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Aon Retirement and Investment Blog

Weekly Update - 24 April 2017 (UK/Europe)

NEW INTELLECTUAL CAPITAL

MARKET MOVES
  • Global equities over the week were impacted by geo-political tensions with North Korea, uncertainty over the first round of French elections and the UK Prime Minister's announcement of a snap general election in June. Despite this, markets edged higher over the week, helped by better than expected US corporate earnings. The MSCI AC World Index rose 0.4% in local currency terms. However, broad sterling strength pushed down returns in sterling terms to -1.5% as the UK election announcement was expected to strengthen the Prime Minister’s hand in EU negotiations and lead to a softer Brexit. Japan was the best performing market both in local currency (1.8%) and sterling terms (-0.1%) driven by strong economic data. The UK was the worst performing market in local currency terms (-2.8%) on the back of the impact of a stronger pound on UK listed exporters. Developed Asia Pacific ex Japan was the worst performing region in sterling terms (-3.4%).
  • UK gilt yields ended the week close to where they started; the 10 year UK gilt yield fell by 1bp to 0.98% whilst the 20 year UK gilt yield remained unchanged to end the week at 1.67%. The 10 year US treasury yield rose by 1bp to 2.24%. European government bond yields were mixed across the region; German bund yields rose by 7bps to finish the week at 0.25% whilst French government bond yields fell by 4bps to 0.88% as they showed resilience ahead of French elections.
  • UK real yields rose over the week due to a fall in breakeven inflation. 20 year real yield rose by 9bps and the Over 5 year real yield rose by 8bps to end the week at -1.82% and -1.81% respectively. 20 year breakeven inflation fell by 9bps to 3.41%.
  • The US high yield bond spread over US treasury yields fell by 6bps to 397bps. The spread of USD denominated EM debt over US treasury yields finished the week 2bps lower at 314bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 1bp to 122bps.
  • The S&P GSCI fell by 4.6% in USD terms over the week. The energy sector fell by 6.6% as the price of Brent crude oil declined by 5.3% to $53/BBL. Crude oil prices fell due to an unexpected increase in US gasoline stockpiles. Industrial metals fell by 0.9% as copper prices decreased by 1.2% to $5,594/MT. Agricultural prices fell by 2.4% whilst the gold price remained flat at $1,286/ounce.
  • Sterling strengthened against major currencies over the week as the pound rallied on expectations of a major win for May’s Conservative party in the upcoming general elections. The US dollar depreciated by 2.0% against sterling, ending the week at $1.28/£. The euro weakened by 1.5% against sterling, finishing the week at €1.20/£. The Japanese yen appreciated by 0.1% against the US dollar, ending the week at ¥109.09/$.
ECONOMIC RELEASES
  • Economic data last week further signaled some moderation in US economic activity. The provisional reading for the Markit Manufacturing Purchasing Managers' Index (PMI) slipped from 53.3 to a seven month low of 52.8. Markets had predicted an increase to 53.8. The services sector also showed signs of slowing as the Services PMI fell by 0.3 points to 52.5. An unexpected drop in new home construction in March amid a cooling of homebuilder confidence (the National Association of Homebuilders’ Housing Market Index dropped from 71 points to 68) added to a sense of a broader moderation in the economy. However, industrial production rose by 0.5% in the three months to March, in line with consensus estimates but above the 0.1% growth over the previous period.
  • Retail sales were the only major economic release from the UK this week. Retail sales posted their biggest quarterly fall since 2010 as higher inflation pushed prices up for consumers. The latest figures for March showed month-on-month retail sales growth (including fuel) was 1.3% lower than expected at -1.8% and similarly sales (excluding fuel), was 1.0% lower than expected at 1.5%. However, both figures for February were revised upwards by 0.3% to 1.7% and 1.6% respectively.
  • The Eurozone economy started the second quarter strongly as the provisional Manufacturing and Services PMI data for April went against expectations of a decline and increased. The manufacturing PMI rose from 56.2 to 56.8 and the services PMI rose from 56 to 56.2. The overall composite index rose from 56.4 to 56.7; the highest level since April 2011. In Germany, the Manufacturing PMI was largely unchanged as it fell 0.1 points to 58.2, remaining near a six year high. An advance reading of the Eurozone consumer confidence survey for April by the European Commission was close to its highest level for nine years. The index rose from -5.0 to -3.6 points which was also above the -4.8 points expected.
  • Economic releases continued to be positive in Japan. The Nikkei Flash manufacturing PMI remained in expansionary territory and increased to 52.8 in April from the previous reading of 52.4 largely due to strong growth in export orders. Japan recorded a trade surplus of ¥614.7bn in March, down from the surplus of ¥813.5bn posted in February but ahead of the estimated ¥608.0bn surplus. Imports rose by 15.8% over the year to March, beating expectations of a 10.0% increase. However, exports outperformed analyst forecasts by a significant margin, rising at 12.0% which was almost twice the forecasted increase of 6.2% over the same period. The robust growth in exports was driven by increases in shipments to China and the US.
  • There was positive economic data emanating from China last week as GDP growth accelerated in the first quarter of 2017. The Chinese economy advanced by 6.9% over the year to March which was above forecasts of growth to remain at 6.8%. Both industrial production and retail sales outperformed expectations, rising by 7.6% and 10.9% respectively over the year. Fixed asset investment over the first quarter, which also came in above expectations at 9.2% compared with the same period last year, supported the higher than expected GDP growth figure.

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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