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Aon Retirement and Investment Blog

Weekly Update - 10 April 2017 (UK/Europe)


  • Global equities had a lackluster start to the second quarter as the MSCI AC World Index drifted down by 0.1% in local currency terms over the week. US Federal Reserve meeting minutes confirmed the trend of monetary tightening whilst disappointing US employment data and increasing eco-political tensions with Syria only slightly unnerved equity markets. Equity markets rose 0.6% in sterling terms. Emerging markets were the best performing region both in local currency (0.7%) and sterling terms (1.3%). Japan continued to be the worst performing market in local currency terms (-1.4%) as yen strength hurt exporter stocks. It was also the worst performing market in sterling terms, returning 0.1%.
  • UK gilt yields fell across most maturities except at the short end of the curve. The 10 year UK gilt yield fell by 5bps and the 20 year UK gilt yield fell by 4bps to end the week at 1.03% and 1.70% respectively. The 10 year US treasury yield fell by 2bps to 2.37%. Yields hit a low of 2.27% on Friday due to the disappointing US employment report but later recovered on speculation regarding the pace of the US Federal Reserve’s reduction of its $4.5 trillion balance sheet. European government bond yields generally fell across the region. German bund yields fell by 10bps to finish the week at 0.23% and French government bond yields fell by 8bps to 0.88%. Italian 10 year bond yields rose by 8bps to end the week at 2.21%.
  • 20 year real yields fell by 13bps and the Over 5 year real yield fell by 12bps to end the week at -1.87% and -1.83% respectively. 20 year breakeven inflation rose by 8bps to 3.47%.
  • The US high yield bond spread over US treasury yields fell by 6bps to 386bps. The spread of USD denominated EM debt over US treasury yields finished the week 4bps lower at 306bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) remained unchanged at 121bps.
  • The S&P GSCI rose by 1.7% in USD terms over the week. The energy sector rose by 3.2% as the price of Brent crude oil rose by 4.9% to $55/BBL partly due to the US launch of missile attacks on a Syrian air base. Industrial metals fell by 0.8% as copper prices decreased by 0.3% to $5,799/MT. Agricultural prices fell by 1.0%. Gold prices rose by 1.5% to $1,266/ounce on the back of increased demand for safe haven assets.
  • Sterling weakened against most major currencies over the week, dragged down by weak industrial output data. The US dollar appreciated by 0.9% against sterling, ending the week at $1.24/£. The euro weakened by 0.2% against sterling, finishing the week at €1.17/£. The Japanese yen appreciated by 0.6% against the US dollar, ending the week at ¥110.74

  • Economic data was fairly mixed in the US last week. The keenly watched ISM Manufacturing index slipped by 0.5 points to 57.2 but, given that it remains well above the key 50 level, the manufacturing sector continued to expand. The unemployment rate fell to a 10 year low of 4.5%; below both last quarter's reading and consensus estimates of 4.7%. However, nonfarm payrolls grew by just 98,000 compared with the 180,000 forecasted. Against a still tightening labour market, annual average hourly earnings growth met forecasts of 2.7% - slightly lower than February's reading of 2.8%. The fall in the US trade deficit to $43.6bn, which was expected to be $44.6bn, was welcomed by the US administration who have placed shrinking the trade deficit at the forefront of US policy.
  • In the UK, the pace of manufacturing sector growth showed signs of slowing as the Manufacturing Purchasing Managers Index (PMI) for March went against consensus and fell marginally from the revised 54.5 in February to 54.2. In contrast, the Services PMI beat forecasts and rose from 53.3 to 55.0 in March. This helped to push up the overall PMI composite from 53.8 to 54.9. Industrial production surprised analysts as it fell yet again in February; production was 0.7% lower than the previous month whilst analysts had expected a 0.2% increase. The fall was driven by declines across all sectors but particularly lower energy consumption this year. The UK trade deficit in goods and services was much larger than expected in February, increasing from the revised £3.0bn in January to £3.7bn in February. Survey forecasts expected the trade deficit to narrow to £2.2bn.
  • Eurozone economic data was largely as expected on the whole. The composite PMI figure for March was revised down from the flash estimate of 56.7 to 56.4 but remained above February's reading of 56.0 driven by strong growth in both France and Germany. Unemployment fell by 0.1%, as expected, to 9.5% in February, which is the lowest level since May 2009. The industrial producer prices index (PPI) rose in February by 4.5% from a revised 3.9%% in February (the highest level in more than five years); the increase was 0.3% more than forecasted. Monthly industrial production in Germany impressed in February, rising 0.2% ahead of forecasts at 2.2%.
  • Japanese economic data was generally strong. The Bank of Japan’s Q1 2017 Tankan survey revealed an optimistic outlook for the economy but fell short of analyst expectations. The Tankan large manufacturer’s index rose to 12 from the previous reading of 10, reaching an 18-month high. The final reading of the Nikkei composite PMI was revised up to 52.9 in March from 52.2 as the services PMI rose to 52.9 from 51.3. However, the final manufacturing PMI was marginally revised downwards to 52.4 from 52.6 over the same period. Wage growth data disappointed as labour earnings rose by 0.4% in the year to February Real wages, which takes inflation into consideration, remained flat over the same period.
  • There was little economic data released in China last week. Similar to the Caixin China Manufacturing PMI released in the previous week, the Services PMI slipped by 0.4 points to 52.2. China's foreign exchange reserves rose by $4bn to $3,009bn, supporting views that the reserve level has stabilized after resuming to fall last year.

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