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Aon Retirement and Investment Blog

Weekly Update - 18 December 2017 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • U.S. Discount Rate Update. Average discount rates remained level in November, as equities continued to rally and Treasury rates rose slightly at short and intermediate durations. In early December, rates have decreased by 7 basis points through Friday, December 8th. The average plan sponsor’s discount rate has now decreased by 52 basis points in 2017.
  • CIO Quarterly Newsletter. A quarterly look at market conditions from our North American Chief Investment Officer.
MARKET MOVES
  • Global equity markets edged higher again last week as the US Federal Reserve hiked interest rates by 25bps to a range of 1.25%-1.50%. Both the Bank of England and the European Central Bank voted to keep their monetary policy unchanged. A string of solid manufacturing data across the major economies supported markets over the week as well. The MSCI AC World Index rose 0.5% in local currency terms. However, broad sterling weakness pushed up returns to 1.1% in sterling terms. The UK was the best performing region in local currency terms (1.3%) in a week in which pro-European Conservatives backed a move insisting that the UK parliament have a full vote on any Brexit deal before it can be implemented. Developed Pacific ex Japan was the best performing region in sterling terms (1.8%). Japan was the worst performing region in local currency terms (-0.7%) as yen strength hurt the export oriented economy. Developed Europe ex UK was the worst performer in sterling terms, being flat over the week.
  • UK gilt yields fell across maturities over the week despite the inflation rate touching a new five year high. The 10 year UK gilt yield fell by 12bps to 1.19% and the 20 year UK gilt yield fell by 13bps to 1.70%. The 10 year US treasury yield fell by 3bps to 2.36%. German bund yields were unchanged at 0.30% whilst French government bond yields rose by 1bp to 0.50%. Greek government bond yields fell by 56bps to 4.51% due to upbeat economic data and the progress made on the bailout program. Italian government bond yields rose by 17bps to 1.77% as political uncertainties, triggered by talks of elections in March 2018, resurfaced.
  • UK real yields fell over the week. The 20 year real yield fell by 8bps to -1.70% and the Over 5 year real yield fell by 7bps to -1.67%. 20 year breakeven inflation fell by 6bps to 3.31%.
  • The US high yield bond spread over US treasury yields rose by 1bp to 364bps. The spread of USD denominated EM debt over US treasury yields finished the week 2bps lower at 288bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 2bps to 103bps.
  • The S&P GSCI fell by 0.1% in USD terms over the week. The energy sector fell by 0.8% as the price of Brent crude oil fell 0.2% to US$63/BBL. Industrial metals rose by 4.0% as copper prices increased 4.9% to US$6,855/MT. Agricultural prices fell by 1.0% whilst gold prices rose 0.5% to US$1,255/ounce.
  • Sterling depreciated against major currencies over the week. The US dollar appreciated by 0.4% against sterling, ending the week at $1.33/£. The euro strengthened by 0.6% against sterling, finishing the week at €1.13/£. The Japanese yen appreciated by 0.8% against the US dollar, ending the week at ¥112.66/$.
ECONOMIC RELEASES
  • In the US, consumer price inflation grew 2.2% in the year to November, in line with expectations and up from 2.0% previously. Excluding the more volatile food and energy components, core CPI increased by 1.7% year-on-year, marginally less than the previous reading of 1.8%. Elsewhere, the Markit Services PMI came in below expectations at 52.4 versus 54.7 expected. Despite the Manufacturing PMI moving higher to 55, from 53.9 the composite reading fell 1.5 points to 53. Retail sales data for November was encouraging, increasing 0.8% month-on-month, beating the 0.3% growth expected and last month’s upwardly revised reading of 0.5%. Retail sales excluding autos increased 1.0% over November, again beating expectations of 0.4% growth.
  • Economic data releases in the UK were mixed over the week. Firstly, headline November consumer price inflation was above expectations at 0.3% month-on-month, versus 0.2% expected. On an annual basis, the Consumer Price Index rose by 3.1%, marginally above the previous and forecasted rate of 3.0%, thus triggering a letter from the Bank of England to the Chancellor setting out the reasons for inflation moving over 1% above their target. Core annual inflation was in line and steady at 2.7% year-on-year; the highest since 2012. Unemployment data for October was slightly above expectations at 4.3%, while the number of people in work was down 56k over the 3 months to October, versus the 40k decrease expected. Supported by the Black Friday sales season, November retail sales (ex-fuel) data came in well above expectations increasing 1.2% over the month versus 0.4% expected. Elsewhere, the Rightmove House Price index fell by a further 2.6% over December, after the previous month’s 0.8% decline.
  • In Europe, the Eurozone Manufacturing PMI estimate for December beat expectations at 60.6, up from 60.1 previously. The Services PMI was also up from 56.2 to 56.5 which resulted in the Composite PMI increasing to 58.0, from 57.5 previously. The December ZEW survey for economic expectations was slightly below the previous reading at 29.0, from 30.9 previously. In Germany, the ZEW survey for current situations was above market expectations of 88.7 at 89.3, but the expectations component of the survey was slightly below the market at 17.4, against 18 expected. Industrial production in Europe was up 0.2% in October, ahead of forecasts of flat growth. The final German consumer price inflation reading for November was unchanged at 0.3% month-on-month and 1.8% year-on-year. The October trade surplus for the Eurozone narrowed to €19.0bn from expectations of €24.3bn.
  • The Japanese economic data was encouraging for the week. The Bank of Japan’s Q4 2017 Tankan survey revealed an optimistic outlook for the Japanese manufacturing sector, reaching its strongest level in eleven years. The Tankan large manufacturer’s index rose to 25 from the previous reading of 22. Meanwhile, the preliminary Nikkei manufacturing PMI rose from 53.6 to 54.2 in December, the highest reading since February 2014. Core machine orders rebounded over October, rising by 5.0%, exceeding expectations of a 2.9% increase.
  • In China, industrial production growth slipped to 6.1% for the year to November, down from 6.2% in the previous month. Meanwhile, urban fixed asset investment met expectations and grew by 7.2% for the year to November, down from 7.3% seen in October. Both indicators support signs of a modest deceleration in the Chinese economy. Retail sales grew 10.2% in the year to November (up from 10.0%previously), but fell marginally short of expectations.
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