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Aon Retirement and Investment Blog

Weekly Update - 11 February 2019 (UK/Europe)


  • There was little progress in the Brexit negotiations. Theresa May held meetings with both the EU and the Irish Government but was unable to secure concessions on the Northern Irish Backstop. Meanwhile, Jeremy Corbyn laid out his five demands for Labour to back the deal which include a customs union and close alignment with the single market. May will meet with Corbyn this week and may move on workers' rights but has ruled out a customs union. A series of votes will be held on Thursday which are expected to include taking no deal off the table and forcing a second meaningful vote on February 26th.
  • Next week, the US Department of Commerce is expected to deliver a report on the national security implications of US auto imports. This could have a significant impact on the US-European Union (EU) trade relations as US may soon impose auto tariffs on the EU.
  • The EU slashed its 2019 growth forecast to 1.3% from 1.9%. The EU-Japan trade deal came into effect from February 1, 2019. The deal eliminates Japanese tariffs on about 94% of all imports from the EU. The EU will eliminate tariffs on about 99% of all imports from Japan over time.
  • The Bank of England (BoE) left its rates unchanged but downgraded 2019 UK growth forecasts to 1.2% from 1.7%. BoE Governor Mark Carney warned that the risks of a no-deal Brexit have increased.
  • Global equity markets fell over the week with the prospect of another US Government shutdown moving closer and trade concerns weighing on investor sentiment. The MSCI AC World Index fell by 0.1% in local currency terms and rose by 0.6% in sterling terms. The Information Technology sector was the best performer at (+1.5%) in local currency terms. The Materials sector was the worst performer at (-1.4%) in local currency terms as global commodity prices fell.
  • Asia Pacific equities were the best performing region in both local currency (+2.6%) and sterling (+2.3%) terms. Japanese equities were the worst performing region in both local currency (-1.8%) and sterling (-1.0%) terms.
  • The 10-year gilt yield fell by 9bps to 1.15% and the 20-year gilt yield fell by 8bps to 1.60%. 10-year US treasury yields fell by -5bps to 2.63%. German Bund yields fell by -9bps to 0.08% and French government bond yields fell by 3bps to 0.54%. Italian government bond yields rose by 28bps to 3.00%in a week in which the European Commission slashed Italy's 2019 growth forecast to 0.2% from1.2%.
  • The Over 5-year real yield fell by 7bps to -1.64% and the UK 20-year real yield fell by 8bps to -1.85%. 20-year breakeven inflation was unchanged at 3.37%.
  • UK investment grade credit outperformed over the week, returning 0.6%. The US high yield bond spread over US treasury yields rose by 3bps to 432bps over the week. The spread of USD denominated EM debt over US treasury yields rose by 9bps to 362bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) was unchanged at 140bps over the week.
  • The S&P GSCI index fell by 1.6% in USD terms over the week. The S&P GSCI Energy index fell by 2.4% as the price of Brent Crude oil fell by 1.0% to US$62/BBL amidst declining investor sentiment and fears of an increase in production from Libya. Industrial metal prices fell by 0.1% as copper prices rose by 1.8% to US$6,207/MT. Agricultural prices fell by 0.9% and gold prices fell by 0.3% to US$1,315/Oz.
  • Sterling depreciated by 0.2% on a trade weighted basis over the week. Sterling weakened by 1.1% against the US dollar and rose 0.1% against the euro, ending the week at $1.29/£ and €1.14/£. The US dollar increased by 0.3% against the Japanese yen, ending the week at ¥109.73.
  • US weekly jobless claims fell from an eighteen-month high of 253k to 234k but nonetheless, fell short of an expected decline to 221k. The Institute of Supply Management's (ISM) Non-Manufacturing index, a measure of activity in the services sector, fell by 1.3 points to 56.7 in January and short of consensus estimates of 57.1. Factory orders in November declined 0.6% after a 2.1% decrease in October as demand for machinery and electrical equipment fell sharply over the month. After widening for five straight months, the US trade deficit unexpectedly narrowed in November to -$49.3bn from an upwardly revised -$55.7bn in October, as imports fell sharply compared to exports.
  • In the UK, the Bank of England held its interest rates unchanged at 1.75% and sharply downgraded its economic growth forecasts amid Brexit uncertainty and slowing global growth. Economic activity in the UK services sector, as measured by the services Purchasing Managers' Index (PMI), fell to 50.1 in January from 51.2, sharply below expectations of 51.0. Over the same period, the Construction PMI slipped to 50.6 from 52.8, significantly below forecasts of it slowing to 52.5. Elsewhere, house prices contracted as the Halifax House Price index fell by 2.9% in January. Year-on-year growth in the Halifax House Price index also slowed to 0.8% for the first quarter of 2019. 
  • In the Eurozone, both the services and composite PMI readings for January ticked higher to 51.2 and 51.0, respectively. Retail sales contracted by 1.6% in December following November's upwardly revised 0.8% increase, taking year-on-year growth to 0.8% from the revised 1.8% in November. In Germany, industrial production fell by 0.4% in December from an upwardly revised 1.3% fall in November; markets had expected a 0.8% increase. Factory orders also came in well below expectations, falling by 1.6% in December from an upwardly revised 0.2% decrease in November. The German trade surplus fell sharply from €20.4bn to €13.9bn, the lowest surplus since January 2016, as exports declined sharply.
  • Following the survey data scandal that overestimated wage growth in Japan, labour cash earnings continued to be encouraging with year-on-year growth ticking higher to 1.8% in December. This was slightly up from the downwardly revised 1.7% growth recorded in the previous month and above analyst forecasts of 1.7%. Once adjusted for inflation, real wages rose by 1.40% in the year to December, up from the downwardly revised 0.8% growth recorded in the previous month but lower than consensus estimates of 1.7% increase. The current account surplus narrowed from ¥757.2bn to ¥452.8bn in December and fell short of forecasts of ¥469.3bn. Elsewhere, the Nikkei Services PMI accelerated to 51.6 in January from 51.0 due to increase in domestic demand whilst the overall composite PMI slowed to 50.9 from 52.0 over the same period due to slowdown in manufacturing sector.
  • There were no economic releases in China due to the Lunar New Year holidays.  
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