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Aon Retirement and Investment Blog

Weekly Update - 9 December 2018


  • Registar for our webinar: "Got OPEB? Now What?" - This webinar will discuss strategies for US state and local government employers to mitigate the short and long-term costs of retiree healthcare benefits. Topics discussed will include GASB OPEB and rating agency insights, financing and plan design options, and the potential OPEB liability impacts associated with various strategies. This webinar will be held on Wednesday December 12th from 2:00 to 3:00 PM ET.
MARKET MOVES (Week ending December 9, 2018)
  • Global equity markets generally fell over the week. Despite an apparent tentative reprieve in trade hostilities between the US and China following the G20 summit, there are lingering concerns over its durability which was exacerbated after the US extradition order for Huawei's chief financial officer. Trade worries alongside the continued flattening of the US yield curve, may be unnerving investors at the moment.
  • The S&P 500 index fell by 4.6%, dragged down by financial and technology stocks, and led to the US equity market underperforming the MSCI World index which fell by 3.7%. However, on a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (0.3% vs. -4.4%).
  • US Large Cap stocks outperformed Small Cap stocks over the week as the S&P 500 index fell by 4.6% and the Russell 2000 index fell by 5.5%. On a year-to-date basis, the S&P 500 Index has outperformed the Russell 2000 Index (0.3% vs.-4.6%). Growth stocks fell by 4.8% and Value stocks fell by 4.3% over the week as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (2.3% vs -2.1%).
  • The US yield curve is the flattest it has been since 2007. The spread between the US 2-year and 5-year treasury yields turned negative for the first time since 2007 while the spread between the 2-year and 10-year yields reached its lowest level since the same year.
  • The 10-year US treasury yield fell by 16bps to 2.85% and the 30-year US treasury yields fell by 17bps to 3.14%. Both the 20-year TIPS yield and the 20-year breakeven fell by 9bps each to 1.06% and 1.95% respectively.
  • The spreads on the Bloomberg Barclays Capital Long Credit Index rose by 5bps to 189bps and the Bank of America Merrill Lynch US Corporate Index rose by 6bps to 151bps. The US high yield bond spread over US treasury yields rose by 21bps to 450bps. The spread of USD denominated EM debt over US treasury yields rose by 4bps to 400bps over the week.
  • The S&P GSCI rose by 2.4% in USD terms over the week. The energy sector rose by 3.3% as the price of WTI Crude oil rose by 3.3% to US$53/BBL in a week in which the OPEC nations and Russia planned to cut their crude oil production by 1.2 million barrels per day. Industrial metals fell by 0.5% as copper prices fell by 1.0% to US$6,173/MT. Agricultural prices rose by 1.9% and gold prices rose by 2.1% to US$1,243/Oz.  
  • The US dollar generally weakened over the week with a particularly disappointing non-farm payroll release dragging the 'greenback' lower. The US dollar was unchanged against sterling, ending the week at $1.28/£. The US dollar depreciated by 0.6% against the euro, finishing the week at $1.14/€. The US dollar depreciated by 0.8% against the Japanese yen, ending the week at ¥112.70/$. The US dollar remained unchanged against the Canadian dollar to close the week at C$1.33/$.  
Economic Releases
  • Economic releases in the US were fairly mixed over last week. A measure of national factory activity, the Institute of Supply Management's (ISM) manufacturing index for November bucked expectations of a modest 0.2 point decline and climbed to 59.3. Both the New Orders and Employment sub-indices rose over the month but there was a marked deceleration in the prices being paid by US manufacturers. The ISM Prices Paid sub-index dropped to 60.7 from 71.6, although the reading still suggests prices are increasing. November's non-farm payroll release failed to meet analyst forecasts of 198k with only 155k new jobs being added over the month; a fall from October's 237k reading. The unemployment rate held firm at 3.7%, as did the year-on-year increase in average hourly earnings at 3.1%; both meeting consensus estimates. 
  • In the Euro Area, the final reading for third quarter GDP growth was unexpectedly revised lower to 1.6%. Releases concerning the fourth quarter were slightly more upbeat, however, with upward revisions to both manufacturing and services PMI readings for November at 51.8 and 53.4, respectively. Retail sales rebounded by 0.3% in October following September's downwardly revised 0.5% fall which took the year-on-year growth to 1.7% from the revised 0.3%. In Germany, industrial production contracted by 0.5% in October against forecasts of a 0.3% increase while factory orders unexpectedly rose by 0.3%, outperforming expectations of a 0.4% decrease. Similar to the wider Euro Area, the final manufacturing PMI reading for November was upwardly revised to 51.8 from 51.6.
  • Japanese economic growth declined in Q3 2018, impacted by a series of natural disasters. Final readings showed that the economy contracted at an annualized 2.5%, worse than the initial estimate of a 1.2% contraction. The Nikkei Services PMI inched 0.1 point lower to 52.3, although it remains in expansionary territory. Meanwhile, year-on-year labor cash earnings accelerated to 1.5% in October from a downwardly revised 0.8% in the previous month. The current account surplus narrowed from ¥1,821.6bn to ¥1,309.9bn in October but was above forecasts of ¥1,262.7bn. 
  • Amid a backdrop of heightened trade concerns, Chinese trade data was sluggish. Exports growth slowed to 5.4% in the year to November as front-loading ahead of tariffs faded. This was below the 15.5% growth recorded previously and forecasted growth of 9.4%. Over the same period, imports rose by 3.0% (the slowest reading since October 2016), significantly below the 20.8% growth recorded previously and well short of the estimated 14.0% increase. Overall, China's trade surplus widened to US$44.74bn, well ahead of analyst estimates of a US$34.40bn surplus. Elsewhere, consumer price inflation slowed to 2.2% over the year to November and came in below analyst forecasts of 2.4%.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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