Financial markets endured bouts of significant volatility in the second quarter 2010 as market concerns over the solvency of some eurozone sovereigns escalated. This ultimately led to the announcement of an extensive support package by the European Union and the International Monetary Fund. While these measures helped to stabilize conditions in key markets, pressures have not yet fully subsided. Rising risk aversion led to a flight from equities and widening credit spreads while gold and benchmark government bond markets rallied strongly due to demand for safe havens. Financial markets also saw sharp falls in activity in certain segments, most prominently in global debt issuance. Concerns over banks’ exposures to sovereign risk pushed European interbank lending rates to their highest level since last autumn (but well below the peaks seen at the height of the worldwide financial crisis) and the European Central Bank responded to rising tensions in financial markets by intervening in selected eurozone government debt markets.
Regulatory reform of the banking sector added a further source of uncertainty, with fears that reforms could have a significant impact on banks’ capital requirements, profitability and ultimately the lending capacity of the financial sector.
Despite the rising headwinds in financial markets and some evidence of waning growth dynamics, the global economic recovery remained on track in the second quarter 2010. The U.S. and emerging markets continued to rebound faster than the eurozone, where the sovereign crisis dampened economic growth. However, the German economy benefited from a strong cyclical recovery in export growth fuelled by the upswing in fast-growing world regions such as Asia. Economic indicators point to an acceleration of growth in Germany’s gross domestic product (“GDP”) in the second quarter 2010 and the labor market remained resilient with the unemployment rate near its pre-crisis lows.