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Aon Retirement and Investment Blog

Weekly Update - 26 February 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets edged higher towards the end of the week after major government bond yields retreated from multi-year highs. The MSCI AC World Index rose 0.7% in local currency and 0.8% in sterling terms. 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 the status-quo, expressing concerns over euro volatility. The All Country Pacific ex Japan was the best performing region in local currency terms (1.6%), predominantly driven by Chinese and Taiwanese equities as markets reopened after the Lunar New Year holidays. Emerging markets were the best performing region in sterling terms (1.9%). The UK was the worst performing market in local currency terms (-0.4%) as economic data was weaker than expected and corporate earnings missed forecasts. Developed Europe ex UK returned the least in sterling terms at -0.5%.
  • UK gilt yields were mixed across maturities over the week. The 10 year UK gilt yield fell by 5bps to 1.54% and the 20 year UK gilt yield fell by 4bps to 1.92%. After touching a four-year high during the week, the 10 year US treasury yield ended 3bps lower at 2.87%. German bund yields fell by 5bps to 0.60% and French government bond yields fell by 3bps to 0.81% over the week. Greek government bond yields rose by 10bps to 4.91% despite a credit rating upgrade by Fitch and Moody’s. Italian government bond yields rose by 8bps to 2.16% due to political uncertainty ahead of general elections.
  • The UK 20 year real yield was unchanged at -1.51% whilst the Over 5 year real yield fell by 3bps to -1.55%. 20 year breakeven inflation fell by 4bps to 3.37%.
  • 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 sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 3bps to 105bps.
  • 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 Brent crude oil increased by 3.2% to US$67/BBL after a drop in US crude inventories as per the Energy Information Administration data. Industrial metals decreased by 2.3% as copper prices fell 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.
  • Sterling had a mixed performance against major currencies over the week. The US dollar appreciated by 0.5% against sterling, ending the week at $1.40/£. The euro weakened by 0.7% against sterling, finishing the week at €1.14/£. The Japanese yen depreciated by 0.5% against the US dollar, ending the week at ¥106.62/$.
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.
  • In the UK, economic growth data was unexpectedly revised down, albeit marginally, with fourth quarter growth lowered by 0.1% to 0.4%. Year-on-year growth was also revised downwards to 1.4%. Preliminary business investment slowed to 2.1% (year-on-year) from 2.7% and below the expected reading of 2.4% growth. The UK budget balance reported a better-than-expected surplus in January, as public sector net borrowing (excluding public sector banks) measured a £10bn surplus, half a billion ahead of economist forecasts. Public sector net borrowing slipped to £11.6bn in January, after December's borrowing was downwardly revised to £300m. Claimants for jobless benefits dropped by 7,200 in January, exceeding expectations while the unemployment rate ticked up to 4.4% from 4.3% in December.
  • 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.
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