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Aon Hewitt Retirement and Investment Blog

Weekly Update - 4 December 2017 (UK/Europe)

MARKET MOVES

  • Global equity markets edged higher in local currency terms over the week. In the Eurozone, political uncertainty held sway after the failure of coalition talks in Germany between the Free Democratic Party and Angela Merkel’s Christian Democratic Union party. The MSCI AC World Index rose 0.2% in local currency terms. Sterling strengthened across the board as Brexit negotiations progressed, with the European Union and Britain closer to reaching a deal on financial commitments, pushing down returns in sterling terms to -0.9%. The USA was the best performing region both in local currency (1.5%) and in Sterling terms (0.5%) as Q3 2017 economic growth data was revised upwards and the Senate Budget Committee voted for the US tax reform bill. Emerging Markets were the worst performers both in local currency’s (-3.2%) sterling terms (-4.3%), predominantly driven by a sell-off in technology stocks.
  • UK gilt yields were mixed across different maturities over the week. The 10 year UK gilt yield fell by 4bps to 1.26% and the 20 year UK gilt yield fell by 3bps to 1.76%. The 10 year US treasury yield rose by 2bps to 2.36%. European government bond yields fell across the region as inflation data missed expectations. German bund yields fell by 7bps to 0.30% and French government bond yields fell by 6bps to 0.51%.
  • UK real yields rose over the week. The 20 year real yield rose by 1bp to -1.66% and the Over 5 year real yield gained by 2bps to -1.64%. 20 year breakeven inflation fell by 2bps to 3.35%.
  • The US high yield bond spread over US treasury yields fell by 4bps to 363bps. The spread of USD denominated EM debt over US treasury yields finished the week 1bps lower at 291bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 2bps to 107bps.
  • The S&P GSCI fell by 0.4% in USD terms over the week. The energy sector fell by 0.2% despite the price of Brent crude oil rising by 0.8% to US$64/BBL as the OPEC and counties outside the oil cartel agreed to extend the production cut until the end of 2018. Industrial metals fell by 2.1% as copper prices fell by 2.5% to US$6,809/MT. Agricultural prices rose by 0.4% whilst gold prices fell by 0.5% to US$1,283/ounce.
  • Sterling appreciated against all major currencies over the week. The US dollar depreciated by 1% against sterling, ending the week at $1.35/£. The euro weakened by 1.6% against sterling, finishing the week at €1.14/£. The Japanese yen depreciated by 1.1% against the US dollar, ending the week at ¥112.80/$.
ECONOMIC RELEASES
  • The second reading of US GDP growth showed that the economy is growing at its fastest rate in over three years. Quarter-on-quarter GDP growth for the third quarter was revised higher to 3.3% from an initial 3.0% while analysts had forecasted that growth would quicken to 3.2%. Despite the economy expanding at an impressive rate, inflation remains rather muted. The US Federal Reserve’s preferred measure of inflation, the Core Personal Consumption Expenditure price index (which excludes food and energy) met expectations and was unchanged from the previous month’s reading of 1.4%. The Institute of Supply Management’s manufacturing index narrowly missed expectations of 58.3 and contracted by 0.5 points to 58.2. Meanwhile, the US consumers’ outlook remains very buoyant with the Conference Board’s measure of consumer confidence hitting a seventeen year high of 129.5; above forecasts of a slight decline to 124.0 from 126.2.
  • In the UK, data releases were mixed over the week. Data for the manufacturing sector was supportive, with the Markit manufacturing Purchasing Managers’ Index reading for November above expectations at 58.2, versus 56.5 expected; the highest in almost four years. However, house price growth was below market forecasts, with the Nationwide house price index increasing 2.5% annually to November, versus expectations of 2.7% growth. Similarly, the GfK consumer confidence reading for November was 1 point weaker than expectations at -12, back to its post-EU referendum low.
  • In the Eurozone, core inflation data was marginally below market expectations with the consumer price index increasing 0.9% year-on-year. There was a modest upward surprise in the November flash CPI report in Germany where headline inflation came in at 0.3% month-on-month, helping to lift the annual rate to 1.8% from 1.5% which is the highest rate since February. The final Eurozone reading of the November Markit Manufacturing PMI was slightly higher than expected at 60.1, as was Germany at 62.5. Confidence readings were stable, with the Eurozone consumer confidence reading for November remaining in positive territory at 0.1. Economic sentiment was as expected, at 114.6 and up from 114.1 previously. Elsewhere, the GfK consumer confidence index in Germany was in line at 10.7 and just below its recent 16-year high. For October’s unemployment statistics, the Eurozone was 0.1% lower than forecasts at 8.8%, and statistics for the unemployment change over November in Germany were encouraging decreasing by 18k over the month.
  • In Japan, headline annual consumer price inflation came in at 0.2% in October. Core consumer price inflation also rose by 0.2% over the same period, meeting consensus estimates. The jobless rate was unchanged at 2.8% in October. However, the job-to-applicant ratio continued on an upward trend, rising to 1.55 over the same period. Retail sales underperformed expectations of 0.2% growth and fell by 0.2% over the year to October, after increasing by 2.3% in September. The provisional reading for industrial production growth stood at 5.9% over the year to October, up from the previous reading of 2.6% but below the estimated 7.1% increase.
  • In China, Purchasing Managers’ Index releases painted a fairly mixed picture over the week. The official manufacturing PMI rose to 51.8 from 51.6, beating estimates of a fall to 51.4.The Caixin manufacturing PMI dropped to 50.8 which was above consensus estimates of a 0.1 point fall to 50.9.
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