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Aon Retirement and Investment Blog

Weekly Update - 29 January 2018 (UK/Europe)


  • Global equity markets rose over the week in which the International Monetary Fund (IMF) upgraded its global economic growth forecasts and the World Economic Forum at Davos took centre stage. The European Central Bank and the Bank of Japan both voted to keep their monetary policy unchanged. The MSCI AC World Index rose 1.3% in local currency terms. However, broad sterling strength on the back of encouraging UK jobs reports dragged down returns to -0.4% in sterling terms. Emerging market equities were the best performing market both in local currency (2.6%) and sterling terms (0.8%), predominantly driven by Brazilian equities after a Brazilian court dismissed an appeal by former President Lula da Silva against a corruption conviction. The UK was the worst performing market in local currency terms (-0.8%) and Japan was the worst performing market in sterling terms (-1.3%).
  • UK gilt yields rose across all maturities over the week supported by strong employment and better than expected economic growth data. The 10 year UK gilt yield rose by 9bps to 1.47% and the 20 year UK gilt yield rose by 4bps to 1.88%. The 10 year US treasury yield rose by 2bps to 2.66%, nearly touching a four-year high after the US government shutdown ended. German bund yields rose by 6bps to 0.57% and French government bond yields rose by 7bps to 0.79% over the week.
  • The UK 20 year real yield rose 6bps to -1.59% and the Over 5 year real yield rose by 4bps to -1.55%. 20 year breakeven inflation was unchanged at 3.41%.
  • Credit spreads fell over the week. The US high yield bond spread over US treasury yields fell by 12bps to 323bps. The spread of USD denominated EM debt over US treasury yields finished the week 4bps lower at 264bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 3bps to 93bps.
  • The S&P GSCI rose by 2.9% in USD terms over the week. The energy sector rose by 3.9% as the price of Brent crude oil rose by 3.2% to US$71/BBL. Industrial metals increased by 1.5% as copper prices rose 0.6% to US$7,043/MT. Agricultural prices rose by 1.4% and gold prices also increased by 1.4% to reach US$1,353/ounce, after rising strongly since mid-December.
  • Sterling strengthened against all major currencies over the week. The US dollar depreciated by 2.4% against sterling, ending the week at $1.42/£. The euro weakened by 0.7% against sterling, finishing the week at €1.14/£. The Japanese yen appreciated by 1.9% against the US dollar, ending the week at ¥108.59/$.
  • US data releases were mixed over the week. The US economy expanded at an annualized rate of 2.6% over the fourth quarter, down from 3.2% previously and missing expectations of 3.0% growth. Despite this, underlying measures of the economy remain robust: personal consumption just exceeded forecasts with an annual increase of 3.8% (up from 2.2%) which is the strongest pace in over three years. This buoyancy led to a marked increase in imports which grew at their fastest rate in over seven years. The manufacturing Purchasing Managers' Index (PMI) unexpectedly rose 0.4 points higher to 55.5; analysts had forecasted a reading of 55.0. Meanwhile, the US Federal Reserve's preferred measure of inflation, the core Personal Consumption Expenditure (PCE) price index, rose at its fastest pace in more than a year; 1.9% for the year to December.
  • In the UK, the preliminary 0.5% estimate of economic growth in the fourth quarter beat expectations and was marginally up from the prior quarter’s 0.4% growth. On an annual basis, the economy grew 1.5%, marginally ahead of forecasts, but slower than the prior quarter’s reading of 1.7% growth. Expansion was driven predominantly by the services sector which accounts for almost 80% of GDP. Official unemployment data for November remained steady at 4.3%, while the claimant count showed a greater than expected increase in December. Wage growth, excluding bonuses, slightly beat expectations to increase 2.4% on an annual basis in the three months to November.
  • In the Eurozone, preliminary PMI readings for January were strong. The composite reading showed a 0.5 point increase to 58.6, beating market expectations of 57.9. Whilst the Eurozone’s manufacturing PMI undershot expectations and declined to 59.6 from 60.6 previously, the reading remains at a very high level in historical terms. German PMI numbers also held firm, with the manufacturing PMI reading 61.2, albeit declining from December’s reading of 63.3 and behind the forecasted level of 63.0. The headline IFO business climate reading for Germany unexpectedly improved in January to reach 117.6 from 117.2 last month. Meanwhile, ZEW economic sentiment indicators for Germany were strong. The ZEW expectations survey rose to 20.4 versus 17.7 forecasted and 17.4 previously.
  • In Japan, headline annual consumer price inflation came in at 1.0% in December, marginally below consensus estimates of 1.1%. Core consumer price inflation also picked up to 0.9% over the same period. Japan’s trade balance posted a surplus of ¥359.0bn in December, up from a revised surplus of ¥112.2bn in the previous month. However, this figure was less than the ¥535.0bn estimate as imports rose by more than expected, up 14.9% over the year to December (against forecasts of 12.4%). Meanwhile, export growth missed analyst forecasts, rising by only 9.3% over the same period. The preliminary reading of the Nikkei manufacturing PMI indicated a pick-up in growth with the index rising from 54.0 to 54.4 in January.
  • In China, industrial profits rose by 21.0% over last year, twice the pace of the previous year and also the fastest growth in six years, to reach 7.5 trillion yuan.
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