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Aon Retirement and Investment Blog

Weekly Update - 16 July 2018

NEW INTELLECTUAL CAPITAL

  • U.S. Discount Rate Update - Average discount rates increased in June as credit spreads continued the widening that has marked 2018 so far. The average plan sponsor’s discount rate increased 10 basis points in June. In early July, rates have decreased by 8 basis points through Thursday July 12th, and are now up 47 basis points this year.
MARKET MOVES (Week Ending July 15, 2018)

Equities
  • Global equity markets rose over the week despite the Trump administration proposing additional tariffs worth US$200bn on China. In the UK, the new Brexit plan presented by Theresa May caused divisions in the government as David Davis, the Brexit secretary, and Boris Johnson, the Foreign Secretary, both resigned from the cabinet over the plan. Over the week, the S&P 500 Index outperformed the MSCI World Index as the S&P 500 Index rose by 1.5% while the MSCI World Index rose by 1.0%. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (5.9% vs. 3.0%).
  • US Large Cap stocks outperformed Small Cap stocks over the week as the S&P 500 Index rose by 1.5% while the Russell 2000 Index fell by 0.4%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (10.6% vs. 5.9%). Growth stocks outperformed Value stocks over the week as growth stocks rose by 2.3% and value stocks rose by 0.7%, as measured by the MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (12.4% vs. -0.2%).
Bonds
  • The 10-year US treasury yield rose by 1bp to 2.83% whilst the 30-year US treasury yield remains unchanged at 2.93%.
  •  The 20 year TIPS yield rose by 1bp to 0.78% and the 20 year breakeven fell by 1bp to 2.09%. 
  • The spread of the Bloomberg Barclays Capital Long Credit Index over the yield on US treasuries fell by 6bps to 166bps and the Bank of America Merrill Lynch US Corporate Index credit spread fell by 4bps to 124bps. The US high yield bond spread and the spread of USD denominated EM debt over US treasury yields both fell by 12bps each to 362bps and 339bps respectively over the week.
Commodities   
  • The S&P GSCI fell by 2.6% in USD terms over the week. The energy sector fell by 2.5% as the price of WTI crude oil declined by 3.8% to US$71/BBL, supported by Libya’s resumed production of crude oil. Industrial metals fell by 2.2% following the decline in copper prices which fell by 2.5% to US$6,166/MT. Agricultural prices fell by 3.8% and gold prices fell by 1.1% to US$1,242/ounce. 
Currencies
  • The US dollar weakened against all major currencies over the week. The US dollar depreciated by 0.5% against sterling, ending the week at $1.33/£. The US dollar depreciated by 0.7% against the euro, finishing the week at $1.18/€. The US dollar depreciated by 0.3% against the Japanese yen, ending the week at ¥110.45/$. The US dollar fell by 0.4% against the Canadian dollar over the week to close at C$1.31/$.  
Economic Releases
  • Inflation in the US continued to accelerate with last week's Consumer Price Index (CPI) data showing a 2.9% increase in prices over the last year. While this was expected, inflation has now accelerated for the last five months and is now running at the fastest rate since February 2012. Core inflation, which excludes volatile food and energy components, also moved higher in June to 2.3% from 2.2%. These inflationary pressures continue to eat away at wage growth as real average hourly earnings growth was flat for a second successive month. Consumers borrowed the most since November last year as consumer credit in the US increased by $24.6bn in May; comfortably beating expectations of a $12.0bn upturn and April's upward revision of $10.3bn. Despite the acceleration in spending, consumer confidence, as measured by the University of Michigan's Consumer Sentiment Index, fell by more than anticipated. The index decreased to 97.1 from 98.2 and below estimates of 98.0. 
  • In the Eurozone, industrial production growth marginally exceeded market expectations, increasing by 1.3% in May, after falling 0.8% in April. Year-on-year growth increased to 2.4%, a 0.7% increase from April and remaining below levels seen in the second half of 2017. In less positive news, the Eurozone ZEW indicator of economic sentiment declined to -18.7. A similar story was seen in Germany where the ZEW survey declined by 8.6 points to -24.7, as fears over an escalation of the international trade war with the US increased. These readings represent the lowest level for each respective indicator since August 2012. The German current account surplus fell sharply by €10.9bn in May to €12.6bn, its lowest level since January 2017 and well below market expectations of €19.8bn.
  •  Japanese economic data was fairly mixed last week. Japan’s current account surplus widened to ¥1938.3bn in the year to May, above forecasts of ¥1266.0bn. This was largely due to an increase in returns on foreign investments rather than a widening trade surplus. Amid trade concerns, core machine orders fell by 3.7% in May following a 10.1% gain in April. However, this was better than the expected decline of 4.9%. The Tertiary Industry index edged 0.1% higher in May against a predicted decrease of 0.3% but below the previous month’s 1.0% increase.
  • In China, consumer price inflation increased to 1.9% over the year to June; 0.1% higher from the previous month. Against a backdrop of tense trade talks, exports and imports grew by 11.3% and 14.1% respectively over the year to June. The sharp slowdown in Chinese import growth compared to that of exports, led to a widening of China's trade surplus to US$41.61bn, well ahead of analyst estimates of US$27.72bn.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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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