Capital markets
Against the backdrop of rising inflation expectations and positive growth prospects in the Eurozone, the yield on 10-year German federal government bonds climbed from 3.95% to as much as 4.65% in the first half of the year. As the effects of the US real estate crisis began to spill over to the European financial sector too, fears were quickly awakened of darker clouds looming on the Eurozone growth horizon. In this climate the market for government bonds was increasingly viewed as a safe haven. The yield on 10-year German federal government bonds stood at 4.31% as at year-end.
The US bond market was driven by rising inflation expectations and a slackening in economic growth during the first half of the year. The yield on 10-year US treasury bonds had increased from 4.70% to 5.23% by the beginning of June. After the Federal Reserve moved in September – citing growth risks – to initiate a cycle of interest rate cuts and reduced key rates by one percentage point to 4.25% by the end of the year, US yields began to rally. The yield on treasury bonds stood at 4.02% as at year-end.
In this uncertain climate credit spreads widened appreciably towards the end of the year after moving sideways for a while. The price behavior was highly volatile.
Movements on stock markets varied in 2007. The Dow Jones Euro STOXX50 closed the year just a shade higher than at the end of the previous year. The German DAX index, on the other hand, built on the good performance of prior years with a gain of 22.3%. In the United Kingdom the FTSE 100 put on 3.8%, hence outperforming most other European indices. The Dow Jones in the United States closed the year 6.4% higher, while the Japanese Nikkei 225 index slipped 11.1%. The mood on equity markets in the first half of the year was driven by strong liquidity, healthy corporate profits and a vigorous wave of mergers and acquisitions. Many stock indices had consequently soared to new record highs by the middle of July. From August onwards the subprime crisis prompted a reassessment of risks. An increasingly risk-averse stance on the part of investors led to a flight to safety and increased selling pressure on equities. Towards the end of the year equity markets began to rally again.
