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Aon Retirement and Investment Blog

Weekly Update - 06 August 2018


  • North America CIO Newsletter.  This quarter we take a look at insights available from currency markets and the longer term structure of inflation, plus our usual update on how we are positioning client portfolios.
MARKET MOVES (Week ending August 5, 2018)
  • With the notable exception of the US, regional equity indexes retreated as trade war concerns escalated, with the US threatening to raise tariffs from 10% to 25% on $200 billion worth of Chinese imports. Lackluster second quarter results of European companies added to market weakness. The S&P 500 Index rose by 0.8% over the week, outperforming the MSCI World Index which remained flat. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (7.4% vs. 4.1%).  
  • US Large Cap stocks outperformed Small Cap stocks over the week as the S&P 500 Index rose by 0.8% while the Russell 2000 Index rose by 0.6%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (9.7% vs. 7.4%). Growth stocks underperformed Value stocks over the week as growth stocks rose by 0.7% whilst value stocks rose by 0.9%, as measured by the MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (12.8% vs. 2.2%).
  • The 10-year US treasury yield fell by 1bp to 2.95% after touching the 3.0% mark mid-week and the 30-year US treasury yield remained unchanged at 3.09%. As expected, the US Federal Reserve kept its monetary policy unchanged but policymakers remained upbeat on the US economy. The 20-year TIPS yield rose by 1bp to 0.90% and the 20-year breakeven fell by 1bp to 2.13%. 
  • The spread of the Bloomberg Barclays Capital Long Credit Index over the yield on US treasuries remained unchanged at 157bps and the Bank of America Merrill Lynch US Corporate Index credit spread fell by 1bp to 115bps. The US high yield bond spread over US treasury yields rose by 1bp to 343bps and the spread of USD denominated EM debt over US treasury yields rose by 9bps to 332bps over the week.
  • The S&P GSCI fell by 0.5% in USD terms over the week. The energy sector fell by 1.1% as the price of WTI crude oil fell by 0.3% to US$68/BBL as US crude oil inventories expanded. Industrial metals fell by 1.5% following the fall in copper prices which fell by 1.4% to US$6,167/MT. Agricultural prices rose by 2.1% while gold prices fell by 0.6% to US$1,216/ounce. 
  • Over the week, the US dollar strengthened against all major currencies except against the Canadian Dollar. The US dollar appreciated by 0.8% against sterling, ending the week at $1.30/£. The US dollar appreciated by 0.5% against the euro, finishing the week at $1.16/€. The US dollar appreciated by 0.2% against the Japanese yen, ending the week at ¥111.17/$. The US dollar fell by 0.6% against the Canadian dollar over the week to close at C$1.30/$.   
Economic Releases 
  • Economic releases were fairly mixed in the US last week with a number of indicators tailing off and falling short of expectations. The US jobs report showed that the increase in nonfarm payrolls failed to meet analyst forecasts of 193k, rising by just 157k over July – the lowest reading in four months. However, news of slowing job growth was softened by upward revisions to previous releases with June's reading moved higher to 248k. The Institute of Supply Management's (ISM) manufacturing index dropped to 58.1 from 60.2; further than the anticipated 0.8point decline. Factory orders built on June's 0.4% increase and rose for a second successive month in July, rising by 0.7%. Consumer confidence, as measured by the Conference Board's Consumer Confidence Index, unexpectedly inched 0.3 points higher to 127.4 from an upwardly revised 127.1. 
  • Annualized GDP growth slowed to 2.1% over the second quarter of 2018 in the Eurozone as the region grew by 0.3% over the quarter which was the slowest quarterly rate since Q2 2016 and also slightly below market expectations. Retail sales growth also came in slightly below expectations at 0.3% in June but the previous reading was revised up to 0.3%. German retail sales saw a sharper increase, growing by 1.2% in June thereby offsetting the 1.2% fall in May. The Eurozone unemployment rate remained at 8.3%; its lowest level since December 2008. Elsewhere, Eurozone Consumer Price Index (CPI) inflation and core CPI inflation both marginally beat expectations, increasing to 2.1% and 1.1% for the year to July.
  • The Bank of Japan adjusted its quantitative easing program at its latest meeting by tweaking its yield curve control policy. The yield on 10-year Japanese government bonds will now be able to fluctuate by 0.2% around zero, up from the previous range of 0.1%. Japanese industrial production contracted sharply by 2.1% in June, based on preliminary data. It was worse than the forecasted 0.3% decline and the 0.2% dip in May. Growth in the manufacturing sector slowed to an eleven month low, as the preliminary Nikkei PMI manufacturing index fell to 52.3 in July from June’s reading of 53.0. However, it was ahead of the flash reading of 51.6. Retail sales met expectations and rebounded by 1.5% over June, on the back of increased spending on fuel, appliances and cosmetics.
  • The official Chinese manufacturing PMI for July fell by 0.3 points to 51.2 amid trade war concerns while new export orders fell at theirs fastest pace in two years. The services sector similarly decreased more than expected with the non-manufacturing PMI falling to 54.0 from 55.0 – below expectations of 54.9. The increasingly active People's Bank of China sought to arrest the renminbi's slide and curb further bearish bets on the currency with the reintroduction of a 20% reserve requirement for banks that sell US dollars to clients using currency forwards, thereby raising the cost of betting on renminbi depreciation.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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