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Aon Retirement and Investment Blog

Weekly Update - 05 February 2018 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • 2018 Aon Compliance Calendar – Significant U.S. Compensation and Benefit Due Dates. Aon is pleased to present its 2018 Compliance Calendar to assist with identifying significant compensation and benefit due dates for your retirement and health and welfare plans. This calendar is based on a January 1 through December 31 ERISA calendar plan year and includes due dates for notice distributions, plan disclosures, and various plan-related regulatory filings, along with certain items that are date-specific.
MARKET MOVES
  • Global equity markets fell over the week for the first time in 2018 as rising bond yields on the back of higher inflation and interest rate expectations led to a sharp sell-off. Globally, economic data held firm whilst earnings reports were mixed. The MSCI AC World Index fell 3.1% in local currency terms and 3.0% in sterling terms. Developed Pacific ex Japan was the best performing region both in local currency (0.0%) and sterling terms (-0.8%) supported by a rally in Australian equities (approximately 58% of the index) on the back of robust manufacturing data. The US was the worst performing market in local currency terms (-3.8%) as encouraging labour market data increased the likelihood of faster monetary policy tightening by the US Federal Reserve in 2018. Developed North America was the worst performing region in sterling terms (-3.4%).
  • UK gilt yields rose across all maturities over the week, in line with government bond yields of major developed markets. The 10 year UK gilt yield rose by 12bps to 1.59% and the 20 year UK gilt yield rose by 7bps to 1.95%. The 10 year US treasury yield rose by 19bps to 2.85% on the back of a stronger than expected employment report in which the wages grew at the fastest pace since 2009. German bund yields rose by 14bps to 0.70% and French government bond yields rose by 10bps to 0.89% over the week.
  • The UK 20 year real yield rose by 7bps to -1.52% and the Over 5 year real yield rose by 6bps to -1.49%. 20 year breakeven inflation rose by 2bps to 3.43%.
  • The US high yield bond spread over US treasury yields rose by 13bps to 336bps. The spread of USD denominated EM debt over US treasury yields finished the week 2bps lower at 262bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 1bp to 94bps.
  • The S&P GSCI fell by 1.5% in USD terms over the week. The energy sector fell by 2.3% as the price of Brent crude oil fell by 1.9% to US$69/BBL. Industrial metals decreased by 0.7% as copper prices fell by 0.6% to US$7,004/MT. Agricultural prices rose by 0.5% whilst gold prices fell by 1.6% to US$1,331/ounce.
  • Sterling depreciated against major currencies (except for the yen) over the week. The US dollar appreciated by 0.4% against sterling, ending the week at $1.41/£. The euro strengthened by 0.5% against sterling, finishing the week at €1.14/£. The Japanese yen depreciated by 1.6% against the US dollar, ending the week at ¥110.39/$.
ECONOMIC RELEASES
  • Although the US Federal Reserve decided to leave the federal funds rate unchanged at 1.25%-1.50%, the latest labour market data pointed toward future rate hikes. Nonfarm payrolls exceeded expectations as a further 200k jobs were added to the US economy; ahead of a forecast of 180k. Moreover, the previous release was upwardly revised from 148k to 160k. The positive jobs report was accompanied by the quickest wage growth since mid-2009. Average hourly earnings were up 2.9% in the year to January, above the consensus estimate of 2.6% growth and up from December's revised reading of 2.7%. Despite the impressive job growth, the unemployment rate met expectations and was unchanged at 4.1%. Elsewhere, the latest reading of the Institute of Supply Management's manufacturing index showed a slight dip from a revised 59.3 to 59.1.
  • In the UK, economic data was mixed over the week, as the Markit Purchasing Managers’ Index (PMI) readings for January disappointed. Growth in the manufacturing sector slowed with the manufacturing PMI slipping to 55.3 from 56.2 and below the forecasted 56.5. The construction sub-index was also weaker than expected at 50.2, down from 52.2 previously, and below analyst forecasts of 52.0. UK house prices saw a slight pick-up in January, as the Nationwide house price index increased by 0.6% over the month, in line with the previous month's increase. Over the year, Nationwide reported a 3.2% increase in the average house price, accelerating from 2.6% in December. Mortgage approvals for December declined by more than expected to 61,000 from a reported 64,700 in November. Encouragingly, the GfK consumer confidence reading for January reported an uptick of 4 points to -9, ahead of market expectations for the sentiment indicator to remain at -13.
  • In the Eurozone, economic growth remained robust over the last quarter of 2017, as the region's Gross Domestic Product (GDP) rose as expected by 2.7% in the year. The reading for the previous quarter was revised up to 2.8%. Flash inflation data for January also met expectations, as Eurozone consumer price inflation ticked lower to 1.3%, the lowest rate since July 2017. In Germany, headline inflation unexpectedly slowed for a second straight month, led by the sharp easing in energy prices. January's preliminary reading showed inflation declining to 1.6% year-on-year. The flash Eurozone manufacturing PMI reading for January came in as expected at 59.6. The manufacturing PMI for Germany was marginally below forecasts at 61.1. Meanwhile, European Commission data showed economic sentiment in the euro bloc easing slightly in January from a 17-year high of 115.1 to 114.7, as a result of a slight decline in sentiment in the retail trade sector.
  • Japanese data was largely positive over the week. The provisional reading of industrial production showed an increase of 2.7% in December, up from the 0.5% increase seen in November. The jobless rate unexpectedly rose to 2.8% in December against the expectation of staying unchanged at 2.7%. However, the job-to-application ratio reached its highest level in 44 years, rising to 1.59 in December from 1.56. The final reading for the Nikkei manufacturing PMI was revised upwards by 0.4 points to 54.8 in January. Retail sales rose by 3.6% over the year to December, above the forecast of 2.2%.
  • The official Chinese manufacturing PMI for January came in slightly lower at 51.3, below the forecasted reading of 51.6 as output and new orders dipped. However, the non-manufacturing PMI beat forecasts of 54.9 with the index rising to 55.3.

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. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given as of the date indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.


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