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Aon Retirement and Investment Blog

Weekly Update - 17 July 2017 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • U.S. Discount Rate Update. Average discount rates decreased by 8 basis points in June, as Treasury rates decreased at the long end and credit spreads tightened for investment grade credit. In early July, rates have increased by 3 basis points through Thursday July 13th. The average plan sponsor’s discount rate has now decreased by 30 basis points in 2017.
UPCOMING EVENTS
  • Managing Retirement Programs in the Utility Industry: Trends and Benchmarking. Join our next Retirement & Investment U.S. webinar on July 25th at 12 noon CT. While retirement programs provide critical benefits for employees, they represent substantial cost and risk for plan sponsors. Utility companies employ diverse design, financing, and investment strategies when managing their programs. During this webinar, we’ll take a closer look at these strategies and share benchmarking data and trends in the utility industry.
MARKET MOVES
  • Global equities rose in the last week, reassured by the US Federal Reserve (Fed) chair Janet Yellen’s semi-annual Congressional testimony. The MSCI AC World Index rose 1.6% in local currency terms. However, broad sterling strength limited the gains to 0.6% in sterling terms. Emerging Markets was the best performing region both in local currency (3.5%) and sterling terms (3.0%) due to the rally in Chinese and Brazilian markets. Chinese equities rallied on the back of solid trade data, whilst Brazilian stocks rose due to the passing of the labour reform bill and President Michel Temer avoiding corruption charges. The UK was the worst performing region in local currency terms, returning the least at 0.4%. The US was the worst performing region in sterling terms (-0.1%) owing to US dollar weakness against sterling.
  • UK gilt yields were mostly unchanged over the week. Initially, yields fell, but rose towards the end of the week as markets awaited British inflation data. The 10 year UK gilt remained unchanged at 1.37% whilst the 20 year UK gilt yield fell by 1bp to 1.92%. The 10 year US treasury yield fell by 7bps to 2.32% on the back of a steady Congressional testimony and disappointing economic data. European government bond yields slipped after a strong move up in core Eurozone yields in recent weeks. German bund yields fell by 4bps to 0.53% and French government bond yields fell by 7bps to finish the week at 0.86%.
  • UK real yields rose over the week due to a fall in breakeven inflation. 20 year real yield rose by 6bps to -1.43% and Over 5 year real yield rose by 5bps to -1.42%. 20 year breakeven inflation fell by 7bps to 3.26%.
  • Credit spreads fell over the week. The US high yield bond spread over US treasury yields fell by 10bps to 373bps. The spread of USD denominated EM debt over US treasury yields finished the week 8bps lower at 308bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 1bp to 106bps.
  • The S&P GSCI rose by 2.5% in USD terms over the week. The energy sector rose by 4.8% as the price of Brent crude oil increased by 3.7% to $49/BBL. Crude oil prices rose after the Energy Information Administration (EIA) reported a fall in crude inventories and cut forecasts for oil prices and crude output in 2018. Industrial metals rose by 0.9% as copper prices increased by 1.7% to $5,905/MT. Agricultural prices fell by 2.6% whilst gold prices rose by 1.4% to $1,228/ounce.
  • Sterling appreciated against major currencies over the week after Theresa May published the “repeal” bill that ends the supremacy of European Union law in the UK. The US dollar depreciated by 1.6% against sterling, ending the week at $1.31/£. The euro weakened by 1.1% against sterling, finishing the week at €1.14/£. The Japanese yen appreciated by 1.2% against the US dollar, ending the week at ¥112.63/$.
ECONOMIC RELEASES
  • US economic releases largely disappointed last week. Consumer Price Index (CPI) inflation was fairly subdued at only 1.6% for the year to June; down from 1.9% in May and below expectations of 1.7%. This represents the fourth consecutive month that CPI has missed expectations, although the low releases have largely been dismissed due to one-off and transitory effects. Advance retail sales unexpectedly dropped by 0.2% in June, which missed predictions of 0.1% growth. This followed an upward revision to May's retail data from -0.3% to -0.1%. Consumer sentiment also took a hit in June as the provisional reading of the University of Michigan's Consumer Confidence Index fell to 93.1 from 95.1, missing expectations of a milder decline to 95.0. Meanwhile, industrial production was a more positive release, rising by 0.4% in June. May's reading was also upwardly revised from 0.0% to 0.1%.
  • In the UK, employment data dominated economic data over last week. Latest employment figures revealed that the ILO unemployment rate dropped to a 42-year low of 4.5% from 4.6%, after employment rose 175k in the three months to May, beating analyst expectations of a 120k increase. The number of Jobless Claims for June climbed by 5.9k, declining from the 7.7k revised figure for May. Despite the tighter labour market, the pace for wage growth declined with average earnings including bonuses rising by just 1.8% year-on-year, down from 2.1% in April. However, earnings excluding bonuses did outperform, up 2.0% year-on-year in May, compared with forecasts of 1.9% growth.
  • In Europe, data was mixed over the week. Industrial production figures for May were ahead of consensus expectations, up 1.3% for the month, versus 1.0% expected, and increasing 4.0% year-on-year, versus 3.5% expected. The latest reading of the Sentix Investor Confidence Index for the Eurozone was marginally above expectations at 28.3. Strong export growth in Germany, up 1.4% in May from 0.9%, helped result in a widening of both the trade (€22.0bn against €18.7bn expected) and current account surpluses (€17.3bn against €15.4bn expected). On a Eurozone aggregate level, this helped to widen the Eurozone trade surplus in May, from €18.6bn to €19.7bn, on a seasonally-adjusted basis. However, the increase fell short of forecasts of a €20.2bn trade surplus.
  • Japanese economic data was generally weak. The final reading for industrial production growth in May was revised down from -3.3% to -3.6%. Machine orders continued to decline; unexpectedly falling by 3.6% in May, following a 3.1% fall in April - well short of the 1.7% increase forecasted over the month. The tertiary industry index slipped by 0.1% in May, but was above forecasts of a 0.5% fall. Japan's current account surplus also fell for the first time in four months in May, declining to ¥1653.9bn from ¥1951.9bn, below the estimated ¥1792.8bn.
  • The Chinese consumer price inflation reading for June slipped below expectations. Consumer prices rose by 1.5%, compared with the 1.6% forecast. Export and import growth in the year to June both exceeded consensus estimates in USD terms, rising by 11.3% (vs. expectations of 8.9%) and 17.2% (vs. expectations of 14.5%) respectively. This led to a widening of the trade surplus to US$42.8bn from US$40.8bn.
The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs. Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given as of the date indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.


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