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Aon Retirement and Investment Blog

Weekly Update - 21 January 2019 (UK/Europe)

MARKET MOVES

  • In the UK, Prime Minister Theresa May suffered a crushing defeat at the ‘meaningful vote’ on her Brexit deal, losing by a record-breaking 230 votes. In the end, 118 Conservative MPs voted against the Government’s deal. Theresa May is required to report back to parliament on a new plan by Monday 21 January. In the US, partial Federal Government Shutdown entered the fifth week, marking the longest government shutdown in the country’s history.
  • German economic growth slowed in 2018, recording the slowest pace of expansion in 5 years. The Chinese economy expanded by 6.6% over 2018, the slowest annual rate since 1990.
  • Global equity markets rose over the week. The MSCI AC World Index rose by 2.4% in local currency terms and rose by 1.5% in sterling terms. The Financials sector was the best performer over the week, returning +4.0% in local currency terms. The Utilities sector was the worst performer, returning +0.6% in local currency terms.
  • US equities were the best performing region in local currency terms (+2.9%). UK equities were the worst performing region in local currency terms (+0.8%). US equities were the best performing region in sterling terms (+2.2%). Japanese equities were the worst performing region in sterling terms (-0.1%).
  • The 10-year gilt yield rose by 6bps to 1.34% and the 20-year gilt yield rose by 5bps to 1.77%. The 10-year US treasury yields rose by 8bps to 2.78%. The 10-year German Bund yields rose by 3bps to 0.25% and the 10-year French government bond yields rose by 1bp to 0.65%. Greek government bond yields fell by 11bps to 4.17%. Prime Minister Alexis Tsipras narrowly won a vote of confidence in parliament over a deal to resolve a naming dispute with neighbouring Macedonia.
  • The real yield on the UK Over 5-year index rose by 16bps to -1.48% and the UK 20-year real yield rose by 17bps to -1.66%. 20-year breakeven inflation fell by 12bps to 3.38%. The House of Lords report on the Retail Price Index (RPI), which argued that RPI in the current form should not continue, was a driver of this fall.
  • Credit spreads generally trended downwards over the week. The US high yield bond spread over US treasury yields fell by 28bps to 427bps over the week. The spread of USD denominated EM debt over US treasury yields fell by 20bps to 372bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) fell by 5bps to 146bps over the week.
  • The S&P GSCI index rose by 2.6% in USD terms over the week. The S&P GSCI Energy index rose by 3.8% as the price of Brent Crude oil rose by 3.7% to US$63/BBL. Industrial metal prices rose by 2.2% as copper prices rose by 1.6% to US$6,022/MT. Agricultural prices rose by 0.8% and gold prices fell by 0.4% to US$1,284/Oz.
  • Sterling appreciated by 1.5% on a trade weighted basis over the week. Sterling strengthened by 0.7% against the US dollar and rose 1.6% against the euro, ending the week at $1.29/£ and €1.14/£ respectively. The US dollar increased by 1.1% against the Japanese yen, ending the week at ¥109.67/$.
 
ECONOMIC RELEASES

  • The US Federal government shutdown continues to rumble on with a number of economic releases delayed. Consumer confidence, which has been fairly resilient over the past several months, weakened in January as the University of Michigan's Consumer Sentiment index declined by 7.6 points to 90.7 and below expectations of a milder dip to 96.8. Although industrial production figures for December did marginally outperform forecasts it did slow from the previous month's downwardly revised 0.4% increase. Initial jobless claims continue to be at very low levels – only 213k claimed unemployment benefits, down from the previous reading of 216k and below consensus estimates of 220k. The Philadelphia Federal Reserve Manufacturing survey for January surpassed expectations and rebounded strongly to 17.0 from a downwardly revised 9.1. Analysts had anticipated a slight dip to 9.0 in January.
  • In the UK, annual consumer price inflation slowed to a two-year low of 2.1% in December from 2.3% previously while core inflation edged higher to 1.9% from 1.8%. November's rebound in UK retail sales proved to be short-lived as retail sales fell more than anticipated in December. The 0.9% fall was lower than the expected 0.8% decline while November's release was also revised lower to 1.3% from 1.4%. The disappointing release for the retail sector was more marked once auto fuel was excluded, as sales fell 1.3% against forecasts of a 0.8% drop. Elsewhere, the Rightmove House Price Index rose by 0.4% in the year to January, slower than the 0.7% growth recorded previously.
  • In the Euro Area, industrial production fell by 1.7% in the month of November, underperforming consensus forecasts of a 1.5% decline. This was the largest monthly fall in over two years. German economic growth slowed in 2018, recording the slowest pace of expansion in 5 years. The German economy grew by 1.5% in 2018, slowing from the 2.2% growth recorded in 2017. Meanwhile, Consumer Price Inflation in the year to December was confirmed at 1.7%, in line with the preliminary reading.
  • In Japan, core machine orders were flat in November, well below the 7.6% growth recorded in the previous month and below analyst forecasts of 3.0% growth. Headline consumer price inflation met consensus estimates and slowed to 0.3% from 0.8% for the year to December while core consumer price inflation, which excludes more volatile food but not energy prices, slowed to 0.7% from 0.9%, marginally below expectations of 0.8%. In addition, the Tertiary Industry index fell 0.3% in November against a forecasted decrease of 0.6% but well below the previous month’s revised 2.2% increase. The year-on-year increase in industrial production was revised higher to 1.5% from 1.4% for November.
  • Despite a series of expansionary policies implemented in recent months, the Chinese economy further decelerated to 6.4% from an annualised 6.5% over the fourth quarter of 2018. It recorded an economic growth of 6.6% in 2018 – the slowest annual rate since 1990. Industrial production grew by 5.7% for the year to December, against analyst expectations of production slowing to 5.3%. Fixed asset investment grew by 5.9% (year-to-date) from a year earlier, marginally below forecasts of 6.0% growth. Retail sales growth unexpectedly picked up in December as sales grew by 8.2% over the period, up from the 8.1% increase seen in the previous month.
 
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