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Aon Retirement and Investment Blog

Weekly Update - 30 July 2018 (UK/Europe)

MARKET MOVES

  • 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 MSCI AC World Index rose 0.8% both in local currency and sterling terms. Developed Europe ex UK was the best performing region in local currency terms (1.7%) and Japan was the best performing in sterling terms (2.0%) as the yen strengthened against sterling. The UK returned the least in local currency terms at 0.4% and Developed North America returned the least in sterling terms at 0.3%.
  • 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. Japanese government bond yields rose by 7bps to 0.10%.
  • UK gilt yields rose across all maturities over the week. Both the 10 year and the 20 year UK gilt yield rose by 5bps to 1.28% and 1.71% respectively. The 10 year US treasury yield rose by 8bps to 2.96% in a week in which the US posted solid economic growth data. In Europe, German bund yields rose by 6bps to 0.41% and the French government bond yields rose by 4bps to 0.70%. Italian government bond yields rose by 16bps to 2.74% driven by reports that the country’s treasury minister might leave the government. The Greek government bond yield fell by 4bps to 3.80% as the S&P improved its rating for Greece to positive from stable.
  • The UK 20 year real yield rose by 2bps to -1.64% and the Over 5 year real yield rose by 3bps to -1.58% over the week. 20 year breakeven inflation rose by 3bps to 3.29%.
  • Credit spreads narrowed over the week. 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 sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 1bp to 122bps.
  • 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. 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.
  • Sterling strengthened against major currencies over the week, with the exception of yen. The US dollar depreciated by 0.2% against sterling, ending the week at $1.31/£. The euro depreciated by 0.7% against sterling, finishing the week at €1.13/£. The Japanese yen appreciated by 0.8% against the US dollar, ending the week at ¥110.98/$.

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.
  • It was a quiet week for UK economic data releases. Having steadily declined for much of the last two years, UK finance loans for housing have started to pick up over the past few months. The number of loans outstanding increased by 1,297 to 40,541, beating market expectations of a small decline. Industrial output showed signs of slowing as the Confederation of British Industry's (CBI) monthly industrial orders balance fell 2 points to 11 in July 2018. Declining output expectations and stocks of finished products were the main drivers. Elsewhere, the CBI Reported Retailing Sales index also declined but business optimism was slightly improved. Overall the CBI survey came in marginally above expectations.
  • 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.

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