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Aon Retirement and Investment Blog

Weekly Update - 06 August 2018 (UK/Europe)

MARKET MOVES

  • 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. Lacklustre second quarter results of European companies added to market weakness. The MSCI AC World Index remained flat in local currency terms but rose 0.6% in sterling terms due to broad sterling weakness. The US was the best performing region in local currency terms (0.8%) and sterling terms (1.6%) supported by encouraging labour market data and solid earnings reports. Developed Pacific excluding Japan was the worst performing region both in local currency (-2.0%) and sterling terms (-1.4%).
  • UK gilt yields rose across all but shorter maturities over the week as the Bank of England (BoE), as widely expected, increased interest rates from 0.50% to 0.75%. Yields fell back later in the week due to a more cautious tone from the BoE. The 10 year UK gilt yield rose by 6bps to 1.33% and the 20 year UK gilt yield rose by 4bps to 1.75%. The 10 year US treasury yield fell by 1bp to 2.95% after touching the 3.0% mark mid-week. As expected, the US Federal Reserve kept its monetary policy unchanged but policymakers remained upbeat on the US economy. In Europe, German bund yields remained unchanged at 0.41% and French government bond yields rose by 4bps to 0.74%. Italian government bond yields rose by 21bps to 2.95%, driven by ongoing political pressure on the finance minister to accommodate electoral promises, leading to concerns over the country’s public finances. Greek government bond yields rose by 26bps to 4.06% as the International Monetary Fund gave a gloomy outlook over the country’s long-term growth prospects.
  • The UK 20 year real yield rose by 1bp to -1.62% while the Over 5 year real yield remained unchanged at -1.58% over the week. 20 year breakeven inflation rose by 3bps to 3.32%.
  • 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 sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 3bps to 119bps.
  • 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 Brent crude oil fell by 1.5% to US$73/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.
  • Sterling depreciated against major currencies over the week. The US dollar appreciated by 0.8% against sterling, ending the week at $1.30/£. The euro appreciated by 0.3% against sterling, finishing the week at €1.12/£. The Japanese yen depreciated by 0.2% against the US dollar, ending the week at ¥111.17/$.

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 0.8 point 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.
  • As widely expected, the Bank of England raised the bank rate by 25bps to 0.75%. Excluding the reversal of the emergency cut that followed the EU referendum vote, this was the first increase since July 2007. The Markit UK Manufacturing Purchasing Managers' Index (PMI) fell by 0.3 points to 54.0 in July, slightly below market estimates of 54.2. Services PMI missed by a wider margin, falling by 1.6 points to 53.5, as new orders decelerated? and employment rose at its weakest pace since August 2016. The GfK Consumer Confidence index slipped back to -10 – its lowest level since February this year. 
  • 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 programme 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.

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