Capital markets
2008 was a year of extremes on the capital markets. Initially, the yield on 10-year German federal government bonds climbed in the first half of the year from 4.3% to 4.7% on the back of rising inflationary expectations in the Eurozone; from mid-year, onwards, declining consumer prices led to a trend reversal in the yields on government bonds. The return on 10-year German federal government bonds, for example, sank to a record low of 2.95% in December. In the United States, 10-year Treasury bonds fell to their lowest level in 50 years to close the year at 2.2%.
In the face of growing pessimism about the economic outlook, the trend towards a flight to quality (especially into German government bonds) was sustained. Most countries in the Eurozone found themselves increasingly dragged into recession. As to its severity and duration, however, the market factored in considerable differences between the individual national economies. Thus, despite interest-rate premiums, government bonds issued by peripheral countries (especially Italy/Greece) fared significantly more poorly.
When the investment bank Lehman Brothers failed in September 2008 financial bonds were already priced with historically high premiums compared to government bonds. These instruments were then impacted again by the bank’s collapse, and industrial bonds were also severely affected. 2008 ended with sharp price declines for virtually all types of bonds.
The 2008 stock market year went down as one of the darkest in market history: the Dow Jones EURO STOXX 50 closed the year with a loss of 44%. The S&P 500 index fell by 39%, the third-worst annual performance since 1927 – after 1931 and 1933. The German stock index, the DAX, closed the year 40% down – a drop second only to that seen in 2002. The British FTSE 100 index turned in its worst performance since 1984 with a minus of 38%. The extraordinarily poor performance of the equity markets was driven principally by the financial market crisis and the economic slump. The billions in write-downs taken by banks as the year got underway merely heralded the start of a need to take substantial value adjustments. Uncertainty and mistrust gave rise to a pronounced risk aversion, necessitating state intervention. Ultimately, governments around the world acquired direct stakes in financial institutions.
Influenced by high inflation in the Eurozone, the euro climbed to a new record level of just under USD 1.60 against the greenback in April 2008, only to subsequently retreat again sharply before rallying to USD 1.39 at year-end. The euro gained almost 30% in value against the pound sterling in the course of the year, closing the year at GBP 0.95 on the back of a substantial rise in the fourth quarter. The British currency was dragged down by the more abrupt economic downturn in the United Kingdom relative to other core European countries as well as by the drastic policy of interest rate cuts pursued by the Bank of England. Closing the year at 126 yen, on the other hand, the euro shed around 22% of its value against the Japanese currency compared to the exchange rate at the beginning of the year. The yen’s recovery in the second half of 2008 was connected with the considerable flows of capital back to Japan and a narrowing of interest rate differences following the policy adopted by central banks in the West to combat the financial market crisis.
