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Aon Retirement and Investment Blog

Weekly Update - 24 July 2017 (UK/Europe)


  • 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.
  • Global equity markets ended higher over the week as the US Q2 2017 earnings season began strongly. Meanwhile, the European Central Bank (ECB) and the Bank of Japan both voted to keep their monetary policies unchanged. The MSCI AC World Index rose 0.2% in local currency terms. However, broad sterling weakness pushed up the returns to 1.4% in sterling terms. The UK was the best performing region in local currency terms (1.1%) as the weakness in the British pound benefitted exporters’ stocks. Developed Europe ex UK was the worst performing region both in local currency (-1.9%) and sterling terms (0.6%) as mixed corporate earnings and a strengthening euro weighed over the index. Japan was the best performing region in sterling terms (2.2%).
  • UK gilt yields fell across all maturities over the week, dragged down by soft inflation data. The 10 year UK gilt yield fell by 14bps to 1.24% and the 20 year UK gilt yield fell by 12bps to 1.80%. The 10 year US treasury yield fell by 9bps to 2.23% despite encouraging economic data. European government bond yields fell across the region as remarks by ECB president Mario Draghi reduced fears of aggressive monetary tightening. German bund yields fell by 9bps to 0.44% and French government bond yields fell by 12bps to finish the week at 0.75%.
  • UK real yields fell over the week. 20 year real yield fell by 13bps to -1.57% and the Over 5 year real yield fell by 14bps to -1.56%. 20 year breakeven inflation rose by 2bps to 3.28%.
  • The US high yield bond spread over US treasury yields fell by 9bps to 364bps. The spread of USD denominated EM debt over US treasury yields finished the week 2bps lower at 306bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) remained unchanged at 106bps.
  • The S&P GSCI fell by 0.6% in USD terms over the week. The energy sector fell by 1.2% despite the price of Brent crude oil increasing by 1.9% to $50/BBL. Industrial metals fell by 0.2% despite copper prices increasing by 1.1% to $5,971/MT. Agricultural prices rose by 0.5% whilst gold prices rose by 2.0% to $1,252/ounce.
  • Sterling depreciated against major currencies over the week as weaker than expected inflation data reduced prospects of monetary tightening in the near future by the Bank of England. The US dollar appreciated by 0.7% against sterling, ending the week at $1.30/£. The euro strengthened by 2.6% against sterling, finishing the week at €1.11/£. The Japanese yen appreciated by 1.3% against the US dollar, ending the week at ¥111.13/$ despite increasing monetary policy divergence between the BoJ and the US Federal Reserve.
  • Over the week, US regional manufacturing data disappointed, with both the Philadelphia Fed Business Outlook (for the mid-Atlantic region) and the Empire Manufacturing index declining more than expected in June. Whilst both indices remain in expansionary territory (index levels above 0) they did reflect a marked deceleration; with the former dropping 8.1 points to 19.5 (below the forecasted 23.0), while the Empire Manufacturing index plummeted by 10.0 points from a two-year high to 9.8 (short of estimates of a fall to 15.0). The US housing market was more resilient, with the number of housing starts rebounding strongly after May's disappointing numbers, increasing by 8.3% which was above forecasts of a 6.2% rise. Similarly, the number of building permits issued recovered, rising by 7.4% in June after decreasing 4.9% in the previous month.
  • In the UK, the week's economic releases were headlined by softer than expected June inflation figures. Headline annual consumer price inflation for June missed expectations that headline inflation would be unchanged, falling to 2.6% from 2.9%. Similarly, annual core consumer price inflation fell to 2.4% from 2.6%. Retail sales data in June was better than expected, with retail sales (excluding auto and fuel) increasing 0.9% from May’s revised measure of -1.5% and predictions of a 0.5% increase. On an annual basis to June, retail sales (ex-auto and fuel) were up 3.0%, from 0.6% to May and the predicted 2.5% rise. Public sector net borrowing data showed that the deficit unexpectedly rose over June, coming in at £6.3bn (against £4.2bn expected and £6.0bn in May). All of this markedly reduced the pressure on the Bank of England to begin raising interest rates.
  • In Europe over the week, the ECB voted to leave their accommodative monetary policy unchanged as markets expected. Other economic releases also largely met consensus expectations, with no surprises from the final June Consumer Price Index (CPI) revisions. Headline consumer price inflation was confirmed at 1.3% year-on-year, as predicted, slightly lower than the revised previous figure of a 1.4% rise. According to the latest survey from the ZEW think-tank, analysts remain upbeat on the German economy. ZEW’s index covering the current economic situation marginally dipped from June, reaching 86.4 in July from the previous reading of 88.0. Similarly, initial July data for the ZEW Survey Expectations index for the Eurozone fell to 35.6 from 37.7.
  • Over the week, the Bank of Japan (BoJ) kept its monetary policy unchanged and lowered inflation forecasts for 2017 and 2018, while delaying the target date for achieving its 2.0% inflation target. The All Industry Activity index fell by 0.9% in May, more than the consensus estimate of 0.8% and up from April's revised increase of 2.3%. The trade balance swung back to a surplus of ¥439.9bn in June from a revised trade deficit of ¥204.2bn in the previous month, but missed expectations of a surplus of ¥488.0bn. Exports rose by 9.7% over the year, marginally ahead of forecasts of a 9.5% increase while imports grew by 15.5% which was also above consensus estimates of 14.4%.
  • Economic releases in China were positive across the board last week as second quarter annualised GDP growth topped expectations coming in unchanged at 6.9%, above forecasts of 6.8%. The consumer sector remained buoyant as retail sales rose by 11.0% in the year to June, up from 10.7%. Industrial production jumped by 7.6% over the year outperforming expectations that growth would remain unchanged at 6.5%.
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