ITEM EX14 - ANNEX 1EXECUTIVE – 8 JULY 2003REVIEW OF THE COUNCIL’S TREASURY MANAGEMENT ACTIVITY IN 2002/03Market Background The last quarter of 2001/2 saw equity markets beginning to recover from the blow to confidence delivered by the September 11th terrorist attacks. However, markets made more erratic progress through the early part of 2002 as hopes for recovery were hampered by a spate of US accountancy frauds. The impact of the Enron failure and of a string of setbacks to the American markets was felt throughout the World. UK stock markets were caught up in the global stockmarket downturn that started in mid-May. Profit warnings were frequent. Investors lost confidence and turned to gilts pushing prices higher and yields lower. In June falling manufacturing production and a widening in the UK’s trade gap caused by a drop in exports, raised doubts about the underlying strength of the economy. Market expectations of a base rate rise to curb galloping house prices receded as a result of tumbling share prices and signs that the UK’s long running retail boom was coming to an end. Faltering economic growth in the Eurozone cut demand for UK exports, leading to a bigger than expected increase in the trade deficit in August, pushing Britain’s trade deficit with the EU to a ten-year high. The Labour Force Survey showed an increase in the number of people out of work for the three months to September showing that the economic slowdown had started to filter through to the jobs market. However, buoyant consumer spending in the service sector, escalating house prices and record levels of household debt, led the bank of England to leave base rates unchanged in November for fear of launching a boom in house prices that could suddenly collapse. In November UK inflation had risen to 2.8%, its highest level for more than 4 years. During November the UK Government announced it would increase this year’s gilt issuance by £3.8bn from previous estimates, £3bn of which was to be raised at the short end of the yield curve. The announcement led to a slide in prices of short-dated bonds and an increase in the cost of borrowing from a low point in October. In January the FTSE100 fell to a 7 year low amid concern of a collapse in UK property prices, the growing prospect of war and gloom about the world economy. The UK market had virtually halved in value from its peak in 2000. Inflation remained above the government’s 2.5% target for the 3rd consequtive month pushed up by fuel prices and the price of clothing which fell less in the sales than in the previous year. Investors again turned to bonds pushing yields down again. In February the manufacturing industry reported its worst fall in output in more than 10 years prompting the bank of England to cut the base rate to 3.75%, its lowest rate since 1955. This led to frenzied buying of short dated bonds pushing yields down further. Uncertainties
caused by the war with Iraq led to volatile markets during February and
March. Investors again turned to the relative safety of bonds, pushing
yields to new lows and increasing the cost of long term borrowing. Stock
markets rose sharply following the end of the year, after coalition troop
advances toward Baghdad raised hopes of a swift end to the conflict in
Iraq. |