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Aon Retirement and Investment Blog
Weekly Update - 12 February 2018 (UK/Europe)
February 12, 2018
NEW INTELLECTUAL CAPITAL
U.S. Corporate Pension Liability Hedging Views
. This update from the U.S. practice provides corporate pension liability hedging views as of December 31, 2017.
MARKET MOVES
The correction in global equity markets spilled over into a second week with global equities recording one of their worst performing weeks in recent times. Investor concerns continued over rising bond yields on the back of higher inflation and interest rate expectations. Falling energy prices exacerbated the sell-off in equity markets. The MSCI AC World Index fell 5.3% in local currency terms while broad sterling weakness limited the downside to -3.6% in sterling terms. The UK was the best performing region in local currency terms as it declined by a relatively smaller -4.6%. The US was the best performing region in sterling term.
(-2.9%) due to dollar strength. Japan was the worst performing region in local currency terms (-6.7%) as yen strength hit the export oriented economy. The AC Pacific ex Japan index fell the most in sterling terms at -5.2%.
UK gilt yields rose across all maturities although movements in bond yields were far more muted than the previous week's changes. The Bank of England (BoE) signaled for an earlier than initially anticipated, as well as slightly more aggressive, monetary tightening at its latest monetary policy meeting. The BoE did, however, decide to keep the base rate unchanged at 0.5%. The 10 year UK gilt yield rose by 2bps to 1.61% and the 20 year UK gilt yield rose by 1bp to 1.96%. The 10 year US treasury yield fell by 1bp to 2.85%. German bund yields fell by 1bp to 0.69% and French government bond yields fell by 2bps to 0.87% over the week. Greek government bond yields rose by 29bps to 4.52%, in a week in which the crisis-hit economy launched the sale of a seven-year bond.
The UK 20 year real yield rose by 1bp to -1.51% and the yield on the Over 5 year real government bond index rose by 3bps to -1.46%. 20 year breakeven inflation fell by 3bps to 3.40%.
Credit spreads rose over the week. The US high yield bond spread over US treasury yields rose by 46bps to 382bps. The spread of USD denominated EM debt over US treasury yields finished the week 33bps higher at 295bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 6bps to 100bps.
The S&P GSCI fell by 6.4% in USD terms over the week. The energy sector fell by 9.1% as the price of Brent crude oil fell by 5.3% to US$65/BBL. Industrial metals decreased by 4.0% as copper prices fell by 4.2% to US$6,712/MT. Agricultural prices rose by 0.2% whilst gold prices fell by 1.3% to US$1,313/ounce.
Sterling depreciated against major currencies over the week. The US dollar was one of the notable outperformers against sterling, appreciating by 2.3% to end the week at $1.38/£. The euro strengthened by 0.7% against sterling, finishing the week at €1.13/£. The Japanese yen appreciated by 1.6% against the US dollar, ending the week at ¥108.69/$.
ECONOMIC RELEASES
After decelerating in the last few months of 2017, growth in the US services sector picked up in 2018. The Institute of Supply Management's (ISM) non-manufacturing index surpassed expectations of a modest increase to 56.7, and rose from 56.0 to 59.9; marginally off the highest level on record of 60.1 posted in October last year. The labour market looked to have tightened further with the number of people claiming for unemployment benefits falling to a near-45 year low of 221k. Last week's initial jobless claims came in below the previous reading of 230k and analyst forecasts of 232k. Elsewhere, the US trade deficit grew by more than expected in December, increasing by 5.3% from a revised $50.4bn to $53.1bn; the largest deficit since 2008. The deficit was forecasted to increase to $52.1bn but was thought to have been driven higher by higher prices of commodity imports.
In the UK, economic data was largely negative over the week. The Markit Purchasing Managers' Index (PMI) readings for January disappointed, as the Composite PMI slipped from 54.2 to 53.0, below analyst forecasts of 54.1. This was driven by falls in both the Services sub-index, which fell from 54.9 to 53.5 as well as last week's recorded decline in the manufacturing index. Industrial production fell by 1.3% in the month of December, below expectations of a 0.9% decrease, and down from a 0.3% increase in November. In contrast to a rise in the Nationwide house prices index in January, the Halifax house prices index unexpected fell by 0.6% over the month, going against analyst forecasts of a 0.2% increase, and in line with the fall in the previous month.
Positive economic data continued to emanate from the Eurozone over the week. The flash Eurozone Composite PMI reading for January came in marginally above expectations at 58.8. In Germany, the flash Composite PMI reading for January also came in slightly above expectations at 59.0, up from 58.8 previously. Retail sales in the Eurozone increased by 1.9% in the year to December, in line with analyst forecasts, but down from a 3.9% increase in the year to November. Meanwhile, German factory orders increased by 3.8% in the month of December, above expectations of a 0.7% increase, and reversing a 0.1% decline in the previous month. The Eurozone Sentix investor Confidence index unexpectedly fell to 31.9, down from 32.9, but nonetheless remains at historically high levels.
Japan’s current account surplus narrowed to ¥797.2bn in the year to December from the previous reading of ¥1347.3bn. Wage growth data was mixed, as labour cash earnings grew by 0.7% for the year to December, higher than consensus estimates of 0.5%. However, real wages (which takes inflation into consideration) fell by 0.5%. The Nikkei Japan PMI for services rose to 51.9 in January from 51.1 in December, as domestic demand showed signs of improvement. The Tertiary Industry index moved 0.2% lower in December, below the previous month's reading of 1.1% and expectations of 0.2% growth.
Chinese inflation data showed signs of cooling, as both the consumer price index and the producers’ price index came in lower at 1.5% and 4.3% respectively for the year to January. Both measures did, however, meet consensus estimates. Imports and exports improved over the year to January but the trade surplus fell to US$20.34bn from US$54.69bn as the surge in imports (up 36.9% over the year from 4.5%) eclipsed the growth in exports (up 11.1% from 10.9%).
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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