Market climate

Economic fundamentals continued to deteriorate in the first quarter as corporations cut back in investments, consumer spending fell or remained subdued and unemployment continued to rise. Most developed economies continued to shrink and the International Monetary Fund (IMF) recently labeled the current recession the worst since the Second World War. Deleveraging in the financial, corporate and household sectors is generally expected to continue throughout the year and well into 2010.

Global policy response has been very significant in the first quarter as governments and central banks took further measures to stabilize markets and stimulate the economy. In the US, following the launch of a stimulus fiscal package, the introduction of a mortgage relief program and other initiatives aimed at restoring investors' confidence in the mortgage-related market, the US Treasury released details of a public-private partnership program to purchase illiquid mortgage pools and mortgage-backed securities.

As a consequence of the uncertainty surrounding the effectiveness of the measures announced early in the year, equity markets remained under pressure and the negative momentum continued until early March. However, in the last few weeks of the quarter, markets rallied. During the quarter, the MSCI world index lost 12.5%, the S&P 500 index gave up 11.7% and the Dow Jones STOXX 600 index was down 15.0%. Some countries witnessed very significant declines, while select emerging markets performed well. China, Russia and Brazil ended the quarter in positive territory. Financial stocks performed worst over the quarter, while the information technology sector fared best. Vola­tility in equity markets remained historically high throughout the quarter.

Credit spreads of high-quality corporate bonds remained at historically elevated levels but contracted significantly over the quarter. Sovereign CDS spreads also tightened substantially over the quarter as the IMF's financial support was deployed and fears of bankruptcy in certain emerging markets eased.

Interest rates remained at historically low levels throughout the quarter. The world's major currencies depreciated against the US dollar in first quarter 2009. The Swiss franc stopped appreciating against major currencies as the Swiss National Bank announced it would be ready to take the measures needed to prevent a further strengthening of the currency. Commodity prices were generally down in first quarter 2009, but oil rebounded in March. Gold was up despite a drop in the second half of the quarter reflecting lower risk aversion among investors.