Global equity markets generally performed strongly in December 2010. In the US optimism about a continuing recovery was fuelled by positive economic reports, while healthy macroeconomic data supported growth in the UK, Europe and emerging markets. Asian equities were also broadly higher, helped by rising commodity prices and an easing of fears over North/South Korean tensions. Longer-term concerns over European sovereign debt, US unemployment figures and growing inflationary pressures in China continued to have an impact, however. Fixed interest markets were more mixed - core government bonds and investment-grade bonds showed negative returns, while high yield and subordinated bank debt performed better.

In the UK the FTSE All-Share index ended the month 7% up, the strongest December performance since 1993, and was up 10.9% over the full year. This could be considered a little surprising given the uncertainty over UK economic conditions, chiefly the continuing level of inflation which has been above the Bank of England's target of 2% in 40 of the last 49 months. Reassuringly for the Government's plans for a sustainable recovery, all the GDP growth in the second half of the year came from the private sector, leading to hopes that government spending cuts and tax increases may not have a crippling effect on continuing economic growth.

The financial sector led a December rally in US stocks, with the S&P 500 index up 6.4% in US$ terms at its highest level since the collapse of Lehman brothers. The rally was underpinned by a 0.1% rise in the growth forecast for the third quarter, while consumer spending rose slightly in November and initial evidence pointed to strong Christmas sales. Consumers remain under pressure from a weak jobs market, however, as the rate of economic recovery has been too slow to generate enough jobs to dent the unemployment rate which has now been above 9% for 19 months.

European equity markets also had a good December, with the FTSE Europe ex UK index ending up over the year, as investors hoped that strong corporate results and improving macroeconomic data would counteract the impact of the continuing sovereign debt crisis. Moody's contributed to the seasonal festive spirit by downgrading Irish debt and warning that Spain and Greece could see another downgrade. Apart from the continuing inexorable German economic vorsprung there was also better news from some peripheral markets, with Portugal, Ireland and Spain all showing signs of a modest export-led recovery and even a slowing in the rate of the Greek decline.

Japanese equities had another good month and the Topix finished 6.2% higher as sentiment was buoyed by an upward revision in third quarter GDP figures to an annualised 4.5%. Hopes of an export-led recovery were dented by a rally in the Yen, however, and a Bank of Japan survey showed the first decline in business sentiment for two years.

While Asian equity markets were generally higher during the month, there was a general theme of inflation-controlling measures as price pressures rose. The Bank of China increased lending rates by 0.25% to 5.81%, while Thailand also increased borrowing costs following similar moves in Malaysia, Australia and Korea in November and observers now wait to see whether Indonesia will follow suit.

The rally in global emerging equity markets continued into December with a monthly rise of 7% in the MSCI Emerging Markets (US$) index, taking gains for the year to 16.4%. EMEA (Europe, Middle East and Africa) was the best performing region, spearheaded by double digit returns from South Africa, Russia and Poland. Although the Asian region was held back by underperformance in China, Taiwan and Korea both outperformed, and while Brazil was strongest in Latin America Mexico, Peru and Chile all showed good results.