Aon Retirement and Investment Blog

Weekly Update - 15 January 2018 (UK Europe)

January 15, 2018

MARKET MOVES

• Global equity markets continued to rise, supported by strong economic data and a continued rise in crude oil prices. In Europe, political uncertainty took a backseat after Angela Merkel’s Christian Democratic Union (CDU) party and the Social Democratic Party (SDP) made headway on a coalition agreement. The MSCI AC World Index rose 1.0% in local currency terms and 0.3% in sterling terms. The US was the best performing market in local currency terms (1.6%), supported by decent Christmas retail sales. The UK returned the most in sterling terms (0.8%). Japan returned the least in local currency terms (-0.2%) and Developed Pacific ex Japan was the worst performing region in sterling terms (-0.8%).
• UK gilt yields rose across all maturities over the week, in line with the trend in government bond yields of major developed markets. The European Central Bank hinted it may soon join the US Federal Reserve and the Bank of England for less accommodative monetary policy, putting upward pressure on yields. The 10 year UK gilt yield rose by 10bps to 1.38% and the 20 year UK gilt yield rose by 6bps to 1.84%. The 10 year US treasury yield rose by 8bps to 2.55%. German bund yields rose by 9bps to 0.53% and French government bond yields rose by 7bps to 0.74% over the week.
• UK real yields rose over the week. Both the 20 year real yield and the Over 5 year real yield rose by 4bps each to -1.64% and -1.61% respectively. 20 year breakeven inflation rose by 2bps to 3.40%.
• The US high yield bond spread over US treasury yields rose 1bp to 337bps. The spread of USD denominated EM debt over US treasury yields also finished the week 1bp higher at 272bps. The sterling investment grade spread over gilt yields (based on the Merrill Lynch index) fell by 2bps to 98bps.
• The S&P GSCI rose by 2.3% in USD terms over the week. The energy sector rose by 4.0% as the price of Brent crude oil rose by 3.5% to US$70/BBL. Industrial metals rose by 0.3% despite copper prices declining by 0.1% to US$7,074/MT. Agricultural prices fell by 1.6% whilst gold prices rose by 0.9% to US$1,331/ounce.
• Sterling continued to be resilient against major currencies over the week, supported by speculation on a second EU referendum. The US dollar depreciated by 0.9% against sterling, ending the week at $1.37/£. The euro remained flat against sterling, finishing the week at €1.13/£. The Japanese yen appreciated by 1.7% against the US dollar, ending the week at ¥111.32/$.

• In the US, consumer price inflation met expectations and slowed down to 2.1% for the year to December from 2.2%. Core inflation, which excludes food and energy, outpaced consensus estimates and rose to 1.8%. Analysts had expected core inflation to be unchanged at 1.7%. Meanwhile, the Labor Department’s producer prices index (PPI) fell in December for the first time in nearly a year and a half. The PPI slipped by 0.1%, while a 0.2% increase was forecasted following two consecutive months of 0.4% growth. Apart from inflation releases, US retail sales slightly underperformed expectations of 0.5% growth, rising by just 0.4% in December. At the same time, November’s provisional reading of 0.8% growth was revised higher to 0.9%.
• In the UK, economic data releases over the week were mixed. Industrial production increased by 0.4% over November, in line with expectations and up from the revised 0.2% rise in the previous month. Manufacturing production also grew 0.4% over November and was marginally ahead of expectations, as well as last month’s upwardly revised 0.3% increase. Production data for both sectors outperformed expectations over the last year, with industrial up 2.5% and manufacturing up 3.5%. The UK trade deficit widened to £2.8bn, against expectations of a £1.5bn deficit. The increase was largely driven by an increase in fuel imports from non-EU countries. Finally, UK house price data for December, as measured by the Halifax house price index, showed a 0.6% decline in values over the month. This move undershot forecasts of 0.2% growth and followed the previous month’s reading of 0.3%.
• In Europe, industrial production data for Germany exceeded consensus expectations as production rose by 3.4% over November, on a seasonally adjusted basis. This represented a rebound from the previous month’s 1.2% decline and forecasts of 1.8% growth. Industrial production data for the Eurozone as a whole was slightly ahead of expectations, increasing 1.0% over the month, up from 0.4% previously. Factory orders in Germany unexpectedly declined by 0.8% over November, after three successive months of gains. This dip was largely attributed to fluctuations in bulk orders; the overall trend, however, remains positive. Meanwhile, the European Commissions’ economic sentiment indicator for December jumped to its highest level since 2000. The indicator moved from its previous reading of 114.6 to 116, beating forecasts of 114.8.
• The Japanese current account surplus narrowed to ¥1347.3bn in the year to November, marking the first decline since June. Japan has recorded a trade surplus for 41 consecutive months, but it has started to shrink in recent months partly due to high crude oil prices. Wage growth data was encouraging as labour cash earnings grew by 0.9% for the year to November against a forecasted increase of 0.6%. Real wages (which takes inflation into consideration) unexpectedly rose by 0.1%; going against analyst forecasts of a 0.1% decline.
• In China, the Consumer Price Index (CPI) rose by 1.8% over the year to December, slightly up from 1.7% in November. The increase in prices was predominantly due to an increase in non-food prices such as medical products and housing. Export growth slowed down in December with exports growing by 10.9% over the twelve month period, down from the revised 11.5% increase up to November. There was also a slowdown in import growth, as imports rose by only 4.5% in dollar terms, against expectations of a 15.1% increase.

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