The second half of 2006 was, in similar fashion to the first half, characterised by relatively low inflation despite an oil price at US$60 and above for much of the period. Financial markets performed well in the main, after a shaky start, which was in part due to concerns over comments by the chairman of the US Federal Reserve, Ben Bernanke. Since then, the riskier segments of global bond markets have performed very well and financial market volatility has dropped to new lows for the year. Equities have also turned in a robust performance with emerging markets leading the charge.

The US economy is now at a point where the corporate sector is still performing strongly but the consumer is starting to weaken. US rates have remained at 5.25% since the last rate rise in May. Proof that the US economy is actually slowing was evidenced early in the period by the sharp decline in GDP during the second quarter of 2006.

The annualised figure to the end of the second quarter revealed that the US economy had only grown by 2.5% compared to the robust 5.6% in the previous three months. At the heart of this was the decline in consumer spending after 17 rises in short-term interest rates began to take effect. Existing home sales continue to soften.

Meanwhile, the European Central Bank raised its interest rate at the end of August to 3.25% to keep inflationary pressures in check. Consumer confidence is high in Europe and merger and acquisition activity continues to support markets.

Against this backdrop, four of Mellon’s specialist asset managers have provided detailed insight into the possible future direction of financial markets as we move into 2007. Each of their views benefits from a differing investment focus and style.