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Aon Retirement and Investment Blog

Weekly Update - 8 January 2018 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • U.S. Corporate Pension Liability Hedging Views. This update from the U.S. practice provides corporate pension liability hedging views as of November 30, 2017. 
  • U.S. Discount Rate Update. Average discount rates fell in December, as the yield curve flattened further and equities continued their climb on the back of U.S. tax reform finally passing in December, eliminating the uncertainty that has lingered throughout 2017. The average plan sponsor’s discount rate decreased 59 basis points in 2017 to 3.72% from 4.31% as of December 31, 2016. In early January, rates have increased by 6 basis points through Thursday, January 4th.
MARKET MOVES
  • In the first trading week of 2018, global equity markets rose, supported by encouraging economic data and a rise in crude oil prices. European markets saw the introduction of regulatory reform in the ‘Markets in Financial Instruments Directive II (MiFID II)’ to increase transparency in trading. The MSCI AC World Index rose 2.5% in local currency terms and 2.4% in sterling terms. Japan was the best performing market in local currency terms (3.7%) supported by a weakness in yen. Emerging markets were the best performing region in sterling terms (3.4%). The UK was the worst performing region in both local currency terms and sterling terms, returning 0.5%.
  • UK gilt yields rose across all maturities over the week. The 10 year UK gilt yield rose by 6bps to 1.28% and the 20 year UK gilt yield rose by 4bps to 1.78%. The 10 year US treasury yield rose by 7bps to 2.48% despite disappointing employment reports. The upward momentum in European government bond yields was curtailed by soft Eurozone inflation data. German bund yields rose by 2bps to 0.44% and French government bond yields rose by 1bp to 0.67% over the week.
  • UK real yields rose over the week. The 20 year real yield rose by 2bps to -1.68% and the Over 5 year real yield rose by 1bp to -1.65%. 20 year breakeven inflation rose by 2bps to 3.38%.
  • The US high yield bond spread over US treasury yields fell by 22bps to 336bps. The spread of USD denominated EM debt over US treasury yields finished the week 14bps lower at 271bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 2bps to 100bps.
  • The S&P GSCI rose by 0.3% in USD terms over the week. The energy sector rose by 0.8% as the price of Brent crude oil rose by 2.2% to US$68/BBL. Crude oil prices rose as the political unrest in OPEC-member Iran remained in focus. Industrial metals fell by 1.6% as copper prices decreased by 1.8% to US$7,079/MT. Agricultural prices rose by 0.5% and gold prices rose by 1.2% to US$1,319/ounce.
  • Sterling appreciated against major currencies (except for the euro) over the week. The US dollar depreciated by 0.3% against sterling, ending the week at $1.36/£. The euro remained flat against sterling, finishing the week at €1.13/£. The Japanese yen depreciated by 0.5% against the US dollar, ending the week at ¥113.23/$.
ECONOMIC RELEASES
  • The keenly-watched US Labour Department report revealed that the US continues to add new jobs to the economy, albeit at a slower than expected pace. Non-farm payrolls data indicated 148k of newly-created jobs in December; down from the upwardly revised 252k job increases in the previous month and expectations of 190k. As expected, the unemployment rate was unchanged at 4.1% but average hourly earnings inched slightly higher to 2.5% for the year to December following a downwardly revised 2.4% wage growth figure for November. The manufacturing sector ended the year strongly with the Institute of Supply Management’s manufacturing index outperforming forecasts and increasing by 1.5 points to 59.7 from 58.2. A surge in new orders growth increased from 64.0 to 69.4 and supported the upward momentum in the manufacturing sector. Factory orders increased for the fifth consecutive month in November, rising by 1.3% versus the forecasted 1.1% increase.
  • In the UK, the flash manufacturing Purchasing Managers’ Index (PMI) for December weakened from last month’s four year high of 57.9 to 56.3, versus 56.3 expected. The construction PMI also missed expectations, falling further than expected from 53.1 to 52.2, against 53.0 forecasted. On a more positive note, the services PMI for December was slightly ahead of expectations at 54.2, against 54.0 forecasted. The composite PMI was therefore very marginally short of expectations at 54.9. Surveys by Nationwide on house prices were encouraging for December, as data showed 0.6% growth in prices over the month, ahead of the previous and expected 0.1% growth rate. On an annual basis, prices rose by 2.6%, up from 2.5% last month and well ahead of the 2.0% forecasted by analysts. Mortgage approvals for November also beat forecasts, growing to 65.2k from 64.9k and ahead of expectations of a slight decline to 64.0k.
  • In Europe, the final reading of December’s manufacturing PMI was unchanged at 60.6, the highest on record since data started in 1997. The services PMI for December was however revised one point lower to 56.5, leading the final reading for the composite index to be one point lower at 58.0. Germany’s manufacturing PMI remained at 63.3 and also the highest on record. Preliminary inflation data for the Eurozone was as expected, prices increasing by 1.4% year-on-year, although it was down from November’s 1.5% reading. However, core inflation stood at 0.9% year-on-year for a third month in a row, marginally undershooting expectations of a slight uptick to 1.0%. Lastly, retails sales for Germany rebounded more than what was expected, increasing 2.3% over the month, following a 1.0% decline in October. On an annual basis, sales grew by 4.4%, versus expectations of 2.3% growth.
  • In Japan, the final reading of the Nikkei manufacturing PMI for December came in at 54.0. Although it was slightly below the preliminary reading of 54.2, it remained higher than the previous reading of 53.6. Services PMI data showed a slight deceleration in the sector with the index inching 0.1 points lower to 51.1 from 51.2. The vehicle sales over the year to December fell by 1.0% following the 5.4% drop seen in November.
  • In China, as the government looks to curb excesses in both debt and property markets while also cracking down on air pollution, analysts had expected a softening in both the manufacturing and non-manufacturing sectors. This did not materialize however, as both the Caixin manufacturing and services PMI data, increased in December. The former increased to a four-month high of 51.5 from 50.8. Meanwhile, the services PMI increased to 53.9.

The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs. Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given as of the date indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.


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