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Aon Retirement and Investment Blog

Weekly Update - 16 July 2018 (UK/Europe)

MARKET MOVES

  • 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 Davies, the Brexit secretary, and Boris Johnson, the Foreign Secretary, both resigned from the cabinet over the plan. The MSCI AC World Index rose 1.4% in local currency terms and 1.7% in sterling terms. Japan was the best performing market in local currency terms (2.4%) as yen weakness boosted exporters’ stocks. Emerging markets was the best performing region in sterling terms with a return of 2.3%. Developed Pacific ex Japan returned the least in local currency terms at 0.6% and Developed Europe ex UK returned the least in sterling terms at 0.5%.
  • UK gilt yields were broadly unchanged over the week as both the 10 year and 20 year UK gilt yield rose by 1bp each to 1.26% and 1.70% respectively. After rising initially, yields fell later in the week as uncertainty over the ability of the government to get the new Brexit plan through parliament increased. The 10 year US treasury yield rose by 1bp to 2.83%. European government bond yields generally fell across the region as the European Central Bank’s latest meeting minutes presented a more cautious outlook for its long term policy rates. Both the German bund and the French government bond yields fell by 1bp each to 0.27% and 0.62% respectively.
  • The UK 20 year real yield remained unchanged at -1.64% whilst the Over 5 year real yield fell by 1bp to -1.59% over the week. 20 year breakeven inflation rose by 1bp to 3.29%.
  • Both the US high yield bond spread and the spread of USD denominated EM debt over US treasury yields fell by 12bps each to 362bps and 339bps respectively over the week. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 2bps to 122bps.
  • 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 Brent crude oil declined by 2.3% to US$75/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.
  • Sterling strengthened against the major currencies, with the exception of the US dollar, over the week. The US dollar appreciated by 0.6% against sterling, ending the week at $1.32/£. The euro depreciated by 0.2% against sterling, finishing the week at €1.13/£. The Japanese yen depreciated by 1.7% against the US dollar, ending the week at ¥112.4/$.
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.
  • Although expected to rebound by 0.5% in May, UK industrial production fell by -0.4%, driven by a slump in crude petroleum and natural gas production and lower energy demand. This marked the third consecutive fall in industrial production and took year-on-year growth to 1.1%; a 0.8% decrease from the downwardly revised April reading. Manufacturing production data was more positive, increasing by 0.4% in May but still underperformed expectations of 0.7%. UK construction output rebounded in May, growing by 1.6% over the year, while April's reading was revised up from -3.3% to -1.2%. Elsewhere, the total UK trade deficit declined by £0.3bn in May as exports, driven by increasing sales of goods, grew by 2.8% whilst imports grew at a slower rate of 2.1%.
  • 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.
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