Global stocks wrapped up 2011 by posting their first annual loss in three years as investors worldwide favoured assets such as U.S. Treasuries and the Japanese yen in response to the worsening of Europe's debt crisis and jitters about the outlook for the Chinese economy.
While U.S. equities edged into positive territory for the year this week, Asian and European stocks remained sharply lower.
Markets in 2011 were characterized by periods of intense volatility and surging bond yields in so-called peripheral euro zone debt markets. The yen rallied to a record high against the dollar, while the euro was ending the year at new lows in 2011 versus the dollar and the yen.
"This was a year for professional risk managers who were scared of a repeat of 2008," said Oliver Pursche, a fund manager at Gary Goldberg Financial Services. "Tremendous volatility required investors to pick their parameters and stick to them during some of the largest swings in stocks."
For equities, the last day of trading in 2011 was marked by light volumes and modest gains. The MSCI Asia Pacific index, the region's broadest gauge, has declined 18 per cent in the past 12 months after it closed the last trading session of the year 0.4 per cent higher.
"Foreign investors were net sellers [of Asian equities]this year," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in New York. "Europe, the uncertainty about the outlook for the global economy and monetary tightening in China were all negative factors."
Fears the euro zone crisis would lead to debt defaults pushed stocks in European banks down more than 30 per cent. The FTSE Eurofirst 300 index dropped 11 per cent this year.
U.S. bank shares were hit hard by worries of euro zone contagion and were set to end the year 20 per cent in the red.
But the broader U.S. market remained resilient amid signs of improvement in the job market, rising consumer confidence and retail sales in the past couple of months. The S&P 500 index, the broadest measure for U.S. equities, rose 11 per cent this quarter, erasing this year's losses and by midday in New York was set to end 0.3 per cent higher for 2011.
Meanwhile, in the sovereign bond markets investors shunned Greece, Italy and Spain in favour of U.S. Treasuries, UK gilts and German Bunds.
Yields on Spanish and Italian bonds surged above 6 per cent in July and climbed further in November at the peak of euro zone concerns. As the year ends, there is a contrast in the performance of Italy and Spain, with 10-year Italian debt yielding 7.08 per cent, up from 4.80 per cent in January, while Spain's 10-year yield is now 5.10 per cent, down from 5.45 per cent at the start of the year.
Investors powered big rallies in German and UK debt this year, with 10-year Bund yields falling to a low of 1.67 per cent in September from a high of 3.49 per cent in April, while 10-year gilt yields fell below 2 per cent for the first time after starting the year at 3.4 per cent. Boosted by haven demand and the Federal Reserve's bond purchases under Operation Twist, the yield on U.S. 10-year Treasury notes dropped to 1.67 per cent in September, its lowest level since 1945 and was ending the year at 1.86 per cent.
An index of long-dated U.S. Treasuries rallied nearly 30 per cent this year, according to Barclays Capital, their best gain since 1995. Barclays U.S. Aggregate bond index, which is the benchmark for bond managers, rallied 7.7 per cent in 2011, its best gain since 2002.
Turbulence reined in currencies, where the Japanese yen was the only major currency to gain against the U.S. dollar. In contrast, the euro was the weakest major currency, down more than 3 per cent this year, after touching a 15-month low against the greenback this week and trading at its lowest level versus the yen since 2001.
"The euro is in trouble," said Jose Wynne, director of research at Barclays in New York. "Our strongest conviction is to short the euro at the moment."
Sterling, the Swiss franc and Scandinavian currencies also fell, with most of the declines coming towards the latter part of the year as the European Central Bank, Swiss National Bank and Bank of England all adopted more aggressive monetary easing stances to fight a credit crunch.
Investors also fled emerging markets currencies, with reports of forex intervention in Turkey and Poland, and lower chances that Hungary will receive international aid for its financial troubles.
Among commodities, gold hit a record of $1,920 (U.S.) a troy ounce in September and was 10 per cent higher in 2011. Crude oil rose for a third year, gaining almost 9 per cent amid supply fears as tensions in the Middle East escalated.
Meanwhile, slowing demand from China hit copper prices and other raw materials. Copper , which is seen as an indicator for economic growth, fell for the first time since 2008.
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