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Aon Retirement and Investment Blog

Weekly Update - 18 February 2019 (UK/Europe)


  • The UK Prime Minister Theresa May suffered another parliamentary defeat in the House of Commons by 303 to 258 with Conservative Brexiteers refusing to endorse her Brexit plan as they believed it would rule out a No Deal Brexit. This has little implications but May weaken the UKs negotiating position. MPs held off on attempting to rule out No Deal with the key votes now expected to occur on 27 February.
  • Risk of another U.S. government shutdown was avoided as the U.S. President Donald Trump signed a funding bill for the remainder of the year. However, Trump declared a national emergency to secure funds for his U.S- Mexico Border wall.
  • There was further progress in the US China trade talks with both sides reporting good progress. U.S. President Donald Trump indicated his willingness to extend the 90-day trade war truce between the U.S. and China by 60 days if they are close to a breakthrough.
  • The Spanish parliament rejected the ruling socialist government’s 2019 budget proposal leading to Prime Minister Pedro Sanchez calling for an early election in mid or late April.
  • In Brazil, President Jair Bolsonaro released the first details of a long-awaited pension overhaul plan which aimed to fix a minimum retirement age. There was previously no minimum retirement age for employees.
  • Global equity markets rose over the week. Investor sentiment picked up on the back of progress in US-China trade talks and expectations that the Fed will end the wind-down of its balance sheet (Quantitative Tightening) earlier than expected. The MSCI AC World Index rose by 2.2% in local currency terms and rose by 2.8% in sterling terms. The Energy sector was the best performer at +3.6% in local currency terms as OPEC members Saudi Arabia and Russia both cut their oil production and US sanctions hit Venezuela's oil exports. The Utilities sector was the worst performer at (+0.4%) in local currency terms.
  • European equities were the best performing region in local currency terms (+3.3%) and sterling terms (+3.5%) despite EPFR data showing near record weekly outflows from the region. Emerging Market equities were the worst performing region in local currency terms (-0.1%) and sterling terms (+0.3%) in a week where Indian stocks experience their biggest weekly decline in four months in the aftermath of a deadly terrorist attack.
  • The 10-year gilt yield rose by 1bps to 1.16% and the 20-year gilt yield rose by 1bps to 1.61%. 10-year US treasury yields rose by 3bps to 2.67%. German Bund yields rose by 2bps to 0.10% and French government bond yields was unchanged at 0.53%. Italian government bond yields fell by 19bps to 2.81% in a week in which data indicated that there was a significant drop in the bad loans held by Italian banks.
  • The Over 5-year real yield fell by 2bps to -1.66% and the UK 20-year real yield rose by 3bps to - 1.83%. 20-year breakeven inflation fell by 1bps to 3.36%.
  • US high yield outperformed over the week, returning 0.6%. The US high yield bond spread over US treasury yields fell by 20bps to 412bps over the week. The spread of USD denominated EM debt over US treasury yields fell by 2bps to 360bps 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 rose by 3.3% in USD terms over the week. The S&P GSCI Energy index rose by 5.9% as the price of Brent Crude oil rose by 6.7% to US$66/BBL. Industrial metal prices fell by 0.9% as copper prices fell by 0.3% to US$6,190/MT. Agricultural prices fell by 0.8% and gold prices rose by 0.1% to US$1,317/Oz.
  • Sterling depreciated by 0.9% on a trade weighted basis over the week. Sterling weakened by 0.7% against the US dollar and fell 0.2% against the euro, ending the week at $1.28/£ and €1.14/£. The US dollar increased by 0.7% against the Japanese yen, ending the week at ¥110.56.
  • In the US, the Consumer Price Index (CPI) was unchanged in January against expectations of a 0.1% increase. On an annual basis, consumer prices increased by the slowest pace since June 2017 at 1.6%. Although slightly ahead of the forecasted 1.5% increase, inflation continued on a downward trend, falling from 1.9% recorded in the previous month. Core inflation, which excludes volatile food and energy components came in at 2.2% matching December reading and ahead of the 2.1% forecasted. Real average weekly earnings rose by 1.9% over the year to January, following the upwardly revised 1.4% growth in December. Despite relatively healthy wage growth, the advance reading of US retail sales for December pointed to a moderation in the previously robust consumer spending in the US with sales declining the most since September 2009. The -1.2% reading was well below consensus estimates of sales growth remaining at 0.1%. Furthermore, industrial production fell by 0.6% in January against an estimated 0.1% increase, marking the first fall in eight months.
  • UK economic growth slowed to 0.2% quarter-on-quarter in Q4 2018 from 0.6% in Q3. This meant that the economy grew by 1.4% over 2018, the slowest pace in six years. Business Investment (-1.4%) decreased for the fourth consecutive quarter and private consumption growth (0.4%) also slowed. Annual consumer price Inflation fell below the Bank of England’s 2 percent target for the first time in two years in January with CPI inflation at 1.8%, down from 2.1% recorded previously and below estimates of 1.9%. The core inflation rate was unchanged at 1.9% as expected. December's industrial production disappointed with year-on-year (YoY) growth falling by 0.9%, worse than the expected 0.5% decline. On a positive note, Retail sales rose by 1.0% in January, rebounding from an upwardly revised 0.7% contraction in the previous month and well ahead of the 0.2% growth forecasted.
  • In the Euro Area, the similar theme of slowing economic momentum was reflected in last week's economic releases. Industrial production fell by a further 0.9% in the month of December, following the 1.7% fall in November and came in below the estimated 0.4% contraction. The German economy avoided a technical recession (defined as two successive quarters of contraction), as its posted flat economic growth in Q4 2018 following a 0.2% contraction in Q3.
  • Japanese economic growth rebounded in Q4 2018 after being impacted by a series of natural disasters in the previous quarter. Supported by a recovery in business spending, preliminary readings showed that the economy grew at an annualised 1.4%, matching consensus estimates but not fully offsetting the annualised 2.6% contraction in the previous quarter. Core machinery orders fell by 0.1% in December, better than the estimated 1.0% fall. In addition, the Tertiary Industry index fell 0.3% in December against a forecasted decrease of 0.1% but better than the previous month’s downwardly revised 0.4% decrease.
  • In China, exports rebounded by 9.1% in the year to January, beating forecast of a 3.3% decline and well above 4.4% contraction in the previous month. Over the same period, imports shrank by 1.5%, significantly easing from the previous decline of 7.6% and better than the estimated 10.2% decrease. The trade surplus came in at US$39.16bn, ahead of analyst estimates of a US$34.30bn surplus but below US$57.06bn recorded in the previous month. Elsewhere, consumer price inflation slowed to 1.7% in the year to January, against analyst forecasts of remaining at 1.9%. Amid a backdrop of greater efforts by the central government to stimulate the economy, new loans in China surged to a record high in January with ¥3,230bn loan.
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