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Aon Retirement and Investment Blog

Weekly Update - 29 August 2017 (UK/Europe)


  • Global equity markets generated modest returns in what was a light trading week. Reports of encouraging developments on US tax reforms triggered an initial equity rally but it failed to sustain over the week. Meanwhile investors were focused on monetary policy guidance from the central bankers’ meeting at Jackson Hole but there was little new information to be garnered from the various speeches. The MSCI AC World Index rose 0.7% in local currency and 0.8% in sterling terms. Emerging markets continued to be the best performing region both in local currency (1.9%) and sterling terms (2.3%), predominantly driven by Brazilian equities on the back of the government’s plan to privatize state assets. Japan continued to be the worst performing region both in local currency (-0.2%) and sterling terms (-0.8%).
  • UK gilt yields fell across all maturities. The 10 year UK gilt yield fell by 3bps to 1.10% and the 20 year UK gilt yield fell by 4bps to 1.69%. The 10 year US treasury yield fell by 3bps to 2.17%. European government bond yields were mixed over the week as uncertainties around the European Central Bank monetary policy weighed on the peripheral bond markets (except Greece). German bund yields fell by 4bps to 0.31% and French government bond yields fell by 1bp to finish the week at 0.69% whilst Portuguese and Italian bond yields rose by 12bps and 8bps to finish the week at 2.89% and 2.10% respectively.
  • UK real yields fell over the week. The 20 year real yield fell by 7bps to -1.73% and the Over 5 year real yield fell by 6bps to -1.70%. 20 year breakeven inflation rose by 3bps to 3.34%.
  • The US high yield bond spread over US treasury yields fell by 9bps to 389bps. The spread of USD denominated EM debt over US treasury yields finished the week 4bps lower at 302bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 1bp to 108bps.
  • The S&P GSCI fell by 0.4% in USD terms over the week. The energy sector fell by 0.7% despite the price of Brent crude oil increasing by 2.1% to $52/BBL. Industrial metals rose by 1.1% as copper prices increased by 3.0% to $6,649/MT. Agricultural prices fell by 0.6% and gold prices fell by 0.2% to $1,293/ounce.
  • Sterling appreciated against major currencies, except the euro, over the week. The US dollar depreciated by 0.2% against sterling, ending the week at $1.29/£. The euro strengthened by 0.9% against sterling, finishing the week at €1.08/£. The Japanese yen depreciated by 0.4% against the US dollar, ending the week at ¥109.26/$.
  • Economic releases were mixed in the US. Employment claims were broadly in line with expectations, with initial jobless claims at 234k, versus 238k expected and continuing claims came in at 1,954k, against 1,950k expected. The Markit manufacturing PMI reported for August was lower than expected at 52.5 against 53.5, however the services PMI increased 2.2pts to 56.9, higher than the 55.0 expected and its highest level since April 2015. The overall composite index ticked up to 56.0 from 54.6 previously. New home sales for July fell 9.4% to 570k, undershooting the predicted and previous 620k. Existing home sales fell 1.3% over the month of July, however remained up 2.1% year-on-year. Elsewhere, MBA mortgage applications fell 0.5% last week, from the 0.1% increase previously. Core durable goods orders (ex-transportation) for July grew slightly above analyst forecasts at 0.5%, while the capital goods new orders (ex-aircraft) grew as expected at 0.4%.
  • In the UK, preliminary readings of Q2 GDP growth were as forecasted, increasing 0.3% over the quarter, and 1.7% year-on-year, unchanged from previous readings. The CBI’s Industrial Trends survey continued to paint a positive picture, with the output expectations and orders indices both moving higher. July borrowing data was lower than expected, with public sector net borrowing at -£0.8bn against £0.3bn expected and private sector net borrowing for July at -£0.2bn against £1.0bn expected. House prices for August as reported by Rightmove decreased over the month by 0.9%, down from the 0.1% increase last month, although remaining up 3.1% year-on-year.
  • In the Eurozone, the Markit Composite PMI for August came in at 55.8, slightly above the 55.5 expected. As did both of the Manufacturing and Services PMIs for the Eurozone; with reported readings of 57.4 and 54.9 respectively. Consumer confidence for the Eurozone for August unexpectedly increased, up to -1.5 from -1.7 previously and compared with expectations of -1.8. However, the ZEW expectations index for August fell to 29.3 from 35.6, predominantly driven by a decrease in the expectations index for Germany. August’s reading for Germany disappointed, at a reading of 10 versus 15 expected and 17.5 previously, partly impacted by concerns that the rising Euro will weigh on the economy as well as the widening diesel car scandal.
  • Japanese economic data was broadly positive in what was a light week for economic releases. Headline annual consumer price inflation was unchanged at 0.4% in July. Core CPI, which excludes fresh food and energy, rose by 0.1% over the same period, and met consensus estimates. Growth in the Japanese manufacturing sector picked up with the preliminary Nikkei manufacturing PMI rising from 52.1 to 52.8 in August.
  • There was very little in the way of data releases for China over the week. Reported Industrial profits for July grew 16.5% year-on-year, decreasing from the previous month's 19.1% growth.
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