Seoul, South Korea -- (SBWIRE) -- 01/07/2011 -- For most of the past month sentiment in the financial markets continued to improve.

There was further evidence that the global economic recovery was still on track, and short-term interest rates remained very low.

But towards month-end the mood changed after the decision to downgrade Greek debt to “junk” status, and to reduce the credit ratings of both Portugal and Spain.

There was a fear that the contagion would spread still further, and that the bond market pressures resulting from the massive fiscal deficits around the world would have serious financial consequences.

There was always the risk that some of the measures that were introduced to counter the recession might have adverse consequences, and this is now proving to be the case.

Shaw Capital Management Korea: Major Equity Markets

After moving ahead for most of the month, most of the major equity markets are ending the period unchanged or slightly higher, and there have been sharp falls in many of the minor markets.

Wall Street has been the exception, and is ending higher, encouraged by some favourable corporate results.

But markets in Europe, including the UK, are lower, and there have been falls in the Chinese market, and other Asian markets, after the measures by the authorities to reduce the risk of over-heating in the Chinese economy.

However views about longer-term prospect are still fairly positive, and the markets seem to be simply pausing until some of the uncertainties have been resolved.

Bond markets; have produced a mixed performance,with the major markets holdings fairly steady, despite the worsening background situation, but with the minor markets, especially in Europe, suffering very sharp falls, and yield spreads between the stronger and weaker markets opening up to record levels.

The threat of sovereign debt defaults has increased and urgent action is needed, especially in Europe, if they are to be avoided.

However there are also warnings that similar conditions could develop in the UK and in Japan if there are no early moves to reduce the level of fiscal deficits.

It is still expected that an aid package will be agreed to avoid a default on Greek debt; but this may only provide temporary relief.

Shaw Capital Management Korea: Currencies

Movements amongst the major currencies have been relatively small over the past month.

However the weakness of the euro has enabled both the dollar and sterling to improve as investors have rushed to reduce their exposure to the European currency.

There is a fear that the debt problems affecting Greece and other countries in the euro-zone will make it extremely difficult to restore the credibility of the euro, and that it might make it necessary for some countries to leave the single currency system, at least on a temporary basis.

Shaw Capital Management Korea: Short-Term Interest Rates

There have been no changes in short-term interest rates in the major financial centres over the month.

The Bank of Canada though has indicated that it is considering pushing rates higher, and this has encouraged speculation that other central banks may be planning similar moves.

Shaw Capital Management Korea: Commodity Markets

Moved higher over the past month as sentiment in the financial markets improved.