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Aon Retirement and Investment Blog

Weekly Update - 01 February 2016 (UK/Europe)


  • Global equities rose over the week as markets rallied sharply on Friday, driven by a surprise move by the Bank of Japan to adopt a negative interest rate policy. The MSCI AC World Index rose 2.1% in local currency terms and 3.0% in sterling terms. All regions recorded positive returns with Japan being the best performing region in local currency terms (4.0%). Emerging Markets was the best performing region in sterling terms, returning 5.6%. Developed Europe ex UK was the worst performing region, both in local currency (1.1%) and sterling terms (1.9%).
  • UK nominal gilt yields fell across all maturities. The 10 year UK gilt yield was 15bps lower at 1.57% and the 20 year UK gilt yield was 16bps lower at 2.22%. Both German and French government bond yields fell by 14bps to finish the week at 0.27% and 0.66%, respectively. Greek government bond yields rose 18 bps ending the week at 9.63%, despite Standard and Poor's upgrading the credit rating for the country to "B-" from "CCC+", as Greece struggles with the economic and migrant situation.
  • UK real yields fell over the week. The 20 year real yield fell by 9bps to -0.85% and the Over 5 year real yield fell by 8bps to -0.91%. 20 year breakeven inflation fell by 6bps to 3.00%.
  • Credit spreads were mixed over the week. The US high yield bond spread over US treasury yields was 13bps lower at 774bps and the spread of USD denominated EM debt over US treasury yields finished the week 2bps lower at 463bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was higher by 3bps at 158bps.
  • The S&P GSCI rose by 3.6% in USD terms over the week. The energy sector rose by 6.5% as the price of Brent crude oil rose 8.2% to USD 34/BBL amid speculation of an OPEC production cut. Industrial metals prices rose by 2.9% over the week as copper prices increased by 2.7% to $4,570/MT. Agricultural prices were 0.8% lower, while gold prices rose by 1.5%, finishing the week at $1,117/ounce.
  • Sterling weakened against the US dollar and the euro, but strengthened against the yen. The US dollar appreciated by 1.1% against sterling, finishing the week at $1.42/£. The euro rose by 1.0% against sterling, finishing the week at €1.31/£. The Japanese yen weakened against the US dollar by 2.1%, ending the week at ¥121.07$, driven by the accommodative monetary policy of the Bank of Japan.
  • US GDP grew at a disappointingly sluggish rate of 0.7% (on a quarter-on-quarter annualised basis) over Q4. Though this low number was largely expected, they are in stark contrast with the previous two quarters’ growth figures of 2% and 3.9% respectively. Durable goods orders fell by 5.1% in December according to the preliminary estimate, mostly due to poor transportation orders. However, capital goods also disappointed, with orders falling by 4.3% against a 0.2% expected contraction.  The preliminary services PMI for January fell to 53.7, lower than consensus, but still well clear of the neutral 50 mark. However, on a brighter note, consumer confidence rose to 98.1 in January, firmly beating both the consensus estimate (96.5) and December’s number (96.3).
  • The first estimate of UK Q4 GDP was released. The economy grew at a rate of 0.5%, ahead of 0.4% Q3 growth. However, year-on-year growth was estimated to be 1.9%, down from the previous quarter’s annualised figure of 2.1%, and was the slowest rate of annual growth since 2013. In more encouraging releases, consumer confidence (as measured by the GfK Consumer Confidence Index) showed an increase, when it was expected to have fallen, and business optimism (measured by CBI’s business survey), while negative at -4%, showed an improvement from the previous reading recorded in October of -12%.
  • In Europe, initial inflation figures were released for January. Headline CPI inflation has moved up to 0.4% from 0.2% in line with expectations. The ‘core’ CPI estimate (which excludes fuel and food prices) crept up to 1.0% from 0.9%. However, the economic confidence indicator fell from 106.7 to 105.0, the lowest level since August. Alongside this, the European Commission business climate indicator disappointed as it fell when it was expected to remain broadly flat. Consumer confidence, which was also anticipated to remain flat in January, reported in line with expectations, a situation mirrored in Germany. German retail sales disappointed in December, with annual sales growing by 1.5%, down from 2.4% in November.
  • Japanese economic data had a weak tone over the week. Exports fell further in December at an annual rate of 8.0%, behind economist estimates of 7.0% fall as the Chinese slowdown had a negative impact. However, the adjusted trade balance recorded a surplus of ¥37bn in December from a surplus of ¥22bn. Japanese CPI inflation slowed to 0.2% over the year to December from 0.3% in November, but met consensus. The “Core-Core” measure which excludes food and energy also slowed over the same period to 0.8% from 0.9%. Consumption data was weak; overall household spending fell by 4.4% over the twelve months to December and retail trade fell by 1.1% over the same period. The Japanese jobless rate remained unchanged at 3.3% in December, but the job to applicant ratio indicated labour market  tightening by rising to a 24-year high of 1.27 in December from 1.25. Industrial production over the year to December fell by 1.6%, as the monthly growth figure for December disappointed at -1.4%.
  • China’s Caixin manufacturing PMI came in above expectations, rising to 48.4 (versus 48.1 expected). On the other hand, the official PMI slightly disappointed. Industrial profits fell by 4.7% over 2015, a sharper contraction than the year-on-year 1.4% fall during the year to November.

The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs.Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case, nor should it be treated as investment advice. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.

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