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Aon Retirement and Investment Blog

Weekly Update - 30 July 2018

MARKET MOVES (Week ending July 29, 2018)

  • Global equity markets rose over the week supported by encouraging corporate earnings reports and receding trade war tensions between the US and the European Union following talks between the US president Donald Trump and European Commission president Jean-Claude Juncker. Elsewhere, the People's Bank of China continued to inject liquidity into the Chinese economy to help mitigate the impact of trade tensions and a decelerating economy. The S&P 500 Index rose by 0.6% over the week, underperforming the MSCI World Index which rose by 0.8%. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (6.6% vs. 4.1%).  
  • US Large Cap stocks outperformed Small Cap stocks over the week as the S&P 500 Index rose by 0.6% while the Russell 2000 Index fell by 2.0%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (9.0% vs. 6.6%). Growth stocks underperformed Value stocks over the week as growth stocks fell by 0.5% whilst value stocks rose by 1.6%, as measured by the MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (11.9% vs. 1.3%).
  • Global government bond yields rose in major developed markets following speculation of a policy tweak from the Bank of Japan; the only major central bank which has remained unchanged on its highly accommodative monetary policy stance. 10-year Japanese government bond yields rose by 7bps to 0.10%. 
  • The 10-year US treasury yield rose by 8bps to 2.96% and the 30-year US treasury yield rose by 6bps to 3.09%, in a week in which the US posted solid economic growth data. The 20-year TIPS yield rose by 4bps to 0.89% and the 20-year breakeven rose by 3bps to 2.14%. 
  • The spread of the Bloomberg Barclays Capital Long Credit Index over the yield on US treasuries fell by 8bps to 157bps and the Bank of America Merrill Lynch US Corporate Index credit spread fell by 6bps to 116bps. The US high yield bond spread over US treasury yields fell by 13bps to 342bps and the spread of USD denominated EM debt over US treasury yields fell by 15bps to 323bps over the week. 
  • The S&P GSCI rose by 1.6% in USD terms over the week. The energy sector rose by 1.8% as the price of Brent crude oil gained 1.7% to US$74/BBL largely due to Iran’s threat of blocking the Strait of Hormuz, which is used by almost a third of global seaborne shipments. However, the price of WTI crude oil fell by 2.5% to US$69/BBL as US oil production reached record highs. Industrial metals rose by 2.0% following the gain in copper prices which rose by 2.9% to US$6,252/MT. Agricultural prices rose by 1.8% while gold prices fell by 0.4% to US$1,224/ounce. 
  • Over the week, the US dollar weakened against all major currencies except against the euro. The US dollar depreciated by 0.2% against sterling, ending the week at $1.31/£. The US dollar appreciated by 0.5% against the euro, finishing the week at $1.17/€. The US dollar depreciated by 0.8% against the Japanese yen, ending the week at ¥110.98/$. The US dollar fell by 0.5% against the Canadian dollar over the week to close at C$1.31/$.  
Economic Releases
  • Despite falling narrowly short of expectations of 4.2%, US economic growth accelerated rapidly by 4.1% over the second quarter; up from a revised 2.2% reading. The fastest pace of growth since 2014 was driven by a surge in consumer spending and business investment with the former exceeding consensus estimates of 3.0% and increasing by 4.0%. Moreover, potential retaliatory tariffs boosted US exports, particularly in soybean shipments and petroleum products. Against a backdrop of a stronger US dollar and heightened trade tensions, net exports are perhaps unlikely to be such a tailwind for the US economy. Economic momentum does not appear to be waning as the manufacturing Purchasing Managers' Index (PMI) unexpectedly inched higher to 55.5 from 55.4 – above forecasts of a decline to 55.1. The one blemish was a stuttering housing market with sales for both existing and new homes falling over the month; existing home sales fell by a further 0.6% while new home sales dropped by 5.3%, below expectations of a 3.1% fall. 
  • In the Eurozone, July PMI data was mixed. The Eurozone Manufacturing PMI beat market expectations, rising by 0.2 to 55.1 – the first monthly increase since December 2017. However, the Eurozone services PMI came in below expectations, falling by 0.8 to 54.4. In Germany, data was more positive with the manufacturing PMI increasing by 1.4 to 57.3 and services PMI only falling by 0.1 to 54.4. Consumer confidence in the Eurozone stood at its downwardly revised reading of -0.6 in July, although marginally higher than analyst forecasts of -0.7. The monthly IFO Business Climate Index for Germany continued its decline, falling by 0.1 to 101.8 as future expectations declined to their lowest level since March 2016.
  • In what was a light week for economic releases in Japan, growth in the manufacturing sector slowed in July with the preliminary Nikkei PMI manufacturing index falling to 51.6 from June’s reading of 53.0. The final reading of the Conference Board's Coincident Index was revised higher to 116.8 from an initial 116.1. Nationwide department sales rebounded by 3.1% in the year to June; more than offsetting the 2% fall in the previous month. 
  • Concerns on the impact of escalating trade tensions continue to present headwinds in China. Slowing factory production was partially offset by rising prices but ultimately could not arrest the fall in industrial production growth which slowed to 20.0% from the previous reading of 21.1%. In a bid to counteract a decelerating economy that also faces trade war ramifications, the People's Bank of China injected $74bn into the banking system – the PBoC's largest single-day injection using its Medium-Term Lending Facility. This was followed by a mix of tax cuts and infrastructure spending.

Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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