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Aon Retirement and Investment Blog

Weekly Update - 07 August 2017 (UK/Europe)


  • Global equity markets generated positive returns over the week supported by strong corporate earnings and broadly positive economic data. The MSCI AC World Index rose 0.6% in local currency and 1.1% in sterling terms due to sterling depreciation. All the regions delivered positive returns both in local currency and sterling terms. The UK was the best performing region with a return of 2.0% as sterling weakened following the gloomier economic outlook in the Bank of England's (BoE) latest quarterly inflation report, which benefited exporters’ stocks. The US returned the least in local currency terms (0.2%) whilst the Developed Pacific (excluding Japan) region returned the least in sterling terms (0.6%).
  • UK gilt yields fell across maturities except at the short end of the curve. The 10 year UK gilt yield fell by 5bps to 1.22% and the 20 year UK gilt yield fell by 3bps to 1.80% after the BoE lowered its growth and inflation forecasts. US treasury yields spiked higher towards the end of the week supported by a stronger than expected increase in non-farm payrolls. However, the 10 year US treasury yield fell by 2bps to 2.27% over the week as a whole. European government bond yields fell across the region (except for Greece). The German 10 year Bund yield fell by 6bps to 0.42% while the 10 year French government bond yield fell by 8bps to finish the week at 0.75%.
  • UK real yields fell over the week. The 20 year real yield fell by 4bps to -1.58% and the Over 5 year real yield fell by 5bps to -1.56%. 20 year breakeven inflation remained unchanged at 3.29%.
  • The US high yield bond spread over US treasury yields rose by 4bps to 363bps. The spread of USD denominated EM debt over US treasury yields finished the week 4bps lower at 301bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) remained unchanged at 105bps.
  • The S&P GSCI fell by 0.5% in USD terms over the week. The energy sector fell by 0.2% despite the price of Brent crude oil increasing by 0.7% to $53/BBL. Industrial metals rose by 0.7% as copper prices increased by 0.8% to $6,348/MT. Agricultural prices fell by 2.9% and gold prices fell by 0.8% to $1,258/ounce.
  • Sterling depreciated against major currencies over the week. The US dollar appreciated by 0.6% against sterling, ending the week at $1.30/£. The euro strengthened by 0.7% against sterling, finishing the week at €1.11/£. The Japanese yen appreciated by 0.1% against the US dollar, ending the week at ¥110.89/$.
  • In the US, the manufacturing sector continues to expand albeit at a slower pace as the Institute of Supply Management's (ISM) manufacturing index showed a fall from a three year high of 57.8 to 56.3, which was slightly below expectations of 56.5. The US Federal Reserve's (Fed) preferred yardstick for inflation, the change in the core Personal Consumption Expenditures price index, remained at 1.5% in the year to June; below the Fed's target of 2%. Meanwhile, US job creation continues to be strong as the US economy added 209k jobs in July, above consensus forecasts of 180k jobs while June's job numbers were upwardly revised to 231k from 222k. As expected, the unemployment rate fell to 4.3% from 4.4%; the lowest level since March 2001.
  • In the UK, the Bank of England's quarterly inflation report indicated the central bank's expectation that Brexit will weigh on the economy as GDP growth for 2017 was revised lower to 1.7% from 1.9%. Current economic data, however, remains more resilient as growth in the manufacturing sector gathered pace. The manufacturing Purchasing Managers' Index (PMI) outperformed expectations of increasing to 54.5 and rose to 55.1 from 54.2, boosted by a strong increase in new export orders. The Nationwide House Price Index defied expectations of a 0.1% decline over July and increased by 0.3% which has taken the annual increase to 2.9%, down from 3.1%. Construction activity disappointed over July with the Construction PMI falling to an eleven month low of 51.9 from 54.8 in June.
  • Eurozone releases over the week were largely positive, with GDP growth of 2.1% for the year to June. The pace of economic expansion matched analyst forecasts while moving higher from 1.9% in the previous period. Eurozone unemployment, long a scourge to policymakers, fell to its lowest level in eight years. Unemployment fell to 9.1% in June from 9.2%. Yet, there remains substantial slack in the labour market which continues to absorb inflationary pressures with annual consumer price inflation, as measured by the Consumer Price Index, remaining at 1.3%. There was further positive news as retail sales outperformed expectations of 2.5% growth and increased by 3.1% in the year to June; up from the 2.4% increase seen in the previous period. German retail sales increased by 1.1% over June, above both forecasts of 0.2% growth and the previous increase of 0.5%. Unemployment in Germany was unchanged at 5.7%, as expected.
  • Japanese economic data was fairly lacklustre. Wage growth data disappointed due to a fall in bonus payments as labour cash earnings fell by 0.4% in the year to June against a forecasted increase of 0.5%. Real wages, which takes inflation into consideration, fell by its fastest rate in 24 months; falling by 0.8% over the year to June. The services PMI fell to 52.0 from 53.3 while the finalised manufacturing PMI was marginally revised downwards to 52.1 from 52.2. However, the provisional release for annual industrial production growth improved from -3.6% in May to 1.6% in June, which was ahead of the estimated 1.5% increase.
  • In China, PMI releases painted a fairly mixed picture for the economy. While still being in expansionary territory, the official manufacturing and non-manufacturing PMIs moved lower indicating a deceleration for both sectors. The manufacturing PMI slipped to 51.4 from 51.7 while the non-manufacturing PMI fell from 54.9 to 54.5. Conversely, the Caixin manufacturing PMI, which focuses more on small and mid-sized businesses, unexpectedly rose over July, moving to 51.1 from 50.4.
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