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Aon Retirement and Investment Blog

Weekly Update - 20 August 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets edged lower over the week as emerging market uncertainties and global trade concerns kept most regional equity markets unsettled. The MSCI AC World Index fell by 0.3% in local currency terms and 0.2% in sterling terms. The US was the only region to generate positive returns, both in local currency (0.6%) and sterling terms (0.9%), as better than expected retail sales data and more scheduled trade talks with China uplifted market sentiment. Emerging Markets were the worst performing region, both in local currency (-3.0%) and sterling terms (-3.4%), as disappointing Chinese economic data, weak quarterly earnings from the Chinese technology giant, Tencent Holdings, and the ongoing currency crisis in Turkey kept investors anxious.
  •  UK gilt yields continued to fall across all maturities over the week despite strong retail sales growth and a 43-year low in the UK unemployment rate. The 10-year UK gilt yield fell by 3bps to 1.22% and the 20-year UK gilt yield fell by 2bps to 1.67%. The 10-year US treasury yield rose by 1bp to 2.87%. In Europe, German bund yields fell by 3bps to 0.30% and French government bond yields fell by 1bp to 0.65%. Italian government bond yields rose by 21bps to 3.16% as Turkish developments coupled with worries over its forthcoming budget to increase the perceived risk of the country's bonds.
  • The UK 20-year real yield rose by 1bp to -1.67% whilst the Over 5-year real yield remained unchanged over the week at -1.63%. 20-year breakeven inflation remained unchanged at 3.30%.
  • The US high yield bond spread over US treasury yields fell by 1bp to 349bps and the spread of USD denominated EM debt over US treasury yields rose by 1bp to 363bps over the week. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) remained unchanged at 119bps.
  • The S&P GSCI fell by 1.4% in USD terms over the week. The energy sector fell by 1.9% as the price of Brent crude oil declined by 1.3% to US$72/BB. Crude oil prices fell as US crude inventories continued to stay at higher levels. Industrial metals fell by 4.2% as copper prices fell by 4.5% to US$5,844/MT. Agricultural prices rose by 0.8% while gold prices fell by 3.0% to US$1,178/ounce.
  • Sterling depreciated against major currencies over the week. The US dollar appreciated by 0.3% against sterling, ending the week at $1.27/£. The euro appreciated by 0.1% against sterling, finishing the week at €1.12/£. The Japanese yen appreciated by 0.2% against the US dollar, ending the week at ¥110.46/$.

ECONOMIC RELEASES

  • Provisional readings for US retail sales outperformed expectations and rose by 0.5% in July, supported by motor vehicle and clothing purchases. Analysts had forecasted retail sales growth to slow from the 0.2% increase in June to 0.1%. Elsewhere, while coming below consensus estimates of 0.3%, industrial production inched 0.1% higher in July and the previous reading was revised higher to 1.0%. Tailwinds of tax cuts and robust consumer demand have also driven a gauge of optimism among US small businesses to the second-highest level on record. The National Federation of Independent Business Small Business Optimism index rose by 0.7 points to 107.9; outperforming expectations of a slight fall. This confidence, however, was not shared by US consumers as the University of Michigan's Consumer Sentiment index dipped to an eleven month low of 95.3 from 97.9 and below expectations of 98. The impact of higher inflation may have dampened consumer sentiment.
  • In the UK, retail sales rose by 0.7% in July which took year-on-year growth to 3.5%; the largest increase since April 2017. The unemployment rate unexpectedly fell by 0.2% to 4.0% in the three months to June 2018, the lowest level since February 1975. However, even as the labour market continues to tighten, nominal wage growth eased to 2.4% in the three months to June. Consumer Price Index (CPI) inflation increased by 0.1% to 2.5% in July 2018, whilst core CPI inflation was unchanged at 1.9%. Transport costs (+5.7% in the year to July) continue to show the fastest increase in prices whilst the price of clothing and footwear fell (-0.4% in the year to July).
  • In the Eurozone, annual GDP growth increased to 2.2% in Q2 2018, above market expectations of 2.1%. This followed higher than expected annualised quarter-on-quarter growth in Germany at 2.2%, although annual German GDP growth slowed slightly to 2.0%. Industrial production in the Eurozone fell 0.7% in June which was worse than the expected 0.4% decline. However, upward revisions to the previous month's reading led to a 0.1% increase in year-on-year growth to 2.5%. The ZEW economic sentiment index for Germany increased by 11.0 points to -11.1 in August from last month's 5-year low.
  • The final reading for Japanese industrial production for June was revised up to a decline of 1.8% from the preliminary estimates of a 2.1% decline. Nonetheless, it represents a large drop from the 0.2% dip in May. Japan posted a trade deficit of ¥231.2 billion in July (from June’s ¥721.4 billion surplus) which was lower than analyst forecasts of a ¥41.2 billion deficit. This was due to rising crude oil prices and faster growth of imports compared to exports. Export growth slowed down to 3.9% in the year to July. Imports rose sharply by 14.6% over the same period, up from 2.5% in June and just ahead of the estimated 14.2% increase.
  • In China, retail sales slowed to 8.8% over the year to July from 9.0% in June, below analyst forecasts of 9.1% growth. Industrial production figures also missed analyst forecasts of 6.3% by remaining unchanged at 6.0%. Fixed asset investment in urban regions failed to meet expectations of 6%and slumped to a record low of 5.5% for the year to July. This downward trend has occurred despite a series of initiatives aimed at boosting spending, such as tax cuts and infrastructure spending.
The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs. Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given as of the date indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.


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