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Aon Retirement and Investment Blog

Weekly Update - 11 December 2017 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • How Do Public Pension Plans Impact Credit Ratings? This paper details how public pension plans influence credit ratings as well as the relationship between credit ratings and borrowing costs for public entities.  Additionally, the paper outlines effective actions that plan sponsors can take today to improve the impact a pension plan has on its locality’s credit rating.
  • Watch our short video on Responsible Investment! To help answer some essential questions about Responsible Investing (RI), we’ve created a short animated video blog. In it, you’ll find information on the four main types of RI, including Environmental, Social and Governance (ESG) integration, Impact Investing, Socially Responsible Investing (SRI), and Mission Related Investing, as well as how responsible investing may potentially enhance returns, reduce volatility, or allow investors to “do good while doing well.
MARKET MOVES
  • Global equity markets moved higher in a week where significant progress was made in coalition talks in Germany, Brexit talks between the UK and Europe, and the US tax reform bill. The MSCI AC World Index rose 0.5% in local currency terms and 1.0% in sterling terms. Developed Europe ex-UK was the best performing region both in local currency terms (1.5%) and sterling terms (1.4%), supported by reduced political uncertainty in Germany and encouraging economic growth data. Developed Pacific ex-Japan was the worst performing region both in local currency terms (-0.5%) and sterling terms (-0.3%), dragged down by weaker than expected economic growth in Australia and falling commodity prices.
  • UK gilt yields rose across maturities. The 10 year UK gilt yield rose by 5bps to 1.31% and the 20 year UK gilt yield rose by 7bps to 1.83%. The 10 year US treasury yield rose by 2bps to 2.38%, supported by an encouraging employment report. European government bond yields fell across most of the region. French government bond yields fell by 2bps to 0.49% although German bund yields were unchanged at 0.31%.
  • UK real yields rose over the week. Both the 20 year real yield and the Over 5 year real yield rose by 4bps each to -1.62% and -1.60% respectively. 20 year breakeven inflation rose by 2bps to 3.37%.
  • The US high yield bond spread over US treasury yields was unchanged at 363bps. The spread of USD denominated EM debt over US treasury yields finished the week 1bp lower at 290bps. The sterling non-gilt credit spread over government yields (based on the Merrill Lynch index) fell by 2bps to 105bps.
  • The S&P GSCI fell by 2.1% in USD terms over the week despite strong Chinese trade and manufacturing data. The energy sector was 1.6% lower over the week with the price of Brent crude oil falling 3.2% to US$62/BBL. Industrial metals fell by 3.8% with copper prices dropping by 4.0% to US$6,537/MT. Agricultural prices slid back by 2.7% while gold prices slipped by 2.7% to US$1,248/ounce.
  • Sterling depreciated against major currencies, with the exception of the euro, over the week despite a boost towards the end of the week by a deal with the European Union on the first stage of Brexit negotiations. The US dollar appreciated by 0.9% against sterling, ending the week at $1.34/£. The euro weakened by 0.1% against sterling, finishing the week at €1.14/£. The Japanese yen depreciated by 0.7% against the US dollar, ending the week at ¥113.54/$.
ECONOMIC RELEASES
  • Although down from October’s release of 244k new jobs, the US labour market continued its impressive run of monthly job gains as November’s non-farm payrolls showed 228k jobs were added over the month. Moreover, the reading was above consensus estimates of 195k. As expected, the unemployment rate in the US was unchanged at 4.1%. The tight labour market has resulted in faster wage growth as average hourly earnings rose at a pace of 2.5% over the year to November; up from a downwardly revised 2.3% in the previous month but falling short of an expected 2.7%. Consumer confidence, as measured by the University of Michigan’s Consumer Sentiment index, dipped in December to 96.8 from 98.5. Analysts had forecasted a slight uptick in confidence to 99.0.
  • In the UK, economic data releases were mixed over the week. The Markit Composite Purchasing Managers' Index (PMI) reading for November was below expectations at 54.9. This was mainly driven by a disappointing Services PMI reading which was below expectations of 55.0 at 53.8. There was good news from the construction sector, however, with the Construction PMI reading for November above expectations at 53.1. Manufacturing production inched 0.1% higher over October, down from the 0.7% increase in September but above expectations of a flat reading.
  • In the Eurozone, year-on-year GDP growth for Q3 was revised upwards by 0.1% to 2.6%. However, data releases for the month of October were generally disappointing. Retail sales fell by 1.1% over October, underperforming expectations of a 0.7% fall. Elsewhere, industrial production in Germany was 1.4% lower over October, against forecasts of a 0.9% increase. Germany's trade balance in October also came in below expectations of €21.9 billion at €18.9 billion. The Eurozone Sentix Investor Confidence reading for December moved to 31.1 from 34.0 previously. German factory orders delivered a positive surprise, increasing by 0.5% over October against expectations of a modest 0.2% fall.
  • The Japanese economy grew at an annualised rate of 2.5% over the third quarter of 2017, up from preliminary estimates of 1.4% and above consensus estimates of 1.5%. The upward revision was largely thanks to business investment over the quarter exceeding initial forecasts. Although remaining in expansionary territory, the services PMI fell to 51.2 in November from 53.4. Wage growth data was mixed as labour cash earnings grew only by 0.6% for the year to October against a forecasted increase of 0.8%. However, real wages (which takes inflation into consideration) met expectations and rose by 0.2% over the same period.
  • In China, inflation decelerated as the Consumer Price Index (CPI) rose by 1.7% for the year to November, down from the 1.9% increase seen in October. Both export and import growth gathered pace in the year to November while the trade surplus widened to $40.21bn from $38.06bn. Imports grew by 17.7% in the year to November against forecasts of 13.0%. Export growth was particularly encouraging, hitting an eight-month high of 12.3% against expectations of 5.3%.
     
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