had not resulted in lasting market rallies.

The latest agreement, for one, requires the establishment of a central banking supervisor before bailout funds can be injected directly into banks. However, there are few details on this, and working them out may take some time.

As Satyajit Das puts it in a commentary today: “Given issues of national control and sovereignty, the risk of delays and failure of agreement are not insignificant.”

Unfortunately, Europe is running out of time because it is running out of money. “There was no commitment of new money of any kind,” he points out. “The ability of the EU to support the peripheral nations on an ongoing basis is questionable.”

The other factor that will drive markets will be global economic growth. Early data for June based on surveys of purchasing managers showed that all the major economies either slowed or are in outright contraction.

The first half of 2012 had been volatile for stock markets. Continuing concerns over Europe's debt crisis and slowing global economic growth mean that the second half could turn out equally so.

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