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Aon Retirement and Investment Blog

Weekly Update - 28 August 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets rose over the week despite the US-China trade talks showing little progress and the US Federal Reserve (Fed) chair Jerome Powell hinting at ‘gradual’ rate hikes at the Jackson Hole meeting. The MSCI AC World Index rose 1.0% in local currency terms and 0.4% in sterling terms. Emerging markets were the best performing region in local currency terms (2.4%), supported by regional currency strength (except for the Brazilian Real) against the US dollar. Developed Europe ex UK was the best performing region in sterling terms (2.1%). Developed Pacific ex Japan was the worst performing region both in local currency (-1.0%) and sterling terms (-1.4%) as political uncertainty in Australia led to a pull-back in Australian equities.
  • UK gilt yields rose across all maturities over the week. The 10-year UK gilt yield rose by 6bps to 1.28% and the 20-year UK gilt yield rose by 7bps to 1.74%. The 10-year US treasury yield fell by 5bps to 2.82% despite the Fed's latest meeting minutes signaling another rate hike as early as September. In Europe, German bund yields rose by 5bps to 0.34% and French government bond yields rose by 3bps to 0.68%. Italian government bond yields fell by 3bps to 3.13%. Greek bond yields fell by 15bps to 4.16% as Greece came out of its eight year bailout program and regained the ability to issue its bonds in international financial markets.
  • The UK 20 year and the Over 5-year real yield rose by 5bps each to -1.62% and -1.58% respectively. 20-year breakeven inflation fell by 1bp to 3.29%.
  • The US high yield bond spread over US treasury yields fell by 3bps to 346bps and the spread of USD denominated EM debt over US treasury yields fell by 1bp to 362bps 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 rose by 2.7% in USD terms over the week. The energy sector rose by 5.1% as the price of Brent crude oil gained 5.6% to US$76/BBL as US crude oil inventories unexpectedly fell. Industrial metals rose by 3.4% as copper prices gained 2.7% to US$6,001/MT. Agricultural prices fell by 3.9% while gold prices gained 1.6% to US$1,198/ounce.
  • Sterling strengthened against major currencies (except for the euro) over the week. The US dollar depreciated by 0.9% against sterling, ending the week at $1.29/£. The euro appreciated by 1.0% against sterling, finishing the week at €1.11/£. The Japanese yen depreciated by 0.7% against the US dollar, ending the week at ¥111.22/$.

ECONOMIC RELEASES

  • US economic releases largely disappointed over last week. Purchasing Managers' Index (PMI) data reflected slowing momentum in the US economy with both manufacturing and services PMIs coming in below analyst forecasts. The former fell to 54.5 from 55.3, below estimates of a 0.3 point decline while the services PMI slipped to 55.2 from 56.0. Although a decline in durable goods orders was predicted, the 1.7% fall over July was worse than expected. Moreover, June's reading was downwardly revised to 0.7% from 0.8%. However, orders for US non-defense capital goods excluding aircraft, a proxy for business spending plans, rose by 1.4% in July, far exceeding consensus estimates of a 0.5% increase and more than June's upwardly revised 0.6%.
  • In the UK, government finances were better than expected with Public Sector Net Borrowing excluding Banking Groups showing a £2.0 billion surplus, as tax receipts came in above expectations. The budget deficit narrowed to £12.8 billion, its lowest level since 2002. The Rightmove House Price index fell 2.3% in August – the largest summer price cuts on record (Rightmove have published data since 2001). This took the year-on-year figure to 1.1%, a 0.3% fall from the July reading. Elsewhere, the Confederation of British Industry (CBI) industrial orders balance declined by 4 points to a three-month low of 7 in August. However, the CBI retailing reported sales survey came in strongly above expectations for the third consecutive month at 29 versus 20 in July and consensus estimates of 13.
  • In the Eurozone, the first reading of the August composite Purchasing Managers' Index (PMI) increased by 0.1 points to 54.4. On a more granular level, the services PMI strengthened but the manufacturing PMI unexpectedly fell by 0.5 points to 54.6. The weakness in European manufacturing came despite the German composite PMI increasing 0.7 points to 55.7, above market expectations of 55.1, as services PMI strength countered a 0.8 point softening in manufacturing PMI to 56.5 in August. Elsewhere, the Eurozone consumer confidence index fell by 1.4 points to -1.9 in August, significantly below market expectations of -0.7 and its lowest level since May 2017.
  • In Japan, headline Consumer Price Index (CPI) inflation increased to 0.9% for the year to July but came in below consensus estimates of 1.0%. However, Japanese core inflation, which excludes more volatile food but not energy prices, remained at 0.8%. There were indications of slightly faster growth in the manufacturing sector as the preliminary Nikkei PMI manufacturing index edged higher to 52.5 from July’s reading of 52.3. Elsewhere, there was a strong upturn in supermarket sales with year-on-year readings rising from 0.1% to 1.5% for the year to July.
  • While there was no economic data released in China last week, the People's Bank of China (PBoC) intervened further in the credit and foreign exchange markets. The PBoC injected a further $22bn of loans through its Medium-term Lending Facility into the banking system in a bid to stimulate stronger credit flows to companies and local governments. Furthermore, the central bank directly intervened in foreign exchange markets by reintroducing a "countercyclical factor" to stabilize the renminbi without unduly deteriorating China's foreign exchange reserves. The move does, however, reflect a marked shift from the recent trend to internationalize the currency.
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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