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Aon Retirement and Investment Blog

Weekly Update - 03 July 2017 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • Non-Profit Key Topics. This paper authored in the US identifies and provides context on six key topics expected to be important for non-profit fiduciaries in 2017.
RECENT EVENTS
MARKET MOVES
  • Global equities ended lower in a volatile trading week amid comments from major central banks which triggered market jitters over an end to ultra-loose monetary policies. Technology stocks also experienced a sell-off over the week. The MSCI AC World Index fell 0.7% in local currency terms. Sterling strengthened, driven by hawkish remarks by the Bank of England (BoE) governor Mark Carney, dragging down global equity returns in sterling terms to -2.3%. Emerging market equities were the best performing region in local currency terms (0.3%) led by a rally in Latin American markets as investors shrugged off news of corruption charges against the Brazilian President Michel Temer. Developed Asia Pacific, excluding Japan, fell the least in sterling terms (-0.9%). Japan was the worst performing region in sterling terms (-2.7%).
  • UK gilt yields rose across all maturities over the week, driven by the prospect of higher UK interest rates. The policy sensitive 2 year yield rose by 12bps to 0.33%, rising above the BoE’s 0.25% base rate for the first time in 2017. The 10 year UK gilt yield rose by 22bps to 1.19% and the 20 year UK gilt yield rose by 21bps to 1.87%. The 10 year US treasury yield rose by 16bps to 2.30% as the US Federal Reserve chair Janet Yellen’s comments over rising asset prices further solidified the case for a higher interest rate environment. European government bond yields rose across the region following comments made by the European Central Bank president, Mario Draghi, which investors perceived as hawkish. German bund yields and French government bond yields rose by 22bps each to finish the week at 0.47% and 0.82% respectively.
  • UK real yields rose over the week. Both the 20 year and Over 5 year real yield rose by 14bps to end the week at -1.58% and -1.57% respectively. 20 year breakeven inflation rose by 7bps to 3.37%.
  • The US high yield bond spread over US treasury yields fell by 9bps to 377bps. The spread of USD denominated EM debt over US treasury yields finished the week 3bps lower at 310bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 1bp to 107bps.
  • The S&P GSCI rose by 5.3% in USD terms over the week. The energy sector rose by 6.5% as the price of Brent crude oil increased by 4.6% to $48/BBL. Industrial metals rose by 2.6% as copper prices increased by 2.5% to $5,927/MT. Agricultural prices rose by 5.9% whilst gold prices fell by 1.0% to $1,243/ounce.
  • Sterling appreciated against major currencies over the week. The US dollar depreciated by 1.9% against sterling, ending the week at $1.30/£. The euro weakened by 0.1% against sterling, finishing the week at €1.14/£. The Japanese yen depreciated by 1.0% against the US dollar, ending the week at ¥112.36/$.
ECONOMIC RELEASES
  • Economic data was broadly positive in the US last week. First quarter GDP growth was revised up to 1.4% from 1.2% as a result of stronger than expected consumer expenditure and export growth; Q1 personal consumption grew by 1.1%, nearly double initial estimates. The improved GDP figures followed an unexpected uptick in consumer confidence, as measured by the Conference Board index which edged higher to 118.9 from 117.6, above consensus forecasts of a decline to 116. Meanwhile, the core rate on Personal Consumption Expenditure (the US Federal Reserve's preferred measure for inflation) met expectations of a 1.4% increase in the year to May but was below the forecast of 1.5%. Durable goods orders, a proxy for business investment, fell for a second straight month, falling by 1.1% in May which was also below expectations of a 0.6% decline.
  • In the UK, the finalised Q1 GDP data was unchanged from May’s previous estimate, an increase of just 0.2% over the quarter and 2% on a yearly basis. UK house price growth rebounded in June, with the Nationwide house price index up 1.1% for the month, ahead of consensus expectations of a 0.1% increase and the 0.2% decrease experienced in May. Mortgage approvals rebounded in May, up to 65.2k from the revised previous figure of 65.1k and beating analysts’ expectations of 64.0k. Meanwhile, consumer confidence unexpectedly slipped back to lows not seen since the immediate aftermath of the Brexit vote. The GfK consumer confidence index fell from -5 to -10, below expectations of a decline to -7.
  • Eurozone releases over the week were largely positive. The economic confidence reading for June advanced to 111.1 from 109.2 in May which was above the 109.5 expected. The consumer sentiment index was confirmed at -1.3 for June, in line with estimates and improving from -3.3 in May, reflecting a more positive economic outlook by consumers. However, Eurozone consumer price inflation (CPI) for June fell to 1.3% from 1.4% in May; though in Germany, predicted consumer price inflation was higher than expected, rising to 0.2%. There was further good news in Germany as the IFO business climate reading for June was up 0.5 points to 115.1 (vs 114.5 expected). Retails sales figures for Germany also grew over May, supporting expectations that private consumption will help propel growth in Europe's largest economy this year.
  • Japanese economic data was mixed over the week. Headline CPI was unchanged at 0.4% in the year to May. The jobless rate unexpectedly increased to 3.1% (the highest rate in six months) from 2.8%, whilst the job-to-applicant ratio continued on an upward trend to 1.49. Retail sales fell by 1.6% in May, more than the 1.0% forecasted decline, as sales fell at supermarket and department stores. The provisional release for annual industrial production growth improved from 5.7% to 6.8% over the year to May, slightly behind the estimated 6.9% increase.
  • China's manufacturing sector confounded analyst forecasts of a slowdown, as the official manufacturing Purchasing Managers' Index rose from 51.2 to 51.7 against expectations that it would move lower to 51.0. A pick up in global demand helped industrial profits to increase by 16.7% in the year to May; up from 14.0% profit growth recorded in April. Finalised trade figures showed a slight narrowing of the current account surplus from US$19.0bn to US$18.4bn.

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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