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Aon Retirement and Investment Blog

Weekly Update - 19 January 2015 (UK/Europe)


  • Join Aon Hewitt on Wednesday, January 21, noon to 1:00 p.m. (US central), for our first U.S. Retirement Webinar of 2015: 2015 Hot Topics in Retirement. The results from the 2015 Hot Topics in Retirement report shows that the new year has no signs of slowing down.
  • Global equity markets were lower over what was another volatile week, with the main news event being the Swiss National Bank's decision to remove the Swiss franc's peg to the euro. Following the announcement on Thursday morning there were a number of significant moves in currency markets and a sell off in equities, but markets rebounded sharply into the end of the week as investors interpreted this to mean that the European Central Bank will launch a round of quantitative easing imminently at its January meeting. The MSCI AC World Index returned -0.3% in sterling terms. The UK was the best performing region in local currency terms (+0.8%), helped by a rebound in basic materials and energy stocks as oil prices stabilised somewhat after their recent sharp falls. Europe ex UK was the best performer in sterling terms (+2.0%) as the steep appreciation in the Swiss franc more than offset euro weakness (the Swiss market accounts for around 20% of the index). The worst performer in local currency terms was Asia Pacific ex Japan (-1.3%) and in sterling terms the US was the weakest performer   (-1.0%) as US markets started the year with underperformance against other regions following last year's strong gains.
  • UK government bond yields were lower at longer maturities, but marginally higher at shorter maturities. The 10 year UK gilt yield was 6 bps lower at 1.54% whilst the 20 year gilt yield fell by 10 bps to 2.06%. The 10 year US Treasury yield fell by 15 bps to 1.82%.
  • UK real yields fell again over the week. The UK 20 year real yield was 7 bps lower at       -0.91% and the Over 5 year real yield fell by 7 bps to -0.93%. 20 year breakeven inflation was 3 bps lower to finish the week at 2.97%.
  • Credit spreads were mixed over the week. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 4 bps to 122 bps. However, US high yield bond spreads over Treasuries rose by 19 bps to 539 bps. The Emerging Market ($) bond spread over Treasuries rose by 11 bps to 393 bps.
  • The S&P GSCI Commodity Index fell by 1.4% in USD terms over the week. The price of Brent crude oil fell by 1.4% to $48/BBL, with the Energy sector as a whole down by 0.5%. Industrial Metals were 2.6% lower over the week and the copper price fell 6.5% to $5,768/MT. Agricultural prices were down by 3.7%. Gold was 4.6% higher over the week at $1,275/ounce.
  • Sterling was mixed against other major currencies over the week, weakening against the US dollar and Japanese Yen but strengthening significantly against the Euro as the Euro weakened on the ECB stimulus hopes. The US dollar appreciated by 0.2% over the week versus sterling, ending the week at $1.51/£, and the euro was 2.6% lower at €1.31/£. The Japanese yen continued its rally against the US dollar, appreciating by 1.0% to ¥117.6/$.
  • The US data last week indicated that 2014 closed on a slightly weak note but that activity picked up once again in the first few weeks of 2015. Retail sales were reported to have fallen by a surprisingly large 0.9% in December, while the previous month's increase was also revised down from 0.7% to 0.4%. The consensus was only expecting a small pullback of 0.1% in December as a counterpoint to Thanksgiving sales activity. Furthermore, industrial production fell by 0.1% in December, following a 1.3% monthly increase in the November. In contrast, the Empire manufacturing index of activity in the New York state area increased by more than expected to 10 in January from -1.2, while the University of Michigan consumer sentiment index increased to 98.2 from 93.6. Finally, the first clear effects of the recent oil price falls were seen in the further slowdown of consumer price inflation in December. The main inflation rate fell to 0.8% from 1.3% but the core index, which excludes food and energy prices, held steadier, only slowing to 1.6% from 1.7%. We think it quite likely that inflation rates will be dampened further in the coming months from cheaper oil prices and this should provide a boost to consumer spending in the US.
  • In the UK, inflation was also the main topic of discussion, with the CPI index falling by more than expected to 0.5% in December from 1% in November, thus prompting a mandatory letter to the Chancellor of the Exchequer to explain why inflation has fallen so far below the Bank of England's target of 2%. The main culprit of falling oil prices is obvious so the letter should be an easy one to write, while the fact that the core rate actually rose a touch to 1.3% from 1.2% should calm nerves too.
  • In Europe, the data calendar was light last week, with many investors looking ahead to the announcement of new monetary policy measures on the 22nd of the month. An indication of the need for monetary policy support came from the November industrial production figures, which showed a 0.4% year-on-year decline in growth, although this was slightly better than expected. Meanwhile in Germany, there was further evidence of the disinflationary forces exerted by lower oil prices, with the wholesale price index falling by 2.3% in December versus a decline of 1.1% in November.
  • Japanese economic data was promising on the whole. November’s trade deficit (¥637B) was smaller than both October’s value (¥767B) and consensus expectations (¥734B), reflecting the impact of the lower oil price on Japan’s economy, which is a large net importer of oil. This caused the adjusted current account surplus (¥915B) to be larger than expected (¥693B) too. The economy watchers survey for December showed improvement as both components increased for the first time since July 2014. The current conditions component improved from 41.5 in November to 45.2, beating expectations of a rise to 44.0. The outlook component rose from 44.0 to 46.7. However, machine orders for November disappointed. They were expected to rise by 4.4% over the month, but only rose by 1.3%, which equated to a year-on-year contraction of 14.6%.
  • Finally, the Chinese trade surplus fell a little to $49.6bn in December from $54.5bn. Underlying this was a stronger than expected increase in export growth of 9.7% from 4.7% and another contraction in imports of 2.4% - they fell by 6.7% in November. Overall, these figures are consistent with an economy that has slowed down but still has a healthy external trade sector.

The information contained above is intended for general information purposes only and should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.

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