In the third quarter of 2007, credit markets were hit everywhere as the sub-prime loans crisis in the US went global. The cost of securitized debt rose sharply and banks became fearful of lending to each other. As a result, interbank rates moved out sharply from the policy rates set by central banks. The resulting credit squeeze forced central banks to flood markets with extra liquidity and in the case of the Federal Reserve to cut its funds rate by 50 basis points.
Despite this, global equity markets were relatively resilient. Indeed, they rose 0.5% in the quarter, and the S&P 500 index appreciated by 1.6%, outperforming Europe and Japan for the first time in many a quarter, as those equity markets fell sharply, by 3.4% and 7.5% respectively. Emerging market equities, after suffering a drop following the initial credit squeeze in August, rallied hugely to end up 11.8%....
