After a positive first quarter in 2010, the second quarter was a turbulent one.  The markets oscillated between “risk love” at the beginning of the quarter and “risk aversion” at the end of the quarter.  In April, strong equity markets and increased risk appetite were quickly pricing in a traditional “V” shaped economic recovery.  May, however, quickly became the opposite, as the markets rapidly moved 180 degrees to fear a relapse into a double dip global recession.  

In my most recent blog in April, I highlighted that the easy money had been made and that we expected a “tricky” volatile period for equities over the next 6 months.

While many 'normal' people spent yesterday watching the final round of soccer's Premier League, rugby's Magners League and golf's Players Championship, financial market participants waited with bated breath for the outcome of what they hoped was another 'final round' of summit meetings in Brussels.  And the outcome was, for once, worth the wait.

A lot has changed in the financial markets since my last update yesterday morning.  At that time, markets had shown quite a muted reaction to the EU/IMF rescue package for Greece.  But from around lunchtime yesterday (Tuesday), the market reaction worsened dramatically.

* The EU and IMF approved a joint €110bn funding package for Greece at the weekend, over three years. Although figures like that have been rumoured for the last few days, this was the first formal confirmation of the amount.
* In return, the Greek government agreed a further €30bn package of austerity measures, involving de facto public sector pay cuts and another rise of 2% in the standard VAT rate, among other things.

The first quarter was a positive one for most financial markets. As expected, it was also a volatile quarter, with positive and negative forces strongly to the fore in both directions, with the “good” finally winning out for the quarter. It is also worth noting that it’s now just over 12 months since the bear market lows of March 2009. The MSCI World Equity index rose by 9.6% in the quarter, and stood 67.7% above its March 2009 low, while the Merrill Lynch over 5 year sovereign bond index rose by 3.1% and 9.6% over the same periods.

Looking ahead

The theme of this year’s World Water Day, 2010 (Monday 22nd March) emphasises the risks surrounding both the quality and the quantity of water resources around the world.

Further Market Gains in 2010, but expect Volatility.

Today's Budget contained few surprises given the many leaks over the last few days.  Public sector pay was cut by €1bn, other current public spending including social welfare by €2bn, and capital spending by €1bn.  The deficit next year remains at a staggering €19bn. Key features of the Budget are listed below.  A comment on the Budget will follow shortly.

The €4bn of savings in today's Budget are clearly necessary to begin the process of reducing the deficit.  But unfortunately this is only the beginning of a multi-year process, and we are faced with the prospect of another four or more Budgets as tough as this one before we get even close to budgetary balance.  That said, this was a genuinely encouraging start.