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Aon Retirement and Investment Blog

Weekly Update - 5 January 2015 (Europe/UK)

HAPPY NEW YEAR FROM THE GLOBAL BLOG!
 
UPCOMING EVENTS

  • Please join the US Investment Consulting Practice on Wednesday, January 14, 2015, from 10:00 a.m. to 11:00 a.m. (Central Time) as we present a live investment strategy webcast for investors.  Aon Hewitt’s Global Asset Allocation Team discusses our firm’s current economic outlook, shares medium-term asset class views, and answers your questions as we begin a new year. Stay tuned for registration information.
MARKET MOVES
  • Global equity markets drifted higher over the Christmas and New Year holiday period as investors reacted to the US Federal Reserve's final statement of 2014 indicating they would be 'patient' in raising interest rates. Over the two weeks, the MSCI AC World Index returned 1.1% in sterling terms, taking the 2014 calendar year return to 11.2%. Asia Pacific (ex Japan) was the best performing region in both local currency (+2.4%) and sterling terms (+3.8%), driven by strong returns in China. The worst performer in local currency terms was the US (-0.5%) as investors booked profits at the end of another strong year. The worst performer in sterling terms was Europe (ex UK) (-0.1%) as the euro weakened on fears over a Greece exit from the Eurozone and the prospect of further monetary stimulus from the ECB. 
  • UK government bond yields were lower at all maturities, and Eurozone yields fell to fresh 1 year lows. The 10 year UK gilt yield fell by 14 bps to 1.73% (131 bps lower than at the start of 2014), whilst the 20 year gilt yield fell by 14 bps to 2.29% (128 bps lower over the year). The 10 year US Treasury yield fell by 6 bps to 2.12%. 
  • UK real yields fell over the period as well. The UK 20 year real yield was 4 bps lower at -0.74% and the Over 5 year real yield fell by 3 bps to -0.75%. 20 year breakeven inflation was 9 bps lower, ending at 3.03%.
  • Credit spreads were broadly unchanged, with the sterling non-gilt spread over government yields (based on the Merrill Lynch index) rising 3 bps to 126 bps. US high yield bond spreads over Treasuries fell by 1 bp to 508 bps. The Emerging Market ($) bond spread over Treasuries rose by 4 bps to 359 bps.
  • The S&P GSCI Commodity Index fell by 5.8% in USD terms over the last 2 weeks, as crude oil prices continued to decline. The Energy sector was down by 7.9% as the price of Brent crude oil fell by 6.7% to $56/BBL, a fresh 5 year low. Industrial Metals were 2.7% lower and the copper price fell 2.0% to $6,321/MT. Agricultural prices were down by 5.1%. Gold was 0.8% lower over the period at $1,189/ounce. 
  • Sterling returns against other major currencies were mixed over the period. The US dollar appreciated by 1.6% versus sterling, ending the period at $1.54/£, but the euro finished the period 0.3% lower at €1.28/£. The Japanese yen fell against the US dollar, depreciating by 0.6% to ¥120.21/$. 
ECONOMIC RELEASES
  • The final estimate of US gross domestic product in Q3 was revised up to an annualised 5% quarter-on-quarter, its strongest in 11 years, from 3.9% previously estimated. Consumer spending has been strong, with a 0.6% rise in November announced, and recent consumer sentiment surveys indicate that the trend will continue, helped by lower oil prices and an improving jobs market. However, there have been some disappointing data releases over the last couple of weeks - Durable goods orders slipped 0.7%, missing expectations of a 3% increase, on the back of weak demand for military equipment. The ISM manufacturing index fell to a six month low in December of 55.5, down from 58.7 last month. Existing home sales fell 6.1% and new home sales fell 1.6% in November. However, these data releases were insufficient to cloud the overwhelming positive growth story in the US at the end of 2014. 
  • In contrast, the pace of the UK economic recovery was slower than previously thought, with Q3 GDP announced to be 2.6% year-on-year (0.7% quarter-on-quarter), down from the 3% previously expected. Furthermore, revisions to previous quarters now indicate that the level of GDP is 2.9% above its previous peak in early 2008, instead of the 3.4% previously estimated. The UK current account deficit increased to a record £27bn, or 6% of GDP in Q3, up from 5.5% in Q2. Low receipts from investment overseas and higher payments to foreign investors are to blame for the rise, although the trade balance continues to be in surplus. 
  • The Eurozone manufacturing purchasing managers’ index (PMI) was lower than the 50.8 first estimated in December, at 50.6. The German figure came in as expected at 51.2 whilst the Italian PMI was the lowest in 19 months. The release keeps pressure up on the ECB to announce more monetary easing.
  • Japan's industrial production posted a surprise drop in November, falling by 0.6% after rising by 0.4% in the previous month. Retail sales were also down over the month, falling by 0.3%. At the same time, inflation continues to slow. Core inflation, excluding fresh food, rose 2.7% in November. The figure is above the 2% target level but it still includes the temporary effects of an April sales tax hike. November household spending fell 2.5% year-on-year in November, compared with expectations for a 3.6% decline and the jobless rate remained steady at 3.5% in November.
  • Chinese industrial profits fell by 4.2% in November, the biggest annual decline since August 2012, driven by weak coal mining, oil and gas sectors. The official manufacturing PMI slipped to 50.1 in December, its lowest level of the year, down from November's 50.3. Meanwhile, HSBC’s manufacturing PMI estimate actually fell below 50 (49.6) indicating that activity shrank for the first time in seven months. 

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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