The following Globetrot report from Threadneedle covers the global market performance for February 2010:

US – Equities experience sharp gains and falls in a turbulent month of trading
After a positive start, stocks retreated after US jobless claims unexpectedly rose and anxiety mounted that ballooning government debt would derail the recovery. Later, generally positive data helped investors snap out of the pessimistic mood and the market logged strong gains over much of the month. US unemployment unexpectedly fell to 9.7%, the lowest level since August, thanks largely to a rise in manufacturing jobs for the first time in three years. Meanwhile, industrial production was stronger than anticipated in January, rising by 0.9%, and the US Index of Leading Indicators rose in January for the tenth straight month. January retail sales came in better than expected, but this was followed by news that consumer confidence unexpectedly declined in February, albeit from a two year high. Meanwhile, the market was subject to repeated jitters over the massive debt overhang affecting countries in peripheral Europe. The Federal Reserve was confident enough about the US economy to raise its Discount Rate (the rate it lends to banks), though Ben Bernanke was quick to assure Congress that there were no plans to raise the base interest rate. The market came in for more volatility in the final week but ended the month modestly higher.

UK – The London market proves more resilient than most in an eventful month for equities
Although UK stocks were susceptible to many of the same forces affecting other European markets in February, they proved more resilient than Continental equities and ended in positive territory in local terms. One of the factors benefiting the London market was generally good news on company earnings, notably Barclays (which reported the largest profit among European banks), Rolls-Royce and BA. Meanwhile, merger and acquisitions activity also returned to the headlines in February with Kraft Foods of America agreeing a takeover of Cadbury. Worries over Britain’s huge budget deficit and generally poor economic data dampened market sentiment and led to a bout of sterling weakness. Unemployment in January unexpectedly rose, with the number of people receiving jobless benefits climbing to the highest level since the Labour Party came to power. Most observers had expected a drop. Meanwhile Britain posted its first January deficit since data gathering began in 1993, as tax income fell and spending rose. Inflation concerns moved to the forefront again, with the CPI rate in December jumping by 2.9% on an annual basis, the most since records began in 1997. Much of the rise was attributed to higher oil prices, but the number still posed a challenge to the Bank of England, which is trying to keep interest rates low to bolster growth. On a brighter note, manufacturing showed signs of recovery, as companies boosted production in December far more briskly than analysts had expected.

Europe ex UK – European markets are dominated by default concerns over southern members
European markets were subject to renewed volatility in February and ultimately ended lower in local terms. Shares suffered sharp corrections early on due to growing concerns of a default in Greece and the possibility of this spreading to other Mediterranean members Spain and Portugal; not surprisingly these markets led the drops. Economic data also proved a drag on the market, with eurozone GDP growth almost coming to a halt in Q4, rising by only 0.1%, versus growth of 0.4% in Q3. Meanwhile, an index of executive and consumer sentiment unexpectedly worsened in February. This pessimism was shared by European Commission economists, who released a report predicting that growth might have trouble gathering momentum over most of the year. Business confidence in Germany also fell, the first decline in 11 months, as bad winter weather curbed retail sales and construction. Mid-month, a show of solidarity from other EU states, particularly Germany, calmed market fears over Greece and led to a Cove recovery in equities. However, worries over the large debt overhang afflicting several of the region’s economies were never far from investors’ minds. Further good earnings news, for example from BNP Paribas and Deutsche Boerse, and a rise in prices for basic materials continued to support the market over the middle of the month. Positive guidance on sales growth from large food conglomerates, such as Nestle, was another contributor to market gains. However, stocks weakened again in the final week of the month, after Moody’s indicated that it might cut Greece’s debt rating and shares in mining companies dropped on falling metals prices.

Japan – The Tokyo market is pre-occupied by worries over a strong yen and deflation
Japanese equities had a tough month in local terms, although the strong yen delivered positive returns to many overseas investors. Concerns over the impact of the recall of Toyota’s cars on its earnings knocked the market in early February. The situation worsened on falling prices for commodities. The market was pulled out of its decline as investor sentiment improved after the release of forecasts for higher earnings by a number of Japanese companies. There was also a good deal of positive economic data over the month. Japan’s GDP expanded by 4.6% in the fourth quarter, helped in particular by strong demand from Asian markets. Meanwhile, machinery orders rose by the most in nine years, signalling further recovery in the manufacturing sector. Consumer confidence also improved and exceeded expectations for the first time in four months in December, although the number of pessimists continued to outnumber optimists. However, worries that deflation would remain a persistent problem for the economy, and that China’s move to cool its recovery, plus the strong yen, would hinder demand for Japanese exports weighed heavily on Japanese equities late in the month.

Asia – Stock markets make little headway in a turbulent month of trading
Asian stocks ended a rather turbulent month close to where they began, as gains in the second and third weeks of February were erased by sharp volatility early in the month and in the final week. Early setbacks were linked to worries that the region’s recovery might be under threat after data showed that January retail sales had fallen in Australia for the first time in five months and that the jobless rate in New Zealand had risen to the highest level in ten years. Markets eventually recovered after better than expected news on Chinese inflation and data showing a rise in jobs growth in Australia. Even a move by China’s central bank to raise its reserve requirement for the second time in two months failed to halt the market advance. However, volatility returned towards the end of the month on concerns that the US and UK governments were preparing to abandon their stimulus programmes. The worries were exacerbated after the move by the US Federal Reserve Bank to raise its Discount Rate (the rate at which it lends to banks). Some disappointing earnings announcements contributed to the downbeat mood, but equities recovered after Bernanke sought to assure investors that interest rates would not be going up soon. Growing optimism about the Asia Pacific region’s own recovery helped markets to end February on a high note.

Bonds – Investor worries over Greece default favours core EU government bonds
Despite the widespread concerns over a debt default by the government of Greece and the potential spread of the problem to Spain and Portugal, government bonds once again outperformed both investment grade and high yield corporate bonds, as they benefited from a renewed rise in investor risk aversion. The beneficiaries were government bonds issued by core EU members such as Germany. New corporate offerings, which have been such a feature of the market over the past year, dried up in February, as issuers sat on the sidelines amid growing concerns over Greece’s debt problems. As a result, February was the slowest month for new issuance in eight years. The high yield market also saw a drop in liquidity and suffered from investor risk aversion over much of the month, although the sector bounced back in the second half of February. Index-linked bonds underperformed other asset classes during much of the first half of the month, but renewed inflation worries later in the period led to a recovery in the sector. Emerging market bonds proved fairly resilient in the face of the default worries surrounding Greece and proved to be one of the strongest fixed income asset classes in February.