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Aon Retirement and Investment Blog

Weekly Update - 26 February 2018


  • Aon’s Chief Investment Officer Newsletter. This newsletter from Aon's North America Chief Investment Officer discusses the interest rate environment and what it tells us about the economic environment and capital markets.
MARKET MOVES (Week ending February 25, 2018)
  • Global equity markets edged higher towards the end of the week after major government bond yields retreated from multi-year highs. In the latest monetary policy meeting minutes, the US Federal Reserve implied a more aggressive monetary tightening path in 2018 whilst the European Central Bank maintained its status-quo, expressing concerns over euro volatility. The MSCI World Index rose 0.2% over the week, underperforming the S&P 500 Index, which rose 0.6% over the same period. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (3.0% vs. 2.0%).
  • US Large Cap stocks marginally outperformed Small Cap stocks over the week as the S&P 500 Index rose 0.6% whilst the Russell 2000 Index rose 0.4%. On a year-to-date basis, the S&P 500 Index has outperformed the Russell 2000 Index (3.0% vs. 1.0%). Value stocks underperformed Growth stocks over the week (-0.1% vs. 1.1%) as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (6.1% vs. 0.0%).
  • The 10 year US Treasury yield fell by 1bp to 2.87% whilst the 30 year US Treasury yield rose by 2bps to 3.16%.
  • The 20 year TIPS yield was unchanged at 0.92% while the 20 year breakeven inflation rate rose by 3bps to 2.09%.
  • The spread on both the Bloomberg Barclays Capital Long Credit Index and the Bank of America Merrill Lynch US Corporate Index over treasury yields rose by 2bps to 135bps and 100bps respectively. The US high yield bond spread over US treasury yields rose by 8bps to 358bps. The spread of USD denominated EM debt over US treasury yields finished the week 3bps higher at 287bps.
  • The S&P GSCI rose by 1.8% in USD terms over the week. The energy sector rose by 3.4% as the price of WTI crude oil increased by 2.6% to US$64/BBL as the Energy Information Administration reported a drop in US crude inventories. Industrial metals fell by 2.3% as copper prices slipped by  1.8% to US$7,062/MT. Agricultural prices rose by 0.6% whilst gold prices fell by 2.1% to US$1,328/ounce.
  • The US dollar appreciated against major currencies over the week. The US dollar strengthened by 0.5% against sterling, ending the week at $1.40/£. The US dollar appreciated by 1.2% against the euro, ending the week at $1.23/€. The Japanese yen weakened by 0.5% against the US dollar, ending the week at ¥106.62/$.
Economic Releases
  • Purchasing Managers' Index (PMI) data released last week showed momentum continuing in the US economy. The manufacturing PMI inched 0.4 points higher to 55.9, exceeding forecasts for the index to remain unchanged at 55.5. However, growth in the service sector improved significantly with the services PMI also reaching 55.9 but from a lower reading of 53.3 and consensus forecasts of 53.7. Housing market data showed US home sales unexpectedly falling by 3.2%; the largest year-on-year decline in over three years. Sales were expected to grow by 0.5% in January, while December's reading was revised up to -2.8%. The number of people claiming unemployment benefits remained at multi-decade lows at only 222k, below the previous reading and consensus estimate of 229k and 230k respectively.
  • Eurozone economic releases were largely negative this week. Final Eurozone inflation for January came in as expected, with prices increasing 1.3% over the year. Preliminary PMI data for the Eurozone in February was slightly softer than expected but still firmly in expansionary territory. The Markit Manufacturing PMI measured 58.5, versus 59.2 expected and 59.6 previously. The Markit Services PMI ticked down from 58.0 to 56.7, undershooting the expected reading of 57.6. This meant the composite PMI read 57.5, down from 58.8 previously and 58.4 forecasted. Preliminary PMI data releases in Germany reflected a similar story with Germany’s manufacturing PMI falling to 60.3 from 61.1 and slightly below expectations of 60.5. Germany’s IFO Business Climate report for February moved lower than expected to 115.4, from 117.6 previously. 
  • In Japan, headline annual consumer price inflation came in at 1.4% in January, marginally above consensus estimates of 1.3%. Core consumer prices grew for the thirteenth consecutive month, rising by 0.9% over the same period. As expected, Japan’s trade balance fell into deficit for the first time in eight months, although it beat expectations of a ¥1003.6bn deficit, standing at ¥943.4bn in January. The swing into a trade deficit was largely due to the increase in crude oil imports. The Japanese manufacturing sector grew at a slower rate in the month of February, as reflected by the preliminary Nikkei PMI manufacturing index falling to 54.0 from January's reading of 54.8.
  • In a week shortened by the "Golden week" public holidays, there were few economic data releases to report on. However, efforts by the Chinese government to cool excesses in the housing market seemed to be effective with property price growth slowing to 5.0% (year-on-year) from 5.3% recorded in December.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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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