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Aon Retirement and Investment Blog

Weekly Update - 11 July 2016 (UK/Europe)


  • Radar. Provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health. A French version of the June 30th issue is now also available. 
  • Upcoming Webinar: Global Retirement Management: Brexit Implications. On July 19 and 20, Aon Hewitt will be hosting a global webinar discussing the impact of Brexit on DC and DB retirement plans around the world, including considerations for multinational organizations. The webinar will broadcast two live sessions to accommodate different global time zones.

MARKET MOVES (week ending 08 July 2016)

  • Global equity markets were flat over the week. Markets were lower for most of the week as financial turmoil continued in Europe due to ‘Brexit’ concerns, UK property funds halting clients from withdrawals and a troubled Italian banking sector. However, markets recovered all of their earlier losses towards the end of the week on the back of better than expected US labour market data. The MSCI AC World Index rose 0.2% in local currency terms. Sterling returns were strong at 2.4% due to broad sterling weakness. The US was the best performing market in local currency terms (1.4%). Continued appreciation of the US dollar pushed up US returns in sterling terms to 3.7%, thus making it the best performing region in sterling terms. Japan was the worst performing market in local currency terms (-3.5%) as the safe haven flows to yen strengthened the currency and hit exporters. Weak economic data was also a contributing factor. Developed Europe ex UK was the worst performing region in sterling terms with returns being flat.
  • UK nominal gilt yields continued their sharp fall across all maturities as the Bank of England (BoE) implemented new measures to increase credit availability and indicated further monetary easing. The 10 year UK gilt yield fell by 13bps to a record low of 0.86% while the 20 year UK gilt yield fell by 9bps to 1.45%. The 10 year US treasury yield fell by 9bps to 1.36% as the US Federal Reserve (Fed) meeting minutes suggested a cautious approach to further interest rate hikes. European government bond yields were mixed across the region. German bund yields fell by 5bps to -0.18% and French government bond yields fell by 6bps, ending the week at 0.11%.
  • UK real yields fell over the week. The 20 year and the Over 5 year real yield fell by 9bps to finish the week at -1.49% and -1.48% respectively. 20 year breakeven inflation fell by 1bp to 2.87%.
  • Credit spreads fell over the week. The US high yield bond spread over US treasury yields fell by 24bps to 588bps and the spread of USD denominated EM debt over US treasury yields finished the week 6bps lower at 377bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 4bps, ending the week at 148bps.
  • The S&P GSCI fell by 5.0% in USD terms over the week due to global growth concerns. The energy sector fell by 7.2% as the price of Brent crude oil fell by 6.4%, ending the week at USD 47/BBL. Crude oil prices fell on the back of increased production from Nigeria along with US dollar strength. Industrial metals fell by 2.1% as copper prices declined by 4.1% to $4,698/MT. Agricultural prices fell 2.3% while the gold price rose 1.5%, finishing the week at $1,356/ounce.
  • Sterling continued to depreciate against major currencies over ‘Brexit’ concerns. The US dollar appreciated by 2.4% against sterling, ending the week at $1.30/£. The euro appreciated by 1.5% against sterling, finishing the week at €1.17/£. The Japanese yen rose 2.1% against the US dollar, again touching the 100 level to end the week at ¥100.55/$.


  • US economic data was mixed. June’s jobs report revealed a monthly gain in nonfarm payrolls of 287,000, a strong increase, partly offsetting May’s very soft 11,000 (revised down from the previous estimate of 38,000) increase. However, the unemployment rate ticked up from its post-crisis low of 4.7% to 4.9%, a slightly higher increase than expected. This was primarily due to new entrants in the labor force, which moderated the negative impact of the rise in the unemployment rate. Meanwhile, the non-manufacturing ISM for June was strong, rising from 52.9 to 56.5; analysts expected only a small rise. Average hourly earnings rose by 2.6% over the year to June, slightly disappointing the consensus, but still a healthy rate of growth. However, only 0.1% points of that are attributable to wage growth over June. Lastly, the IBD/TIPP economic optimism index for July fell to 45.5, catching analysts, who expected no change (from a prior reading of 48.2), off-guard.
  • In the UK, month-on-month industrial production fell by 0.5% in May following a 2.1% surge in April. Year-on-year production grew by 1.4%, beating expectations of 0.5%. Manufacturing also declined by 0.5%, beating consensus expectations of a 1.2% fall. The UK trade balance for May was -£2,263m, ahead of expectations of -£3,575m. The National Institute of Economic and Social Research predict Q2 2016 growth of 0.6%, compared with an estimated 0.6% expansion in the three months through to May. NIESR notes that its estimate is predominantly driven by data from before Britain's EU referendum.
  • In the Eurozone, retail sales volumes were in line with expectations with a monthly increase of 0.4%. The year-on-year figures were 0.1% behind expectations at 1.6%. The Eurostat producer prices index (excluding construction) came in at 0.6% month-on-month for May following a decline of 0.3% in the previous month. German industrial production (adjusted for seasonal swings) dropped the most in 21 months, falling by 1.3% from the previous month where it rose 0.5%. Germany's construction PMI (seasonally adjusted) fell from 52.7 to 50.4.
  • Japanese economic data was disappointing over the week. Wages contracted for the first time since June 2015, falling by 0.2% over the twelve months to May, whereas analysts had expected an increase of 0.5%. Real wages rose 0.2% over the same period, slower than the 0.6% rise recorded in the previous month. This is a setback to ‘Abenomics’. The June Economy Watchers survey revealed the most pessimistic outlook since November 2012 as the outlook component sharply fell to 41.5 from 47.3, much below the consensus estimate of 46.7. The current conditions component also fell to 41.2 over the same period. The adjusted current account surplus for May was weaker than expected at ¥1415bn (consensus estimate of ¥1515bn) as the trade surplus was lower than expected at ¥40bn compared to the expected surplus of ¥56bn. The services PMI entered contraction territory at 49.4 in June from 50.4, which dragged down the composite PMI to 49.0.
  • In China, the services PMI rose to 52.7, but the fall in the manufacturing PMI (already released before the week) brought the composite down to 50.3.
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