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Aon Retirement and Investment Blog

Weekly Update - 02 July 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets declined over the week as trade tensions between the US and China continued. The Trump administration’s decision to limit Chinese investments in US technology companies also worried investors. Markets recovered the majority of their initial losses later in the week as European Union leaders agreed an immigration deal and China eased restrictions on foreign investment. However, all the regions posted negative returns over the week. The MSCI AC World Index fell 1.1% in local currency terms and 0.7% in sterling terms. The UK fell the least in local currency terms at -0.4% and Developed Pacific ex Japan fell the least in sterling terms at -0.3%. The MSCI AC Asia Pacific ex Japan was the worst performing region both in local currency and sterling terms, falling by 1.5% and 1.3% respectively, driven by underperformance of Chinese equity markets.
  • UK gilt yields fell across all maturities over the week, in tandem with the government bond yields of other major developed markets. The 10 year UK gilt fell by 3bps to 1.27% and the 20 year UK gilt fell by 4bps to 1.71%. The 10 year US treasury yield fell by 4bps to 2.85%. Both German bund yields and French government bond yields fell by 3bps each to 0.30% and 0.66% respectively. Greek government bond yields fell by 18bps to 3.94% as the Greek Prime Minister Alexis Tsipras promised a set of financial commitments to improve the country’s financial health.
  • The UK 20 year real yield fell by 2bps to -1.62% and the over 5 year real yield fell by 1bp to -1.56% over the week. 20 year breakeven inflation fell by 4bps to 3.28%.
  • The US high yield bond spread over US treasury yields rose by 22bps to 361bps over the week. The spread of USD denominated EM debt over US treasury yields rose by 14bps to 367bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 6bps to 124bps.
  • The S&P GSCI rose by 3.4% in USD terms over the week. The energy sector rose by 6.0% as the price of Brent crude oil rose by 5.1% to US$79/BBL. Crude oil prices rose as US inventory levels experienced a steep drop and the US urged its allies to stop importing crude oil from Iran. Industrial metals fell by 2.0% following the 2.4% decline in copper prices to US$6,646/MT. Agricultural prices fell by 2.0% and gold prices fell by 1.5% to US$1,250/ounce.
  • Sterling weakened against major currencies over the week. The US dollar appreciated by 0.5% against sterling, ending the week at $1.32/£. The euro appreciated by 0.8% against sterling, finishing the week at €1.13/£. The Japanese yen depreciated by 0.8% against the US dollar, ending the week at ¥110.77/$.

ECONOMIC RELEASES

  • US economic data was a little disappointing over last week. Finalized GDP data showed that the US economy slowed by more than initially expected over the first quarter. Quarter-on-quarter annualised real GDP growth was revised lower to 2.0% from 2.2%, driven by the weakest consumer spending (an increase of only 0.9%) in almost five years. New orders for US-made capital goods unexpectedly fell in May with non-defense orders for capital goods (excluding aircraft) dipping by 0.1%, below expectations of a 0.3% increase. The US Federal Reserve's (Fed) preferred measure of inflation, the core Personal Consumption Expenditure price index, hit the 2.0% inflation target for the first time in six years.
  • In another quiet week for UK data releases, first quarter GDP growth was revised up slightly to 0.2% as construction output was revised higher following a change in the Office of National Statistics' methodology. Year-on-year GDP growth remained at 1.2%. UK house prices increased by more than expected in June, increasing by 0.5% over the month and 2.0% over the year. Mortgage approvals also came in above expectations increasing to 64.5k from 62.5k in the previous month. The GfK Consumer confidence index underperformed expectations and fell slightly to -9, but remains within its recent sideways trend.
  • In the Eurozone, June CPI inflation accelerated to 2.0% from 1.9% although core inflation slowed to 1.0% from 1.1%. Both moves were in line with expectations. Broad Money Supply (M3) growth in the Eurozone was higher than expected in May, increasing by 4.0%, but remains below the c.5.0% growth seen over 2016 and 2017. In Germany, the IFO business climate index declined across all sectors, falling to 101.8 in June. Retail sales disappointed with a 2.1% decrease over May which more than offset the downwardly revised 1.6% gain over April. Over the year, retail sales declined by 1.6%, lower than consensus estimates of a 1.9% increase. Meanwhile, German unemployment remained at 5.2% in June despite a higher-than-expected 15k fall in unemployment over the month.
  • Data from Japan wasn’t much better. Japanese industrial production edged 0.2% lower in the month of May based on preliminary data. Although above forecasts of a 1.0% decline, May's reading was down from the 0.5% growth in April. Japan’s labour market continued to tighten as the jobless rate for May fell to 2.2% (the lowest reading since 1992). The job-to-applicant ratio reached its highest level since 1974, inching 0.01 point higher to 1.6. Retail sales dropped by 1.7% over May, far worse than the forecasted 0.8% fall and the downwardly revised 1.3% reading for April. The consumer confidence index in June marginally fell to 43.7 from 43.8.
  • The official Chinese manufacturing PMI for June fell by 0.4 points to 51.5 as trade war concerns between the US and China intensified. Sentiment in service industries picked up slightly with the non-manufacturing index rising to 55.0 from 54.9 over the month. Although slowing from the previous month's strong upturn, industrial profit growth for the year to May remained firmly in double-digit territory at 21.1% from 21.9%.

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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