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Aon Hewitt Retirement and Investment Blog

Weekly Update - 31 July 2017 (UK/Europe)

NEW INTELLECTUAL CAPITAL MARKET MOVES
  • Global equity returns were broadly unchanged over the week with the MSCI AC World Index remaining flat in local currency terms. Advances in commodity prices failed to push up equity markets due to mixed corporate earnings reports and doubts over the Trump administration’s ability to implement the promised reforms. Broad sterling strength dragged returns down to -0.9% in sterling terms for unhedged UK investors. Emerging market equities were the best performing region in local currency terms (0.4%), supported by the International Monetary Fund’s upgrade of China growth forecasts for 2017. The UK was the worst performing region in local currency terms (-1.1%) in a week which saw the IMF downgrading UK growth 2017 forecasts. All regions delivered negative returns in sterling terms with Developed Pacific ex Japan falling the least at -0.3% and Japan falling the most at -1.3%.
  • UK gilt yields fell at the short end of the curve but rose at medium to long term maturities. The 10 year UK gilt yield rose by 4bps to 1.27% and the 20 year UK gilt yield rose by 3bps to 1.84%. The 10 year US treasury yield rose by 6bps to 2.29% as the US Federal Reserve indicated that it expected to begin trimming it’s $4.5 trillion balance sheet ‘relatively soon’ but kept interest rates unchanged. European government bond yields rose across the region (except Portugal). German bund yields rose by 4bps to 0.48% and French government bond yields rose by 8bps to finish the week at 0.83%.
  • UK real yields rose over the week. 20 year real yield rose by 3bps to -1.54% and the Over 5 year real yield rose by 5bps to -1.51%. 20 year breakeven inflation remained unchanged at 3.28%.
  • The US high yield bond spread over US treasury yields fell by 5bps to 359bps. The spread of USD denominated EM debt over US treasury yields finished the week 1bp lower at 305bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 1bp to 105bps.
  • The S&P GSCI rose by 4.2% in USD terms over the week. The energy sector rose by 7.6% as the price of Brent crude oil increased by 5.4% to $51/BBL. Oil prices rose after Saudi Arabia pledged to curb its oil exports and Nigeria agreed to cut its crude oil production. Industrial metals rose by 2.8% as copper prices increased by 5.4% to $6,296/MT. Agricultural prices fell by 1.3% whilst gold prices rose by 1.3% to $1,268/ounce.
  • Sterling appreciated against major currencies over the week as Q2 2017 GDP data met consensus estimates. The US dollar depreciated by 1.0% against sterling, ending the week at $1.31/£. The euro weakened by 0.2% against sterling, finishing the week at €1.12/£. The Japanese yen appreciated by 0.2% against the US dollar, ending the week at ¥110.96/$.
ECONOMIC RELEASES
  • In the US, the pace of economic expansion quickened over Q2 2017 with a 2.6% annualized rate of GDP growth; up from Q1’s 1.2% but narrowly below consensus estimates of 2.7%. This pick-up in growth was also accompanied by the first increase in the manufacturing Purchasing Managers' Index (PMI) since the index reached 55.1 in January. The manufacturing PMI outperformed forecasts of an increase to 52.3 and rose to 53.2 from 52.0 previously. Durable goods ordered surged by 6.5% over the month after declining by 0.1% in May. The release outperformed expectations of a more modest 3.9% growth and represented the fastest increase in orders in nearly three years. The US consumer also showed signs of resilience as the Conference Board's Consumer Confidence index unexpectedly rose from 117.3 to 121.1 in July, against the predicted slight decrease to 116.5.
  • After a difficult start to the week with the IMF lowering its 2017 GDP growth forecast for the UK from 2.0% to 1.7% on "weaker-than-expected activity", actual Q2 GDP data met analyst forecasts. Growth in the UK economy edged up by 0.3% in the three months to June, up from 0.2% in the first quarter. Year-on-year growth, however, slowed to 1.7% from 2.0%. The UK GfK Consumer Confidence reading decreased a further two points in July to -12. It has now returned back to the post-Brexit low recorded in July 2016. However, this pessimism was not shared by UK businesses as the CBI Business Optimism index rose to 5. Analysts had expected the index to fall to 0 from 1 over July.
  • In Europe, economic data releases were mixed over the week. The Markit Eurozone Manufacturing PMI for July disappointed slightly at 56.8, down from 57.4 and 57.2 expected, which in turn pushed the Markit Composite PMI index lower to 55.8 from 56.3. M3 money supply in the Eurozone grew as forecasted at 5.0% in the year to June, in line with the previous period. The final Eurozone consumer confidence reading for July was left unchanged at -1.7, whilst the economic and industrial confidence readings were above expectations (112.0 vs 110.8 and 4.5 vs 4.4 respectively). In Germany, the IFO business climate reading for July unexpectedly ticked up to 116.0 against 114.9 forecasted and from 115.1 previously, to hit its highest levels since German reunification. German Consumer Price Index (CPI) data for July was ahead of expectations growing 1.7% year-on-year (from 1.5% expected and 1.6% in June).
  • Japanese economic data was also mixed over the week. Headline annual CPI was unchanged at 0.4% in June. The jobless rate fell to 2.8% in June from 3.1% in May. The job-to-applicant ratio continued on an upward trend to 1.51 over the same period – the highest level since February 1974. Growth in the Japanese manufacturing sector continued to slow with the Nikkei manufacturing PMI falling from 52.4 to 52.2 in July. Retail sales recovered slightly after declining by 1.5% in May, rising by 0.2% in June vs a forecasted 0.4% increase.
  • However, there were encouraging economic releases in China last week. A fall in material costs alongside strong sales led industrial profit growth to gather pace and increase by 19.1% over the year to June; up from 16.7% in May. The Conference Board's Leading Economic Index rose by 1.6% to 171.6 while the Coincident Economic Index increased by 2.0% to 167.3.
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