Stock markets finished their worst quarter in more than five years on Monday with further losses as investors continued to favour less risky assets.
The losses have seen many equity markets enter bear market territory – a fall of 20 per cent from recent peaks – over the last three months as a result of deepening fears about a US recession and continued tensions in credit markets.
For the UK’s FTSE 100, the S&P 500 index in the US and the pan-European FTSE Eurofirst 300, this was the worst quarterly performance since the third quarter of 2002, when accounting scandals at Enron and WorldCom sparked a global equity sell-off.
The Eurofirst 300 fell 0.3 per cent to 1,262.14 on Monday as the banking sector came under renewed pressure, with fears that further credit market-related writedowns will damage future earnings.
With three-month losses of 16 per cent, it was the worst first-quarter performance on record for the index. The FTSE 100 lost 11.7 per cent, another record first-quarter loss.
In the US, the Dow Jones Industrial Average rose 0.4 per cent in New York on Monday to 12,262.89, but that still left it down 7.5 per cent on the quarter. The S&P 500 fell 9.9 per cent on the quarter.
And in Tokyo, the Nikkei 225 Average lost 2.3 per cent on the day, and finished at 12,525.54, down 17.4 per cent on the quarter. The biggest faller in the quarter, however, was the Shanghai Composite index, which dropped 34 per cent.
Investors fled equity funds during the quarter. EPFR Global, which provides flows and allocations data, said equity funds recorded net outflows of $97.9bn during the first 13 weeks of 2008.
On currency markets, the dollar continued its slide, garnering scant support from a larger rise than expected in business activity as measured by purchasing managers in Chicago and the surrounding industrial heartland of the Midwest.
Higher inflation than expected in the eurozone provided investors with another reason to sell the dollar.
The rise makes a near-term interest rate cut from the European Central Bank less likely. Marc Chandler at Brown Brothers Harriman said: “While eurozone data point to deceleration of growth, elevated prices remain the ECB’s main concern.”
The euro edged lower against the dollar, while the Swiss franc added 0.1 per cent.
Sterling was hurt by further evidence of a weakening UK housing market, with the pound falling by 0.6 per cent against the dollar.
Turkish markets were hit after the country’s constitutional court agreed to hear a case calling for the dismantling of the ruling AKP. The Istanbul Stock Exchange fell 1.2 per cent to 39,015.44, while the lira fell more than 3 per cent against the dollar.
Government bonds performed well over the first quarter, with many benchmarks recording their biggest returns in five and a half years as investors sought havens from the risks of credit markets and slowing economic growth.
UK gilts outperformed on Monday after weak housing data underpinned fears of faltering British growth. This forced the yield on the 10-year gilt 6.8 basis points lower to 4.34 per cent and the yield on the two-year note down 19bp to 3.81 per cent.
Treasury yields recovered a little after the Chicago PMI data but the 10-year yield remained 2bp lower at 3.42 per cent.
Adam Parry at MF Global said eurozone bonds were starting to look expensive.
He said: “The Bund curve is currently showing some fairly severe anomalies as traders seem to be ignoring relative value and ploughing cash into benchmark securities.”
The yield on the two-year Bund traded flat on Monday at 3.41 per cent but has fallen nearly 50bp so far this year.
Oil prices fell heavily on Monday as funds sought to book profits ahead of the close of the quarter.
Nymex West Texas Intermediate May fell $4.04 to $101.58 a barrel. Brent fell $3.47 to $100.30.
Gold, meanwhile, traded quietly at about $924 an ounce, having gained 18 per cent over the quarter.
Credit markets tightened as equities came off their lows. In Europe, the iTraxx Crossover index of mostly junk graded bonds was 28 basis points lower at 578 basis points.
