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Aon Hewitt Retirement and Investment Blog

Weekly Update - 03 April 2017 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • Onshore Chinese Bonds Enter the Global Universe. China’s large onshore bond market is becoming increasingly open and transparent and its entry into bond indices will have a big impact on index composition and, consequently, bond investing. This timely piece examines recent Chinese financial market developments, characteristics of the Chinese bond market, and opportunities and risks associated with the opening of the Chinese bond market. 
MARKET MOVES
  • Global equity markets were supported by higher energy prices last week. The MSCI AC World Index rose 0.6% in local currency terms. Returns declined to 0.3% in sterling terms due to broad sterling strength. Developed Europe ex UK was the best performing region in local currency terms (1.6%). Japan was the worst performing market both in local currency (-1.0%) and sterling terms (-1.5%) dragged down by industrial and financial sectors. Developed Pacific ex Japan was the best performing region in sterling terms with a return of 1.2%.
  • UK gilt yields fell across all maturities in line with the government bond yields of major developed markets. The 10 year UK gilt yield fell by 6bps and the 20 year UK gilt yield fell by 5bps to end the week at 1.07% and 1.74% respectively. The 10 year US treasury yield fell by 1bp to 2.40%. European government bond yields generally fell across the region after the UK Prime Minister triggered article 50 and initiated the formal process for ‘Brexit’. German bund yields fell by 8bps to finish the week at 0.33% and French government bond yields fell by 4bps to 0.97%. Greek government bond yields fell by 57bps to 7.04% due to progressive talks on a bail-out deal with its creditors.
  • UK real yields fell over the week. Both the 20 year real yield and Over 5 year real yield fell by 4bps to -1.74% and -1.71% respectively. 20 year breakeven inflation fell by 1bp to 3.39%.
  • The US high yield bond spread over US treasury yields fell by 15bps to 392bps. The spread of USD denominated EM debt over US treasury yields finished the week 2bps higher at 310bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 1bp to 121bps.
  • The S&P GSCI rose by 2.7% in USD terms over the week. The energy sector rose by 5.0% as the price of Brent crude oil rose by 3.8% to $53/BBL. Crude oil prices rose after US crude inventories increased less than expected. Industrial metals rose by 0.4% as copper prices increased by 0.7% to $5,816/MT. Agricultural prices fell by 0.7% and the gold price fell by 0.1% to $1,247/ounce.
  • Sterling strengthened against major currencies over the week. The US dollar depreciated by 0.1% against sterling, ending the week at $1.25/£. The euro weakened by 1.1% against sterling, finishing the week at €1.17/£. The Japanese yen depreciated by 0.3% against the US dollar, ending the week at ¥111.43/$.
ECONOMIC RELEASES
  • Economic releases were largely positive in the US last week, as GDP growth for the fourth quarter of 2016 was revised up to 2.1% from 2.0%. Consumer confidence, as measured by the Conference Board Consumer Confidence index, outperformed expectations and surged to 125.6 from a revised 116.1; the highest level in 16 years. Based on provisional data, wholesale inventories rose by 0.4% after falling 0.3% in the previous month. Following a disappointing start to the year, the US housing market rebounded as the number of pending home sales increased by 5.5%; significantly outperforming expectations of a 2.5% increase.
  • In the UK, year-on-year Q4 GDP growth was confirmed at 1.9%, which was 0.1% lower than analyst expectations based on the previous reading. The UK's current account balance increased sharply from the revised -£27.7bn to -£12.1bn in the fourth quarter against the forecast £16.0bn deficit. This improvement can be partly attributed to the depreciation of sterling and the narrowing of the trade deficit following an increase of £7.6bn in exports. House prices fell for the first time since June 2015 in March as the Nationwide house price index unexpectedly fell by 0.3% which was well below consensus expectations of a 0.3% rise. Household spending power continues to be subdued as wage growth lags behind increasing inflation.
  • Inflation remains below the European Central Bank's target of 2% according to the latest Consumer Price Index (CPI) data. In the Eurozone, prices rose by 1.5% compared with 1.8% expected over the year to March; the lowest reading for 3 months. The latest reading for core inflation of 0.7% was also lower than expected. Similarly, German CPI inflation fell below expectations as prices rose 0.2%, well below expectations of 1.6%. Eurozone surveys for economic, industrial and services confidence were all below consensus estimates in March and also lower than the previous month. The number of people unemployed in Germany fell by 30k, which was 20k more than expected. This took the jobless rate, as measured by the unemployment claims rate, to a record low of 5.8%.
  • Japanese economic data had a mixed week. Headline CPI rose to 0.3% over the year to February beating analyst forecasts of 0.2%. Meanwhile, core inflation, which excludes both fresh food and energy, rose by 0.1% meeting expectations. The labour market strengthened in February as the jobless rate fell to a 22-year low of 2.8% whilst the job-to-applicant ratio remained unchanged at 1.43. Retail sales rose by 0.2% in February, less than the consensus estimate of a 0.3% increase. The provisional release for industrial production showed an increase of 4.8% over the year to February which was above consensus estimates of 3.9% growth.
  • Economic releases were broadly encouraging in China last week and pointed to a stronger economy. Both the manufacturing and non-manufacturing sectors continue to grow, as the latest official Purchasing Managers' Indices increased to 51.8 and 55.1 respectively. In particular, the latest manufacturing PMI reading was the highest reading since April 2012. The Caixin China Manufacturing PMI, however, unexpectedly slipped to 51.2 from 51.7 with slower growth in production and new orders attributed to the 0.5 point fall. China continues to run a current account surplus but the final reading for the last quarter of 2016 showed a steep decline in the surplus to $11.8bn.
The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs. Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given as of the date indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.


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