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Aon Hewitt Retirement and Investment Blog

Weekly Update - 18 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.
  • Aon Hewitt's Datta Says U.K. Consumer Will Be Strained Tapan Datta, head of Global Asset Allocation at Aon Hewitt, and Bloomberg Gadfly's Andrea Felsted discuss the U.K consumer and the potential for an interest rate hike by the BOE. They speak to Bloomberg's Manus Cranny and Matt Miller on "Bloomberg Daybreak: Europe." 
MARKET MOVES
  • Global equity markets fell in a holiday shortened week as lingering geo-political issues continue to weigh on equity markets, especially following rising tensions in North Korea and Syria. The MSCI AC World Index fell 0.9% in local currency terms and sterling strength compounded weak domestic equity returns further, pushing down returns in sterling terms to -1.6%. All regions posted negative returns except for the Developed Asia Pacific (excluding Japan) region which returned 0.5% in local currency and 0.1% in sterling terms. Japan continued to be the worst performing market in local currency terms (-2.0%) as renewed yen strength continued to weigh on the export-sensitive economy. The US was the worst performing market in sterling terms (-2.1%) as the US dollar fell sharply against sterling.
  • UK gilt yields fell across all maturities. The 10 year UK gilt yield fell by 4bps and the 20 year UK gilt yield fell by 3bps to end the week at 0.98% and 1.67% respectively. The 10 year US treasury yield fell by 15bps to 2.23% (hitting a five-month low) on the back of Trump’s comments about the US dollar which suggested that the US Federal Reserve should keep interest rates low as the strong US dollar was hurting the economy. European government bond yields were mixed across the region. German bund yields fell by 4bps to finish the week at 0.19%. French government bond yields rose by 4bps to 0.92% due to mounting political uncertainty in the upcoming French Presidential elections, as anti-euro socialist candidate Jean-Luc Mélenchon has surged in recent polls.
  • UK real yields fell over the week due to an increase in breakeven inflation. The 20 year real yield fell by 5bps and the Over 5 year real yield fell by 6bps to end the week at -1.92% and -1.89% respectively. 20 year breakeven inflation rose by 3bps to 3.50%.
  • The US high yield bond spread over US treasury yields rose by 17bps to 403bps. The spread of USD denominated EM debt over US treasury yields finished the week 10bps higher at 316bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index)remained unchanged at 121bps.
  • The S&P GSCI rose by 1.0% in USD terms over the week. The energy sector rose by 1.3% as the price of Brent crude oil continued on an upward trend, rising by 1.4% to US$ 56/BBL.Industrial metals fell by 2.5% as copper prices decreased by 2.4% to $5,660/MT. The agricultural sector bucked a recent trend and rose by 1.3% whilst gold prices rose by 1.6% to$1,286/ounce as political uncertainty increased.
  • Sterling strengthened against major currencies over the week with the exception of the yen,which benefited from its safe haven status. The US dollar depreciated by 1.0% against sterling, ending the week at $1.25/£. The euro weakened by 0.9% against sterling, finishing the week at €1.18/£. The Japanese yen appreciated by 1.4% against the US dollar, ending the week at ¥109.24/$.
ECONOMIC RELEASES
  • Economic data was fairly mixed in the US last week. Both consumer and producer price inflation came in lower than expected. Annual consumer price inflation dropped to 2.4%, below expectations of a 2.6% increase in prices. Consumer prices in March dropped by 0.3% on the back of a sharp fall in gasoline prices. Meanwhile, there was disappointment from the advance figures for March retail sales which saw a monthly fall of 0.2% – a second successive month of retail falls. Demand for vehicles softened over March; retail sales (excluding vehicles) rebounded 0.5% following a downward revision to the previous month to a 0.2% decline. Despite the disappointing news, consumer confidence remained buoyant with the University of Michigan's confidence index increasing to 98.0 from 96.9, above expectations of a slight decrease to 96.5.
  • In the UK, consumer price inflation met expectations and remained unchanged at 2.3%, as lower airfares offset rising food and clothing prices. CPIH, the Office for National Statistics' newly adopted measure for inflation (which includes owner-occupied housing costs and council tax) also came in at 2.3%. Unemployment remained steady at 4.7% in March whilst nominal wage growth came in above consensus forecasts at 2.3%, which failed to outstrip price growth. Whilst UK house price growth rose to 5.8% from 5.3% in the year to March, it underperformed expectations of stronger 6.1% growth.
  • Eurozone economic data was largely mixed. Industrial production underwhelmed as annual production growth was only 1.2%, below estimates of 1.9% growth. Monthly production growth slipped by 0.3%. The fall was largely driven by contractions in energy and non-durable consumer goods productions. Investor sentiment in the region performed better with the Sentix investor confidence index advancing by 3.2 points to 23.9 – the highest level since 2007. Similarly, economic sentiment in Germany improved significantly as the ZEW Economic Sentiment Survey rose to its highest levels since the UK's EU referendum last summer. April's measure of Germany's economic outlook increased to 19.5 from 12.8 which was also well above forecasts of a milder increase to 14.8.
  • Japanese economic data was encouraging in what was a fairly light week in terms of economic releases. A widening of the trade surplus (as a result of exports rising at a faster rate relative to imports) led to the sharp increase in current account surplus to ¥2813.6bn from ¥65.5bn. The finalised figure for industrial production growth over February was revised up to 3.2% from 2.0%. Machine orders rose by 1.5% in February, which was less than the forecasted 3.6% increase. The Producer Price Index (PPI) continued on an upward momentum as the index rose by 1.4% over the year to March (the fastest pace since December 2014) on the back of increases in export prices.
  • There was broadly positive economic data emanating from China last week. Consumer price inflation increased marginally to 0.9% for the year to March albeit below expectations of inflation at 1.0%. Conversely, producer price inflation moderated slightly to 7.6% partly on the back of falling energy and chemical prices, but was above forecasts of 7.5% growth. Exports rebounded strongly in the year to March, increasing by 16.4% after an unexpected 1.3% decline in the year to February. Whilst imports also surprised on the upside, the strong growth in exports led to a widening of the trade surplus to $23.9bn.
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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