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Aon Retirement and Investment Blog

Weekly Update - 09 July 2018 (UK/Europe)

Market Moves

  • Global equity markets ended higher over the week supported by encouraging US economic data. In what was a holiday shortened week due to the US Independence Day holiday, investors' concerns over a potential US-China trade war were enhanced with both countries imposing tariffs worth US$34bn on each other. The MSCI AC World Index gained 0.8% in local currency terms and 0.4% in sterling terms. The US was the best performing region in local currency terms (1.6%) and Europe ex UK was the best performing region in sterling terms (1.3%). Markets in Asia underperformed for the week with Japan being the worst performing region both in local currency (-1.9%) and sterling terms (-2.2%), as trade war fears and the possibility of a slowing Chinese economy pulled down the banks and tourism dependent stocks.
  • UK gilt yields fell at longer maturities but increased slightly at shorter maturities as the Bank of England governor Mark Carney produced more upbeat comments about the UK economy, increasing prospects for an interest rate hike in August. The 10 year UK gilt yield fell by 2bps to 1.25% and the 20 year UK gilt yield fell by 3bps to 1.68%. The 10 year US treasury yield fell by 3bps to 2.82%. The spread between the 10 year and 2 year US treasury yield touched the lowest level since 2007. German bund yields fell by 2bps to 0.28% and French government bond yields fell by 4bps to 0.63%. Italian government bond yields gained 1bp, increasing to 3.95% as investors focused on the upcoming Italian budget which is expected to raise the federal debt levels.
  • The UK 20 year real yield and the Over 5 year real yield fell by 2bps each to -1.64% and -1.58% respectively over the week. 20 year breakeven inflation remained unchanged at 3.28%.
  • The US high yield bond spread over US treasury yields rose by 13bps to 374bps over the week. The spread of USD denominated EM debt over US treasury yields fell by 16bps to 351bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) remained unchanged at 124bps.
  • The S&P GSCI fell by 1.3% in USD terms over the week. The energy sector fell by 1.5% as the price of Brent crude oil fell by 2.9% to US$77/BBL. Industrial metals fell by 4.3% following the decline in copper prices which fell by 4.8% to US$6,326/MT. Agricultural prices went up by 0.7% and gold prices went up by 0.4% to US$1,255/ounce.
  • Sterling strengthened against major currencies, with the exception of the euro, over the week. The US dollar depreciated by 0.5% against sterling, ending the week at $1.33/£. The euro appreciated by 0.2% against sterling, finishing the week at €1.13/£. The Japanese yen appreciated by 0.3% against the US dollar, ending the week at ¥110.45/$.
Economic Releases
  • Economic data in the US was more positive last week following the previous week's disappointing releases. The Institute of Supply Management's (ISM) manufacturing index jumped for a second consecutive month, unexpectedly rising by 1.5 points to 60.2. Analysts had expected the index to move 0.2 points lower. US factory orders also exceeded expectations of being unchanged and rebounded over May, offsetting the upwardly revised 0.4% decline in April. The US Jobs Report showed that 213k jobs were added to the US economy, surpassing estimates of a 195k increase. Moreover, the previous month's increase was revised higher to 244k from 223k. Despite the increase, the US unemployment rate unexpectedly inched higher to 4.0% from 3.8% but this was due to the unanticipated increase in the labour force participation rate (moving from 62.7% to 62.9%). US wage growth, however, failed to meet consensus estimates of 2.8% (year-on-year) and remained at 2.7%.
  • In the UK, the composite Purchasing Managers' Index (PMI) increased to 55.2, beating market expectations that it would remain at 54.5. This increase was broad based with the three main underlying PMIs increasing from May's readings. The largest increase was the services PMI which increased from 54.0 to 55.1 in June, benefitting from an increased rate of new business growth. The Halifax House Price Index increased at a slightly slower rate in the three months to June, increasing by 1.8% on a year-on-year basis but above estimates of a 1.6% increase. House price growth remains robust, driven by low mortgage rates, greater affordability, a robust labour market, and a continued shortage of properties for sale.
  • In the Eurozone, following the downward revision in April's reading to 8.4%, the unemployment rate was unchanged in May. This represented the lowest level since December 2008 and was below expectations of 8.5%. The retail sector continues to slow, as retail sales growth decelerated by 0.2% to 1.4% in May on a year-on-year basis. In Germany, industrial production sharply increased by 2.6% in May, rebounding from a 1.6% decline in April. The increase was driven by strong output growth for consumer (6.5%) and intermediate (3.0%) goods and was above market expectations of a 1.1% increase. The final readings of the Markit Eurozone and Germany PMIs were revised up to 54.9 and 54.8 respectively.
  • Japanese economic data was fairly mixed. The Bank of Japan’s Q2 2018 Tankan survey revealed a pessimistic outlook for the Japanese manufacturing sector. The closely-watched Tankan large manufacturer’s index fell to 21 from the previous reading of 24. However, the large non-manufacturing index rose to 24 from 23. The Nikkei services PMI rose to 51.4 in June from 51.0. There was positive news in labour markets as labour cash earnings accelerated, rising by 2.1% for the year to May from a downwardly revised 0.6% increase, and above a forecasted increase of 0.9%. Real wages rebounded by 1.3% over the same period after decreasing by a revised 0.2% previously.
  • The Caixin manufacturing PMI, which focuses more on small and mid-sized Chinese businesses, decreased to 51.0 in June from the previous reading and expectations of 51.1. However, growth in the services sector accelerated with the services PMI rising to 53.9 from 52.9; above expectations of 52.7.
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