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Aon Retirement and Investment Blog

Weekly Update - 28 January 2019 (UK/Europe)

MARKET MOVES
  • The International Monetary Fund downgraded 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 European Central Bank kept its interest rates unchanged and warned of a further slowdown amid global trade tensions and Brexit uncertainty. The Bank of Japan kept its monetary policy unchanged but lowered its inflation forecasts for 2019. 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.
  • Global equity markets rose over the week. The MSCI AC World Index rose by 0.1% in local currency terms and fell by -1.8% in sterling terms. The Information Technology sector was the best performer at +1.7% in local currency terms. The Energy sector was the worst performer at -1.2% in local currency terms.
  • Emerging Market equities were the best performing region in local currency terms (+1.4%). UK equities were the worst performing region in local currency terms (-2.3%). Emerging Market equities were the best performing region in sterling terms (-0.6%). UK equities were the worst performing region in sterling terms (-2.3%).
  • The 10-year gilt yield fell by 3bps to 1.30% and the 20-year gilt yield fell by 5bps to 1.72%. 10-year US treasury yields fell by -3bps to 2.75%. German Bund yields fell by -5bps to 0.20% and French government bond yields fell by 5bps to 0.60%. Spanish government bond yields fell by 12bps to 1.23%.
  • The Over 5-year real yield fell by 4bps to -1.52% and the UK 20-year real yield fell by 3bps to -1.70%. 20-year breakeven inflation fell by 3bps to 3.35%.
  • USD denominated EM debt outperformed over the week, returning 0.9%. The US high yield bond spread over US treasury yields rose by 7bps to 434bps over the week. The spread of USD denominated EM debt over US treasury yields fell by 12bps to 361bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) fell by 2bps to 144bps over the week.
  • The S&P GSCI index fell by 0.8% in USD terms over the week. The S&P GSCI Energy index fell by 1.5% as the price of Brent Crude oil fell by 1.7% to US$62/BBL. Industrial metal prices rose by 1.8% despite copper prices fell 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.
  • Sterling appreciated by 1.1% on a trade weighted basis over the week. Sterling strengthened by 2.0% against the US dollar and rose 1.8% against the euro, ending the week at $1.32/£ and €1.16/£. The US dollar was unchanged against the Japanese yen, ending the week at ¥109.68.
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 UK, the ILO unemployment rate edged down to a record low of 4.0% in the three months to November, against expectation of it remaining at 4.1%. Nominal wages grew by 3.4% in the three months to November, the fastest pace since 2008. Public Sector Net Borrowing excluding Banking Groups recorded a £3.0bn deficit in December, far more than market expectation of £1.9bn. This was partly due to larger net contribution to the European Union. Elsewhere, the Confederation of British Industry's monthly industrial orders balance swung back into negative territory in January to -1 from 8 and significantly below expectations of 5.
  • 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. 
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