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Aon Retirement and Investment Blog

Weekly Update - 09 April 2018 (UK/Europe)


  • Global equities continued to be under pressure as concerns over escalating trade tension between the US and China dominated markets. The US-China trade dispute entered another phase with President Donald Trump threatening to impose tariffs on an additional $100bn of Chinese imports increasing the likelihood of Beijing reciprocating with retaliatory tariffs on US goods. The MSCI AC World Index fell 0.5% in local currency terms and 1.0% in sterling terms. The UK was the best performing region in local currency terms (1.9%) predominantly driven by the Energy and Consumer Staples sector. The US was the worst performing region both in local currency (-1.3%) and sterling terms (-1.7%) mainly due to the continuing sell-off in the technology sector.
  • UK gilt yields rose across the curve. The 10 year UK gilt yield rose by 6bps to 1.41% and the 20 year UK gilt yield rose by 8bps to 1.77%. The 10 year US treasury yield rose 4bps to 2.78% despite the news that US Job growth data missed estimates. European government bond yield movements were generally small across the region. The 10 year German bund yield rose by 1bp to 0.50% and the 10 year French government bond yield rose by 2bps to 0.74%.
  • The UK 20 year real yield rose by 6bps to -1.62% and the Over 5 year real yield rose by 7bps to -1.57%. 20 year breakeven inflation remained unchanged at 3.34%.
  • The US high yield bond spread over US treasury yields fell by 15bps to 364bps over the week. The spread of USD denominated EM debt over US treasury yields fell by 7bps to 295bps.The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose 1bp to 114bps.
  • The S&P GSCI fell 2.1% in USD terms over the week. The energy sector fell by 3.6% as the price of Brent crude oil decreased by 3.2% to US$67/BBL. Industrial metals increased by 0.7% as copper prices increased by 0.3% to US$6,703/MT. Agricultural prices rose by 1.2% and gold prices rose by 0.3% to US$1,328/ounce.
  • Sterling appreciated against major currencies over the week. The US dollar depreciated by 0.4% against sterling, ending the week at $1.41/£. The euro weakened by 0.7% against sterling, finishing the week at €1.15/£. The Japanese yen depreciated by 0.7% against the US dollar, ending the week at ¥107.11/$. 
  • Economic data in the US was largely disappointing compared with consensus estimates. The Institute of Supply Management's (ISM) manufacturing index, a forward-looking gauge of economic activity, slipped from 60.8 and moved to 59.3; failing to meet expectations of 59.6 and indicating deceleration in the sector. All sub-components of the headline ISM index moved lower with the exception of the ISM Prices Paid index which rose 3.9 points to a seven-year high of 78.1. The effects of tariffs on steel and aluminum imports were thought to have led to panic-buying and a short-term boost to prices. The increase in non-farm payrolls along with the unemployment rate also failed to meet consensus estimates with only 103k jobs being added to the economy, lower than February's upwardly revised 326k jobs and expectations of 185k while the US unemployment rate stayed at 4.1%. However on the positive side, wage growth data was encouraging as average hourly earnings picked up to 2.7% for the year to March from 2.6%.
  • In the UK, there was little in the way of economic data releases over the week aside from the Purchasing Managers' Index (PMI) readings for March. The manufacturing PMI unexpectedly rose to 55.1 in March, after the previously reading was revised lower to 55.0. Markets had predicted the PMI to tick down to 54.7. Conversely, the services PMI ticked down from 54.5 to 51.7, against analyst expectations of a reading of 54.0. Similarly, the construction PMI came in lower than expected for March at 47.0, versus 51.0 predicted and 51.4 previously. The latter has now moved back into contractionary territory following five months of growth in the sector. These movements led the composite PMI 2 points lower to 52.5, thereby failing to meet the estimated reading of 54.0.
  • In the Eurozone, data releases over the week were largely in line with expectations. Final PMIs for March were broadly in line with expectations. The manufacturing PMI came in as expected at 56.6, down slightly from December's record high. The final German PMI readings for March were a little disappointing with the manufacturing and services PMIs both moving lower, moving to 58.2 and 53.9 respectively from 58.4 and 54.2. Inflation data for the Eurozone in March showed headline inflation rising as expected to 1.4% on an annual basis from 1.1% previously. Core inflation, however, remained at 1.0% year-on-year, marginally under expectations. Industrial production data for Germany in February was disappointing, declining 1.6% over the month from the previous 0.1% growth and short of analyst forecasts of 0.2% growth. Retail sales in Germany failed to meet expectations of a 0.7% increase, declining a further 0.7% over February after the previous month's 0.3% decrease.
  • Japanese economic data had a weaker tone. The Bank of Japan’s Q1 2018 Tankan survey revealed a slightly pessimistic outlook for the Japanese manufacturing sector due to the strength in the yen. The closely watched Tankan large manufacturer’s index fell to 24 from the previous reading of 26. Meanwhile, labour cash earnings rose by 1.3% for the year to February against a forecasted increase of 0.5%. However, real wages fell by a further 0.5% over the same period after decreasing by 0.6% previously. The Nikkei services PMI fell to 50.9 from 51.7, recording the slowest growth in the sector in 17 months.
  • The Caixin manufacturing PMI, which focuses more on small and mid-sized Chinese businesses, moved to 51.0 from 51.6 and below expectations of 51.7. Similarly, the services sector also decelerated with the services PMI falling by 0.9 points to 52.3.
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