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Aon Retirement and Investment Blog

Weekly Update - 3 December 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets rose over the week. The MSCI AC World Index rose by 3.4% in local currency terms and 3.7% in sterling terms with the Information Technology and Health Care sectors being the best performers.
  • Escalations in US-China trade tensions came to a temporary halt at the G20 summit. The US president Donald trump agreed to delay increasing tariffs on $200 billion worth of Chinese imports from 10% to 25% for a period of 90 days. In lieu of which, China agreed to increase imports of agricultural, energy and other products to reduce the trade imbalance with the US.
  • The US was the best performing region both in local currency (4.9%) and sterling terms (5.3%) led by a strong performance in the heavily-weighted Information Technology and Health Care sectors. Developed Pacific ex Japan was the only region to generate negative returns in local currency terms (-0.1%) dragged down by Australian equities. UK equities returned the least in sterling terms (0.4%).
  • UK gilt yields had mixed performance across maturities. The 10-year UK gilt yield fell by 2bps to 1.35% while the 20-year UK gilt yield rose by 7bps to 1.91% over the week. 10-year US treasury yields fell by 3bps to 3.01% in a week in which the US Federal Reserve chair Jerome Powell mentioned that the US interest rates are just below their ‘neutral level’ (the level which would neither stimulate nor hinder economic growth).
  • In Europe, German Bund yields fell by 2bps to 0.31% and French government bond yields fell by 3bps to 0.68%. Italian government bond yields fell by 21bps to 3.21% as hopes grew that the Italian government would cut its target deficit to 2.0% to avoid disciplinary measures from the European Commission. Greek government bonds were also buoyed falling by 29bps to 4.25%.
  • The UK 20-year real yield rose by 4bps to -1.59% and the Over 5-year real yield rose by 6bps to -1.41%. 20-year breakeven inflation rose by 5bps to 3.45%.
  • The US high yield bond spread over US treasury yields remained unchanged at 429bps, following the sharp rise in spreads in mid-November. The spread of USD denominated EM debt over US treasury yields fell by 2bps to 396bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) rose by 3bps to 145bps.
  • The S&P GSCI rose by 0.8% in USD terms over the week. The energy sector rose by 0.8% despite the price of Brent Crude oil declining by 0.2% to US$59/BBL. Industrial metal prices rose by 0.5% as copper prices rose by 0.5% to US$6,238/MT. Agricultural prices rose by 1.9% and gold prices fell by 0.5% to US$1,218/Oz.
  • Sterling depreciated against major currencies (except for the Japanese yen) over the week. Sterling fell 0.4% against the US dollar, ending the week at $1.28/£, and fell 0.2% against the euro to €1.13/£. The Japanese yen depreciated by 0.7% against the US dollar, ending the week at ¥113.55/$.
ECONOMIC RELEASES
  • In the US, consumer confidence (as measured by the Conference Board's Consumer Confidence index) met expectations and fell by 2.2 points to 135.7 from 137.9. This was largely driven by a 4.1 point decline in the underlying Expectations index which offset a 0.8 point increase in the present situation index. Nonetheless, consumer confidence remains at very high levels. The Federal Reserve's preferred measure of inflation, the core Personal Consumption Expenditure price index, slowed to 1.8% (year-on-year) from 1.9%. The second reading for third quarter GDP growth was unchanged at 3.5%; though the New York Fed Staff's 'Nowcast' currently estimates that fourth quarter growth will slow to 2.5%. For a fifth straight month the US trade deficit has risen with the provisional reading of the goods trade balance widening to -$77.2bn from -$76.3bn; narrowly above consensus estimates of -$77.0bn.
  • In the UK, the Gfk Consumer Confidence index dropped to -13 (the lowest level in 11 months) in November from -10 as uncertainties over the outcome of Brexit negotiations continued. However, the Confederation of British Industry (CBI) Retailing Reported Sales survey came in strongly above expectations at 19 in November versus 5 in October and consensus estimates of 10. Elsewhere, the Nationwide House Price index rose 0.3% in November (the fastest rate for 4 months) from 0.0% in October and above expectations of 0.1%.
  • In the Euro Area, the provisional reading for November CPI inflation slowed in line with expectations to 2.0% from 2.2%. Similarly, core CPI inflation unexpectedly slowed from 1.1% to 1.0%. The Euro Area unemployment rate remained unchanged for the fourth consecutive month at 8.1% in October, failing to meet expectations of a fall to 8.0% as the number of unemployed people rose slightly. Despite the apparent wave of negative releases, the European Commission's economic sentiment indicator surpassed analyst forecasts and only slipped by 0.2 points to 109.5, while its industrial sentiment indicator rose by 0.4 points to 3.4. In Germany, the IFO Business Climate index fell by 0.9 points to 102.0 in November as the indicators for both current conditions (105.4 from an upwardly revised 106.1) and business expectations (98.7 from 99.7) fell.
  • Based on preliminary data, Japanese industrial production rebounded by 2.9% in October; significantly outpacing forecast growth of 1.2% and recovering from September’s 0.4% decline. Retail sales rose by 1.2% in October from the revised 0.1% growth recorded in September. However, Japan’s labour market unexpectedly weakened as the jobless rate for October inched slightly higher to 2.4%, against forecasts of it remaining at 2.3%. The job-to- applicant ratio inched lower to 1.62 from 1.64. The consumer confidence index in November unexpectedly ticked lower to 42.9 from 43.0, against expectations of an increase to 43.2.
  • In China, the official Chinese manufacturing PMI for November fell to 50.0 (indicating no growth in the sector) from 50.2, the weakest level in over two years as new orders slowed further. The official non-manufacturing index fell to 53.4 from 53.9 over the month due to a sharp slowdown in construction sector despite of government increasing infrastructure spending. The Caixin manufacturing PMI, which focuses more on small and mid-sized Chinese businesses, edged up to 50.2 in November against expectations of it remaining at 50.1. Against a backdrop of heightened trade tensions, industrial profit growth slowed for a sixth consecutive month to 3.6% over the year to October, down from the previous reading of 4.1%.
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