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Aon Retirement and Investment Blog

Weekly Update - 12 December 2016 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • Radar. Provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health. A French version of the November 24th issue is also now available. 

MARKET MOVES

  • Equity markets were broadly unperturbed by the result of the Italian referendum as global equities rose over the week with all regions posting positive returns. All three major US equity indices, the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite Index, closed the week at record highs. The MSCI AC World Index rose 3.2% in local currency terms and 3.7% in sterling terms. Developed Europe, excluding the UK, was the best performing region in both local currency (5.1%) and sterling terms (4.7%), as banking stocks rose strongly. Developed Pacific ex Japan was the worst performer in both local currency and sterling terms as it returned 1.5% and 2.2% respectively.
  • UK gilt yields rose across all maturities. The 10 year UK gilt yield rose by 6bps to 1.44% and the 20 year UK gilt yield rose by 7bps to 1.98%. The 10 year US treasury yield rose by 7bps to 2.47%, as markets anticipated an interest rate hike by the US Federal Reserve on 14 December. European government bond yields rose across most of the region as the ECB extended its quantitative easing program until December 2017 but reduced the pace of its monthly asset purchases to €60bn from April 2017. German bund yields rose by 7bps to finish the week at 0.26% and French government bond yields rose by 8bps, ending the week at 0.81%.
  • The UK 20 year index-linked gilt yield was unchanged at -1.54% whilst the Over 5 year index-linked yield fell by 3bps to -1.58%. 20 year breakeven inflation rose by 8bps to 3.53%.
  • Credit spreads fell over the week as investors’ risk appetite for high yielding assets picked up. The US high yield bond spread over US treasury yields ended the week 36bps lower at 428bps. The spread of USD denominated EM debt over US treasury yields finished the week 22bps lower at 344bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 2bps at 124bps.
  • The S&P GSCI commodity index rose by 0.6% in USD terms over the week. The energy sector remained flat despite the price of Brent crude oil falling 1.2% to USD 54/BBL. Industrial metals rose 1.5% as copper prices increased by 1.1% to $5,822/MT. Agricultural prices rose 1.3% while the gold price fell by 1.0% to $1,163/ounce.
  • Sterling appreciated against all major currencies except for the US dollar. The US dollar appreciated by 0.7% against sterling, ending the week at $1.26/£. The euro weakened by 0.5% against sterling, finishing the week at €1.19/£. The Japanese yen depreciated by 1.2% against the US dollar, ending the week at ¥115.19/$.

ECONOMIC RELEASES

  • US consumer sentiment surged to 98.0 from 93.8 as consumers equated a Donald Trump presidency with policies that would provide a boost for economic growth. Building on from last week's positive jobs report, labour productivity rose for the first time in three quarters. The Institute of Supply Management's Non-Manufacturing Purchasing Managers' Index (PMI) outperformed expectations as the index jumped from 54.8 to 57.2 in November. However, the US trade deficit widened to a four month high in October on the back of a strong dollar, growing to $42.6bn from $36.2bn.
  • UK industrial production unexpectedly fell in October. The 1.3% fall was the sharpest monthly decline in four years, well below the positive 0.2% forecast. However, the fall in production was partly caused by one-off factors, such as the shutdown of a North Sea oilfield. Other sectors of the economy were more resilient with the dominant services sector growing at its fastest pace since January. The Markit/CPI Services PMI rose from 54.5 to 55.2 in November, outperforming consensus estimates of 54.0. The UK trade deficit narrowed by the most since records began in 1998, from £5.2bn to just under £2.0bn, helped by sterling weakness since the EU referendum. Export volumes dropped 2.1% in the three months to October whilst import volumes moved up by 4.4%.
  • Economic data released in the Eurozone was worse than expected but remained broadly positive. The final Markit Eurozone Composite PMI was revised down to 53.9 from the initial estimate of 54.1, but remains well in expansionary territory. Investor confidence fell short of expectations, as the Sentix investor confidence index dropped to 10.0 from 13.1. However, there were signs of a healthier consumer, as retail sales rebounded from two months of decline; the 1.1% increase in October was above forecasts of a 0.8% increase. German factory orders also increased 4.9% in October on the back of strong demand for investment goods, which was above expectations of a 0.6% increase.
  • Japanese economic data was mixed last week. Economic growth was sharply revised down to 1.3% from 2.2% (quarter-on-quarter, annualized) in Q3 2016, dragged down by a contraction in business spending. Deflationary concerns continued as the GDP deflator was down 0.2% over the third quarter, more than the consensus estimate of a 0.1% decline. However, the Japanese service sector performed well as the Nikkei Japan Services PMI rose to 51.8 in November from 50.5, driven by the opening of new stores. The adjusted current account balance rose to ¥1,929 billion in October from ¥1,477 billion, despite a narrowing of the trade surplus, which fell to ¥588 billion from ¥642 billion.
  • Economic releases in China this week pointed to more stability for the world's second largest economy. After months of decline, exports in the year to November edged up 0.1% outperforming predictions of another sharp fall of 5.0%. Imports also grew by a better than expected 6.7%, compared against a 1.7% predicted drop. Soaring coal and steel prices led to producer prices in China increasing at the fastest rate in five years. The 3.3% increase in producer prices extends recent inflation after years of producer price deflation.

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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