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Aon Retirement and Investment Blog

Weekly Update - 30 April 2018 (UK/Europe)


  • Global equity markets edged higher over the week, supported by stronger than expected corporate earnings releases. The European Central Bank and the Bank of Japan both voted to keep their monetary policy unchanged. The MSCI AC World Index rose 0.4% in local currency terms, however broad sterling weakness pushed up returns to 1.4% in sterling terms. The UK was the best performing region in local currency terms (1.9%) despite economic growth falling to its slowest rate in five years, as weakening of the pound boosted returns on blue chip stocks which generate much of their revenue outside the UK. Japan was the best performing region in sterling terms, returning 1.9%. Emerging markets were the worst performing region both in local currency (-0.3%) and sterling terms (0.6%).
  • UK gilt yields fell across all maturities over the week as weak UK economic growth in Q1 2018 reduced expectations for an interest rate rise by the Bank of England in the upcoming monetary policy meeting. Both the 10 year and 20 year UK gilt yield fell by 4bps each to 1.46% and 1.84% respectively. The 10 year US treasury yield was unchanged at 2.96% after touching the 3.0% mark in a week in which Q1 2018 GDP data indicated a slowdown in the economy, but still beat analysts’ forecasts. European government bond yields fell across the region. Both the 10 year German bund yield and French government bond yield fell by 3bps each to 0.57% and 0.79% respectively.
  • The UK 20 year real yield fell by 2bps to -1.53% and the Over 5 year real yield fell by 3bps to -1.47%. 20 year breakeven inflation fell by 1bp to 3.31%.
  • The US high yield bond spread over US treasury yields rose by 11bps to 344bps over the week. The spread of USD denominated EM debt over US treasury yields rose by 12bps to 307bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) remained unchanged at 109bps.
  • The S&P GSCI fell by 0.1% in USD terms over the week. The energy sector rose by 0.3% as the price of Brent crude oil increased by 0.8% to US$75/BBL. Industrial metals declined by 5.6% as copper prices fell by 2.0% to US$6,797/MT. Agricultural prices rose by 2.5% whilst gold prices fell by 1.1% to US$1,322/ounce.
  • Sterling depreciated against major currencies over the week. The US dollar appreciated by 1.6% against sterling, ending the week at $1.38/£. The euro strengthened by 0.2% against sterling, finishing the week at €1.14/£. The Japanese yen depreciated by 1.3% against the US dollar, ending the week at ¥109.09/$.
  • The first reading for first quarter GDP growth indicated a slowdown in the US economy with year-on-year growth slowing to 2.3% from 2.9%. Although GDP growth came in above expectations of 2.0%, weakness in both consumer and business spending were enough to trigger a slowdown in the US economy, although last year's tax cuts are likely to make their presence felt in future quarters. We caught a glimpse of this positive influence with the increase in the forward-looking manufacturing Purchasing Managers' Index (PMI) which unexpectedly rose by 0.9 points to 56.5; above the 55.2 anticipated by analysts. The Conference Board's Consumer Confidence index also unexpectedly increased in April, rising from a downwardly revised 127.0 to 128.7. Finally, the number of Americans filing unemployment benefits declined to the lowest level in more than 48 years as initial jobless claims dropped by a seasonally-adjusted 24k to 209.
  • Economic releases were mixed in the UK. The provisional GDP data for the first quarter revealed that the UK economy grew at its slowest rate (quarter-on-quarter growth) in over five years, expanding just 0.1% over the quarter compared with market expectations of 0.3% and the previous quarter's reading of 0.4%. The ONS cited a combination of weaker manufacturing growth, subdued consumer-facing industries and construction output falling significantly as detracting from economic expansion. Year-on-year GDP growth also missed expectations, measuring 1.2%, from 1.4% previously and expected. Consumer confidence took an unexpected hit with the GfK's index dipping to -9 from -7. There was, however, positive news earlier in the week as the UK's net borrowing for March was broadly unchanged at £1.3bn from a revised £1.2bn and well below forecasts of £3.0bn.
  • In the Eurozone, the European Central Bank kept all three interest rates unchanged. Meanwhile, preliminary PMI data for April was softer than expected for the manufacturing sector, as the index declined to 56.0 from 56.6 in March and fell just shy of the forecasted 56.1. The decrease marked the second consecutive month of decline. Economic confidence in the Eurozone increased by 0.1 point to 112.7 and industrial confidence jumped from 6.4 to 7.1, beating expectations of 5.8. In Germany, the preliminary manufacturing PMI reading of 58.1 beat forecasts of 57.5 but could not arrest the downward trend seen since the start of the year. The IFO Business Climate reading for April was slightly behind expectations measuring 102.1 from 103.2 previously and 102.8 forecasted. Both of the IFO expectations and current assessment readings for Germany moved slightly lower and missed market forecasts measuring 98.7, versus 99.5 and 105, versus 106 previously.
  • In Japan, growth in industrial production slowed to 1.2% in March, down from the 2.0% increase in February but above expectations of a 0.5% increase. Retail sales missed forecasts of 1.5% growth, rising by only 1.0% in the year to March and slowing from an upwardly-revised growth rate of 1.7% in February. Japan's jobless rate remained unchanged at 2.5% in March. The Japanese manufacturing sector improved in April, with the preliminary Nikkei PMI manufacturing index rising to 53.3 from the previous month’s reading of 53.1.
  • In China, industrial profits grew at the slowest pace in 21 months as it rose by just 3.1% in the 12 months to March. The latest reading was significantly lower than the 10.8% increase recorded in February underscored by weaker gains made in the manufacturing sector and declining profits for ferrous metals producers.
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