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Aon Retirement and Investment Blog

Weekly Update - 27 January 2019


  • Asset Allocation View: Quarterly Investment Outlook. The Quarterly Investment Outlook has been published for January 2019. It comments that ‘late cycle’ worries will keep coming back; market volatility is correctly reading the various threats to the current economic expansion. The tendency for volatility expectations to run ahead of realized market volatility is potentially creating some opportunities.
  • Corporate Pension Liability Hedging Views 12-31-2018. This update from the U.S. Practice provides corporate pension liability hedging views as of December 31, 2018.
MARKET MOVES (Week ending January 27, 2019)

  • Global equity markets remained largely flat over the week. The International Monetary Fund downgraded its global economic growth forecasts from 3.7% in 2018 to 3.5% in 2019 and 3.6% in 2020 respectively. The US Federal government shutdown finally ended last Friday as President Trump signed a three-week funding measure to temporarily re-open government. 
  • The S&P 500 index fell by 0.2%, underperforming the MSCI World index which rose by 0.1%. On a year-to-date basis, the S&P 500 Index performed in line with the MSCI World Index with both returning 6.4%.
  • US Large Cap stocks underperformed Small Cap stocks over the week as the S&P 500 index fell by 0.2% and the Russell 2000 index remained broadly unchanged. On a year-to-date basis, the S&P 500 Index has underperformed the Russell 2000 Index (6.4% vs. 10.0%). Growth stocks rose by 0.1% and Value stocks fell by 0.4% over the week as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (7.2% vs 5.9%). 
  • The 10-year US treasury yield and the 30-year treasury yield fell by 3bps each to close the week at 2.75% and 3.06% respectively. The 20-year TIPS yield rose by 1bp to 1.11% and the 20-year breakeven fell by 4bps to 1.81%.  
  • The spreads on the Bloomberg Barclays Capital Long Credit Index fell by 4bps to 181bps and the Bank of America Merrill Lynch US Corporate Index fell by 6bps to 140bps. The US high yield bond spread over US treasury yields rose by 7bps to 434bps. The spread of USD denominated EM debt over US treasury yields fell by 12bps to 361bps over the week.
  • The S&P GSCI fell by 0.8% in USD terms over the week. The energy sector fell by 1.5% as the price of WTI Crude oil fell by 0.2% to US$54/BBL. Industrial metals rose by 1.8%, despite copper prices falling by 2.0% to US$5,901/MT. Agricultural prices fell by 0.2% and gold prices rose by 0.8% to US$1,294/Oz.    
  • The US dollar's performance against major currencies over the week was mixed. The US dollar depreciated by 2.0% against sterling, ending the week at $1.32/£. The US dollar depreciated by 0.3% against the euro, finishing the week at $1.14/€. The US dollar broadly remained unchanged against the Japanese yen, ending the week at ¥109.68/$. The US dollar appreciated by 0.1% against the Canadian dollar, ending the week at C$1.33/$.    
Economic Releases
  • The US Federal government shutdown finally ended last Friday as President Trump signed a three-week funding measure to temporarily re-open government. The Markit Manufacturing PMI for January unexpectedly rose by 1.1 points to 54.9, beating analysts' forecasts of 53.5. This was the highest reading since May 2018, as business optimism amongst manufacturers increased sharply. Meanwhile, Services PMI fell by 0.2 points to 54.2, but still exceeded consensus estimate of a 54.0 reading. The number of existing home sales fell to its lowest level in three years, as it contracted by 6.4% in the month of December. This was far worse than the forecasted contraction of 1.5%, and down from the revised growth of 2.1% recorded in the previous month. 
  • In the Euro Area, both the January Markit Manufacturing PMI and Services PMI came in well below expectations at 50.5 and 50.8 respectively. These represent the lowest levels since Q3 2013. Having remained fairly resilient up until this point, employment growth slowed sharply for both sectors. German PMIs were mixed with the January Markit/BME Manufacturing PMI falling to 49.9 from 51.5, the first contraction in activity since November 2014. Order books continued to decline, led lower by weakness across the autos industry and lower demand from foreign markets. However, Services PMI increased from 51.8 to 53.1 as increasing domestic demand helped offset slowing new business. Elsewhere, the January German IFO Business Climate index dropped to 99.1 from 101 in December and below expectations of 100.7.
  • In Japan, growth in the manufacturing sector stalled with the preliminary Nikkei PMI manufacturing index falling to 50.0, down 2.6 points from December’s reading of 52.6. This was the lowest reading since August 2016. Japan posted a trade deficit of ¥55.3bn in December, higher than analyst forecasts of a ¥42.3bn deficit but significantly lower than November’s ¥737.7bn deficit. Export growth contracted by 3.8% in the year to December, the quickest pace of contraction since October 2016 as shipments to China fell. Imports rose by 1.9% over the same period, well below the 12.5% increase seen in November and less than the estimated 4.0% increase.
  • In China, industrial profits contracted by 1.9% in the year to December, the second consecutive month of contraction following the 1.8% fall in November (which was the first contraction in profits in nearly three years). The People’s Bank of China injected 257.5bn yuan via the Targeted Medium-Term Lending Facility (TMLF) ahead of the Lunar New Year holidays.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.
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