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Aon Retirement and Investment Blog

Weekly Update - 18 July 2016 (UK/Europe)


  • Corporate Liability Hedging Views. An update of U.S. hedging views as of 30 June 2016.  
  • Radar. Provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health. French version of the July 7th issue is also available.
  • Discount Rate Update. Average discount rates decreased during June as the United Kingdom voted for its withdrawal from the European Union. Rates moved significantly lower across the curve in the United States and other developed markets. The average plan sponsor’s discount rate decreased 23 basis points in June to 3.84%. In early July, rates have decreased by 19 basis points through Wednesday.  


  • Global equity markets rose over the week as global monetary easing remained on the agenda and there was a better than expected start to the US earnings session. The MSCI AC World index rose 2.7% in local currency terms. Sterling gained some ground, reversing its recent decline, resulting in a 0.5% return to unhedged sterling investors. The UK appointed its new Prime Minister, Theresa May, removing some short-term political uncertainty. Japan was the best performing market in local currency terms (9.3%) as Prime Minister Shinzo Abe won the upper-house elections, increasing expectations for further fiscal stimulus. UK equities returned the least in local currency terms (1.2%), as the Bank of England (BoE) kept its monetary policy unchanged. Emerging markets were the best performing region in sterling terms by returning 2.7% while US was the worst, falling by 0.6%.
  • UK nominal gilt yields rose across all maturities following the BoE’s decision to keep the interest rate on hold, as market participants had expected the central bank to loosen monetary policy. Both 10 and 20 year UK gilt yields rose by 10bps, ending the week at 0.96% and 1.55% respectively. The 10 year US treasury yield rose by 23bps to 1.59%, driven by positive US economic data. European government bond yields rose across most regions. German bund yields rose by 12bps to -0.06% and French government bond yields rose by 12bps, ending the week at 0.23%.  The Greek government bond yield fell by 27bps ending the week at 7.84%.
  • UK real yields rose over the week. The 20 year real yield rose by 14bps and the Over 5 year real yield rose by 11bps, finishing the week at -1.35% and -1.37% respectively. 20 year breakeven inflation fell by 2bps to 2.85%.
  • Credit spreads narrowed over the week. The US high yield bond spread over US treasury yields fell by 46bps to 542bps and the spread of USD denominated EM debt over US treasury yields finished the week 27bps lower at 350bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 14bps, ending the week at 134bps.
  • The S&P GSCI rose 0.6% in USD terms. The energy sector rose by 1.0% as the price of Brent crude oil rose by 2.1%, ending the week at USD 48/BBL. Industrial metals rose by 2.6% as copper prices rose by 4.3% to $4,901/MT. Agricultural prices rose 0.2% while the gold price fell 2.1%, finishing the week at $1,328/ounce.
  • Sterling strengthened against major currencies last week. The US dollar depreciated by 2.1% against sterling, ending the week at $1.32/£. The euro weakened by 1.7% against sterling, finishing the week at €1.20/£. The Japanese yen fell 5.0% against the US dollar, ending the week at ¥105.81/$, on hopes of further quantitative easing.


  • US economic data was mixed. The University of Michigan consumer sentiment index fell to 89.5 from 93.5 in July, the lowest reading in three months. However, advance data for retail sales suggested a monthly growth rate of 0.6% in June, higher than expected. Industrial production grew by the same amount in June, more than offsetting the -0.3% contraction seen the previous month. Consumer price inflation (CPI) was 1.0% over the year to June, the same as May’s reading but less than consensus analysts forecasts. The core index, which excludes volatile energy and food components, rose by 2.3%, a slight improvement on the previous month. Lastly, the NFIB Small Business Optimism Index rose to 94.5 in June, marking the third consecutive monthly rise.
  • In the UK, the BoE decided not to decrease the bank rate to 0.25%, as markets were expecting, as the Monetary Policy Committee preferred to wait for the release of initial economic data after the Brexit vote. Construction output (seasonally adjusted) in May fell by 2.1% ahead of the EU referendum. This was much greater than the 1.2% decline expected by analysts. Construction output year-on-year to May 2016 was -1.9%, beating consensus expectations of -3.5%.
  • In the Eurozone, month-on-month CPI for June was 0.2%, a fall from May's increase of 0.4%, feeding doubts over whether inflation will be enough to meet the ECB's target over the medium term. May industrial production (seasonally adjusted) month-on-month declined by 1.2%, well beyond market expectations of -0.8%. However, industrial production in April was revised up from 1.1% to 1.4% which largely made up for the disappointing May figure. Large falls in energy and capital goods output were the key drivers of the May fall.
  • It was a very light week for economic releases in Japan. Machine tool orders remained in contraction territory, falling by 19.9% over the twelve months to June. The final reading for industrial production was revised downwards to -0.40% over the twelve months to May, indicating a deeper contraction than the preliminary estimate of -0.10%. 
  • Chinese GDP growth for Q2 beat expectations with a reading of 6.7% versus 6.6% expected, which matched Q1’s growth rate. Industrial production also surprised on the positive side, growing by 6.2% over the year to June (versus 5.9% expected). However, imports shrank by 2.3% over the same period. Finally, exports grew by 1.3% over the twelve months to June, beating the consensus estimate by one percentage point.
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