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Aon Retirement and Investment Blog

Weekly Update - 23 July 2018 (UK/Europe)


  • Global equity markets remained broadly unchanged over the week even though US president Donald Trump threatened to impose tariffs on all Chinese imports to the US, worth US$505 billion a year, and criticized the higher interest rate policy of the US Federal Reserve (Fed). The MSCI AC World Index rose 0.1% in local currency terms. However, broad sterling weakness pushed up the return to 0.9% in sterling terms. In a holiday-shortened week, Japan was the best performing market both in local currency (0.8%) and sterling terms (2.1%), supported by encouraging economic data. AC Pacific ex Japan was the worst performing region in local currency terms (-0.2%) whilst the UK was the worst performing region in sterling terms, returning 0.2%.
  • UK gilt yields fell across maturities (except at the short end of the curve) over the week as prospects for the Bank of England raising its benchmark interest rate took a hit on the back of soft inflation and retail sales data. The 10 year UK gilt yield fell by 4bps to 1.23% and the 20 year UK gilt yield fell by 3bps to 1.66%. The 10 year US treasury yield rose by 5bps to 2.88%, supported by retail sales data and the Fed chair Jerome Powell’s upbeat congressional testimony. European government bond yields rose on the back of the US trend with German bund yields rising by 8bps to 0.35% and French government bond yields rising by 4bps to 0.65%.
  • The UK 20 year real yield fell by 1bp to -1.65% and the Over 5 year real yield fell by 2bps to -1.61% over the week. 20 year breakeven inflation fell by 3bps to 3.26%.
  • The US high yield bond spread over US treasury yields fell by 7bps to 355bps and the spread of USD denominated EM debt over US treasury yields fell by 2bps to 338bps over the week. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose slightly by 1bp to 123bps.
  • The S&P GSCI fell by 1.2% in USD terms over the week. The energy sector fell by 2.2% as the price of Brent crude oil declined by 3.0% to US$73/BBL. Industrial metals fell by 0.9% following the decline in copper prices which fell by 1.5% to US$6,073/MT. Agricultural prices rose by 2.7% while gold prices fell by 1.0% to US$1,229/ounce.
  • Sterling weakened against major currencies over the week. The US dollar appreciated by 0.8% against sterling, ending the week at $1.31/£. The euro appreciated by 1.1% against sterling, finishing the week at €1.12/£. The Japanese yen appreciated by 0.5% against the US dollar, ending the week at ¥111.84/$.
  • Against a backdrop of lower income taxes, higher employment and rising wages, consumer spending in the US continued to grow over June. Retail sales rose for a fifth consecutive month, increasing by 0.5% as expected. Moreover, May's reading was upwardly revised from 0.8% to 1.3% - suggesting US GDP may accelerate over the second quarter as consumer activity accounts for a large part of economic activity. June industrial production just exceeded consensus estimates at 0.6% which more than offset the downwardly revised 0.5% decline seen in May. However, the housing market has seemingly not kept up with other areas of the economy with housebuilding plummeting by 12.3% in June to a seasonally-adjusted 1,173k; a nine month low. Analysts had expected a far more modest 2.2% fall over the month.
  • In the UK, annual consumer price inflation (CPI) remained at 2.4% for the third consecutive month in June. However, this was 0.2% below expectations as increases in the prices of food and non-alcoholic beverages were lower than expected. Moreover, core inflation which excludes food and energy prices, unexpectedly slowed to 1.9% from 2.1%. The International Labour Organization (ILO) unemployment rate remained at 4.2% in the three months to May 2018, standing at its joint-lowest level since 1975. Despite the tight labour market, wage growth (excluding bonus payments) slowed by 0.1% to 2.7% over the same period. UK consumers remain under pressure with retail sales (including auto fuel) declining by 0.5% in June; short of the 0.2% consensus estimate and bucking the recent upturn.
  • In the Eurozone, June CPI was confirmed at 2.0% but core inflation was lowered slightly to 0.9%. In Germany, producer price inflation continued to accelerate with prices growing by 3.0% in the year to June 2018. A jump in energy prices was once again the major driver while costs also increased for both intermediate and capital goods. The seasonally-adjusted Eurozone trade balance came in below expectations for the fourth month in a row, falling by €1.2bn to €16.9bn in May. The seasonally-adjusted ECB current account surplus fell sharply to its lowest level since March 2015.
  • In Japan, headline CPI remained at 0.7% for the year to June but below consensus estimates of 0.8%. Core inflation, which excludes more volatile food and energy components, increased to 0.8% from 0.7%. Japan's trade balance rebounded to a ¥721.4 billion surplus in June from May’s ¥580.5 billion deficit and far ahead of analyst forecasts of a ¥531.2 billion surplus. This was due to faster growth of exports compared to imports. Exports grew by 6.7% for the year to June while imports grew by 2.5% over the same period – however, both were below expectations.
  • As expected, the Chinese economy decelerated from an annualised 6.8% to 6.7% over the second quarter of 2018. Slowing infrastructure investment weighed on overall growth in the world's second largest economy with fixed asset investment in urban regions decreasing to 6.0% for the year to June. A similar trend was observed with industrial production, as production growth slowed to 6.0% for the year to June; down from 6.8% in the previous month and below 6.5% forecasted. Conversely, retail sales growth accelerated to 9.0% over the year to June from 8.5% in May, beating analyst forecasts of 8.8% growth.
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