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Aon Retirement and Investment Blog

Weekly Update - 30 December 2018 (UK/Europe)

MARKET MOVES 

  • Global equity markets remained volatile over the fortnight with markets making large moves over the Christmas holidays period. The MSCI AC World Index returned -3.6% in local currency terms. However, sterling appreciation, particularly against the US dollar pushed down returns in sterling terms to -4.2%. During the period, the CBOE Volatility Index (VIX), which measures volatility in the US equity market, reached a six-month high of 36.2 as it remained above its long-term average of 20.
  • In a unanimous decision, the US Federal Reserve (Fed) raised its benchmark interest rates by another 25bps to a range of 2.25% - 2.50%. The US federal government was partially shut down over the fortnight as Congress failed to pass legislation to fund government operations amidst a dispute over a proposed border wall between the US and Mexico. In Brexit news, the European Union announced a series of contingency measures which could be implemented to reduce some of the potential impact in the event of a no-deal Brexit.
  • Developed Asia Pacific ex Japan was the best performer in local currency terms (0.3%) whilst UK was the best performer in sterling terms (-1.6%). Japan was the worst performer in local currency terms (-5.9%), whilst Developed North America was the worst performer in sterling terms (-5.3%).
  • In UK, the 10-year gilt yield rose by 4bps to 1.27% and the 20-year UK gilt yield rose by 2bps to 1.72%. 10-year US treasury yield touched a 10-month low as it fell by 15bps to 2.74% over a fortnight in which the partial US government shutdown dominated headlines.
  • In Europe, the German bund and French government bond yields both fell by 1bp each to 0.24% and 0.70% respectively. Italian government bond yields fell by 21bps to 2.75%. The Italian government won the parliamentary vote for its 2019 budgetary plans, after a deal was struck with the European Commission to lower their proposed budget deficit. The Italian government also lowered their GDP forecast to 1.0% from 1.5%. Greek government bond yields rose by 11bps to 4.35%.
  • The UK 20-year real yield rose by 11bps to -1.81% and the Over 5-year real yield rose by 10bps to -1.59%. 20-year breakeven inflation fell by 8bps to 3.47%.
  • The US high yield bond spread over US treasury yields rose by 84bps to 530bps. The spread of USD denominated EM debt over US treasury yields rose by 20bps to 410bps over a fortnight. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) remained unchanged at 148bps.
  • The S&P GSCI fell by 7.6% in USD terms over the fortnight. The energy sector fell by 11.5% as the price of Brent crude oil fell by 13.4% to US$52/BBL. Industrial metal prices fell by 2.4% as copper prices declined by 1.4% to US$6,018/MT. Agricultural prices fell by 3.0% and gold prices rose by 3.5% to US$1,279/Oz.
  • Sterling had a mixed performance against major currencies over a fortnight. Sterling appreciated by 1.0% against the US dollar, ending the fortnight at $1.27/£ whilst it declined by 0.2% against the euro to €1.11/£. The Japanese yen appreciated by 2.7% against the US dollar, ending the fortnight at ¥110.42/$.
Economic Releases
  • In their last meeting of 2018, the US Federal Open Market Committee (FOMC) decided to hike the Federal funds rate target by 0.25% to 2.25-2.50%. While FOMC officials have lowered their 2019 projection for the Fed funds rate with only two rate hikes, it remains ahead of current market pricing which implies no additional rate hikes. Third quarter real GDP growth was revised slightly lower to an annualized 3.4% from 3.5%. Although orders for durable goods did rebound 0.8% in November after dropping 4.3% in the previous month, the reading was only half of the forecasted growth rate. The Conference Board's Consumer Confidence Index underperformed expectations and slipped to 128.1 from an upwardly revised 136.4 – December's reading was estimated to fall 1.9 points to 133.5.
  • In the UK, economic growth slowed to 0.4% from 0.6% in the three months to October as growth in the manufacturing sector weakened, largely driven by falling car sales, and construction growth slowed. Strong growth in IT and professional services were the main driver in the service sector. October’s industrial production disappointed with output contracting by 0.8% year-on-year after being flat in the previous month. The unemployment rate remained at 4.1% in the three months to October, meeting expectations, with job vacancies near an all-time high. However, nominal wages grew by 3.3% in the three months to October, the fastest pace since 2008, against expectations of it remaining at 3.2%. Elsewhere, the October trade deficit widened to £3.3bn from a revised £2.3bn in September as imports rose (+2.8%) by more than exports (+1.0%).
  • In the Euro Area, consumer price inflation was revised lower to 1.9% in the year to November, below the preliminary estimates of 2.0% and October's reading of 2.2%. Consumer confidence fell by 2.3 points to -6.2 in December; the lowest reading since February 2017. In Germany, consumer price inflation slowed to 1.7% in the year to December, significantly below November's reading of 2.3%. Inflation reached an eight-month low in Germany as a slowdown in energy and food prices drove inflation lower. The IFO Business Climate Index for Germany missed estimates of a 0.3-point dip to 101.7 and fell by one point to 101.0 in December; the lowest reading in two years as trade tensions and Brexit concerns reduces business confidence.
  • In Japan, the Bank of Japan’s Q4 2018 Tankan survey revealed resilient sentiment in both manufacturing and non-manufacturing sectors with both outperforming expectations of a 1-point fall. The Tankan large manufacturer’s index held firm 19 and above the consensus estimates of 18 while the non-manufacturing increased by 2-points to 24. More-positive sentiment was also reflected in the Nikkei manufacturing PMI release with December's reading showing a 0.2-point increase to 52.4. However, the outlook soured for both sectors with the manufacturing outlook falling to 15 from 19, and the non-manufacturing outlook falling to 20 from 22. After September's natural disaster affected 18.3% drop, core machine orders rebounded by 7.6% in October but missed analyst forecasts of 9.7% increase.
  • In China, industrial production growth unexpectedly slowed to 5.4% for the year to November. Analysts had expected November's reading to remain at 5.9%. Fixed asset investment grew by 5.9% (year-to-date) from a year earlier, marginally beating economist forecast of 5.8% growth. In addition, retail sales growth decelerated to 8.1% over the year to November, falling short of analyst forecasts of 8.8% growth.
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