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Aon Retirement and Investment Blog

Weekly Update - 20 June 2016

UPCOMING EVENTS

  • Rethink Pensions: European Pension and Retirement Savings ConferenceAon Hewitt’s first EMEA-wide pension and retirement savings conference takes place in October in Amsterdam. Meet with your peers, exchange ideas and hear from thought leaders on pensions and retirement at our free one-day conference. Leave with insight into all aspects of corporate pensions and retirement provision.
NEW INTELLECTUAL CAPITAL
  • European Union: European Pensions Regulator Proposes Pan-European Pensions Risk Framework. Aon has produced a note summarizing the latest proposals from the European Insurance and Occupational Pensions Authority  (EIOPA) for a pan-European pensions risk framework. This follows a recent Europe-wide impact assessment showing a total shortfall in European pension schemes, calculated using risk-free measures, of €1,200bn (of which €950bn was for UK schemes). No immediate action is required; but the proposals reinforce the continued focus on risk and governance in pension schemes across Europe.
  • Discount Rate Update. Average discount rates increased during May as the treasury curve flattened and corporate spreads widened at the long end of the curve. The average plan sponsor’s discount rate increased 2 basis points in May to 4.07%. In early June, rates have decreased by 16 basis points.
  • Radar. Provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health. A French version of the June 2nd issue is also now available.

MARKET MOVES - Week Ending June 17, 2016

Equities 
  • Global equity markets ended sharply lower over a volatile trading week as investors’ focused their attention on US Federal Reserve (Fed) statements and the possible exit of Britain from the EU as the “Leave” campaign gained momentum. The MSCI World Index fell 1.7% and the S&P 500 Index fell 1.1% over the week. On a year to date basis, the S&P 500 has outperformed MSCI World (2.4% vs. -0.1%).
  • US Small Cap stocks underperformed Large Cap stocks as the Russell 2000 fell 1.6% over the week compared to a 1.1% decline by the S&P 500. On a year to date basis, Large Cap stocks have outperformed Small Cap stocks (2.4% vs. 1.5%). Growth stocks underperformed Value stocks last week (-1.4% vs. -0.8%) as measured by MSCI USA indices. On a year to date basis, Value stocks have outperformed Growth stocks, returning (4.6% vs. -0.1%).
Bonds
  • 10 year and 30 year US Treasury yields fell by 3bps, thus ending the week at 1.61% and 2.42% respectively, as the Fed left interest rates unchanged.
  • 20 year TIPS yields rose by 6bps to 0.43% over the week. 20 year Breakeven fell by 10bps to 1.33%.
  • Credit spreads widened over the week as investors became more risk averse due to global growth concerns. The Barclays Capital Long Credit Index spread over treasury yields rose by 6bps to 218bps and the Merrill Lynch US Corporate Index spread ended the week 4bps higher at 160bps. The US high yield bond spread over US treasury yields rose by 23bps to 621bps and the spread of USD denominated EM debt over US treasury yields finished the week 11bps higher at 405bps. 
Commodities 
  • The S&P GSCI fell by 1.3% in USD terms over the week. The energy sector fell by 2.4% as the price of WTI crude oil fell by 2.2% to USD 48/BBL. Oil prices fell as the US Energy Information Administration reported a lower than expected drop in crude inventories. Industrial metals rose by 0.8% as copper prices rose by 1.0% to $4,542/MT. Agricultural prices were 0.5% higher and the gold prices rose 1.1%, finishing the week at $1,287/ounce.
Currencies 
  • The US dollar appreciated against major currencies over the week except for the yen. The US dollar appreciated 0.2% against sterling, ending the week at $1.43/£. The US dollar strengthened 0.4% against the euro finishing the week at $1.12/€. The Japanese yen appreciated by 2.5% against the US dollar, ending the week at ¥104.29/$, after the Bank of Japan (BoJ) left its monetary policy unchanged. 

ECONOMIC RELEASES

  • US economic data was fairly soft. Headline consumer price inflation slowed to 1.0% in May when analysts had hoped it would remain at 1.1%. However, the ‘core’ index, which excludes volatile food and energy components, rose by 2.2% over the same period, a slight increase of 0.1% on the previous month. Real wage growth remained at 1.1% in May (on a year-on-year basis). Retail sales (excluding auto and gas) rose by 0.3% in May, in line with expectations but a fall from the prior month’s 0.6% gain. The NAHB housing market index rose to 60 from 58, just beating expectations, and the Empire manufacturing index strongly rose to 6 from -9. Industrial production fell by 0.4% in May, nearly offsetting the 0.6% rise from the previous month, but still in line with the broadly declining trend since late 2014. Lastly, the current account deficit widened to $125bn in the first quarter of 2016, up from $113bn the previous quarter.
  • Eurozone annual consumer price inflation was in line with expectations at -0.1%. Core inflation also met expectations at 0.8%. Industrial production ex construction in April was better than expectations at 1.1%. Q1 unemployment rose by 1.4%, up from 1.2% in the previous period.
  • It was a very light week for economic releases in Japan. Industrial production was revised up over April from 0.3% to 0.5%. The Bank of Japan kept its monetary policy unchanged at -0.1% and maintained its qualitative easing program at ¥80tn, although it is expected that some more quantitative easing may be announced later in the summer. 
  • Foreign direct investment into China fell by 1.0% over the year to May in renminbi terms, a disappointing reading given expectations of 5.0% growth. Meanwhile, annual retail sales growth to May was 10.0%, 0.1% less than expected, and industrial production grew by 6.0% over the same period.

Source: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions. 
 
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, nor should it be treated as investment advice. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.


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