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Aon Retirement and Investment Blog

Weekly Update - 2 January 2018 (UK/Europe)


  • Global equities rose marginally over the last two weeks of 2017 which saw the US Senate pass Trump’s tax reform bill. The MSCI AC World Index rose 0.6% in local currency terms, whilst it fell 0.3% in sterling terms. Emerging Markets were the best performing region in local currency terms (2.8%), predominantly driven by Korean equities. The UK returned the most in sterling terms at 2.7%. Developed Europe ex UK was the only region that fell in local currency terms, falling -0.5%, due to political uncertainty in the Eurozone periphery. The US returned the least in sterling terms at -1.6% due to dollar weakness.
  • Globally, government bond yields rose. Both the 10 year and the 20 year UK gilt yield rose by 4bps to 1.23% and 1.74% respectively. The 10 year US treasury yield rose by 6bps to 2.41%. European government bond yields also rose across the region. German bund yields rose by 12bps to 0.42% and French government bond yields rose by 16bps to 0.66%. Portuguese government bond yields rose by 12bps to 1.93% despite Fitch credit rating agency upgrading the Portuguese bonds credit rating to investment grade. Italian government bond yields rose by 18bps to 1.95% after the Italian President dissolved parliament ahead of elections in March 2018. Spanish government bonds yields rose by 11bps to 1.57% as pro-independence parties maintained a majority in the Catalan regional elections.
  • The 20 year real yield was unchanged at -1.70% whilst the Over 5 year real yield rose by 1bp to -1.66%. 20 year breakeven inflation rose by 5bps to 3.36%.
  • The US high yield bond spread over US treasury yields fell by 6bps to 358bps. The spread of USD denominated EM debt over US treasury yields finished the week 3bps lower at 285bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 1bp to 102bps.
  • The S&P GSCI rose by 5.5% in USD terms. The energy sector rose by 6.7% as the price of Brent crude oil increased by 5.0% to US$67/BBL. Industrial metals rose by 6.3% as copper prices increased by 5.1% to US$7,207/MT. Agricultural prices rose by 2.3% and the gold price rose by 3.9% to US$1,303/ounce.
  • Sterling appreciated against major currencies (except for the euro) over the period. The US dollar depreciated by 1.6% against sterling, ending the week at $1.35/£. The euro strengthened by 0.5% against sterling, finishing the week at €1.13/£. The Japanese yen was flat against the US dollar, ending the week at ¥112.65/$.
  • In the last two weeks of 2017, the final reading of US Q3 GDP growth was revised marginally down to 3.2% from 3.3%. Nonetheless, the US economy still grew at the fastest pace in more than two years. Despite rebounding from a 0.4% decline in October, the provisional 1.3% increase in orders for US capital goods in November fell short of expectations of a 2.0% gain The Conference Board’s consumer confidence index fell from a seventeen-year high of 128.6. The index dropped to 122.1, below forecasts of 128.0, due to a perceived worsening in expectations in the business climate. Finally, the US Federal Reserve’s preferred measure of inflation, the core Personal Consumption Expenditures (PCE) price index, met expectations and rose to 1.5% from 1.4%.
  • In the UK, the final readings of Q3 GDP growth were ahead of market expectations, as the economy grew 1.7% year-on-year, against expectations of 1.5%. Business investment was strong, outperforming initial estimates of 1.3% growth, as it increased by 1.7% in the twelve months to September. However, UK consumer confidence, as measured by GfK’s Consumer Confidence Index, disappointed as it fell one point in December to -13; its lowest level since December 2013 and down from -7 in the same period last year. Public sector net borrowing (excluding banking groups) data for November came in at £8.7bn, down £0.2bn compared with the same month last year and the lowest November total since 2007. The fall in public borrowing, which beat forecasts of £9.0bn, was driven predominantly by an increase in current receipts.
  • In Europe, data releases were mixed over the period. Germany’s IFO Business Climate reading edged down unexpectedly to 117.2, from 117.6 in November. The dip in this widely-followed indicator reflects less optimistic business expectations compared with the previous month yet remains favorable. However, consumer confidence data for the Eurozone was encouraging, with the European Commission’s measure exceeding estimates. The indicator rose from 0 to 0.5 in December; the highest reading since January 2001. Meanwhile, German inflation data surprised on the upside. The December flash reading reflected a 1.6% year-on-year price increase, versus 1.4% expected.
  • In Japan, headline annual consumer price inflation came in at 0.6% in November, marginally beating consensus estimates of 0.5%. Core consumer price inflation also picked up to 0.3% over the same period. The tight labour market persists in Japan with the jobless rate falling to 2.7% in November from 2.8%. Meanwhile, the job-to-applicant rose to 1.56 over the same period. Retail sales outperformed expectations of 1.0% growth and rose by 2.2% over the year to November. Japan’s trade balance posted a surplus of ¥113.4bn in November against a forecasted deficit of ¥40.0bn.
  • Industrial profits in China grew at their slowest pace in seven months, at 14.9%, in the year to November; down from the previous month’s reading of 25.1%. Factors that have supported industrial profitability over the last year, namely strong demand and a pick-up in producer price inflation, weakened in November. The final reading of the current account surplus showed a widening to $40.5bn from $37.1bn.
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