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Aon Retirement and Investment Blog

Weekly Update - 04 June 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets moved slightly lower over the week. Markets initially fell in the wake of political turmoil in Europe and the imposition of steel and aluminium tariffs on the European Union, Canada and Mexico by the US. However, equities recovered the majority of losses later in the week, supported by the formation of a government in Italy and Donald Trump’s willingness to hold talks with his North Korean counterpart Kim Jong-un. The MSCI AC World Index fell 0.1% in local currency terms and 0.2% in sterling terms. The US was the best performing market both in local currency (0.6%) and sterling terms (0.5%). Japan was the worst performing market both in local currency (-1.2%) and sterling terms (-1.6%).
  • UK gilt yields  fell marginally across most maturities. The 10 year UK gilt yield fell by 2bps to 1.29% whilst the 20 year UK gilt yield remained unchanged at 1.75%. The 10 year US treasury yield fell by 4bps to 2.89%. European government bond yields experienced a volatile week across the region. Italian government bond yields rose over the week by 16bps to 2.69%. Initially, yields rose sharply after the Italian president Sergio Mattarella blocked the bid by the anti-establishment parties to form a coalition government. However, yields fell back later after the successful formation of a coalition government by the 5-Star Movement and the right wing League. Spanish bond yields fell by 7bps to 1.43% in a week in which the Spanish Prime Minister Mariano Rajoy was ousted and replaced by Pedro Sanchez. German bund yields fell by 2bps to 0.37% and French government bond yields fell by 1bp to 0.70% over the week.
  • Both the UK 20 year real yield and the over 5 year real yield fell by 5bps each to -1.62% and -1.55% respectively over the week. 20 year breakeven inflation rose by 3bps to 3.30%.
  • The US high yield bond spread over US treasury yields rose by 2bps to 355bps over the week. The spread of USD denominated EM debt over US treasury yields rose by 18bps to 341bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 4bps to 121bps.
  • The US high yield bond spread over US treasury yields rose by 2bps to 355bps over the week. The spread of USD denominated EM debt over US treasury yields rose by 18bps to 341bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 4bps to 121bps.
  • The S&P GSCI Commodity Index fell by 1.0% in USD terms over the week. The energy sector fell by 1.4% despite the price of Brent crude oil increasing by 0.5% to US$77/BBL. Industrial metals rose by 1.4% despite copper prices decreasing by 1.0% to US$6,814/MT. Agricultural prices fell by 1.9% and gold prices fell by 0.7% to US$1,295/ounce.
  • Sterling marginally strengthened against major currencies over the week. The US dollar depreciated by 0.1% against sterling, ending the week at $1.33/£. The euro depreciated by 0.1% against sterling, finishing the week at €1.14/£. The Japanese yen depreciated by 0.3%against the US dollar, ending the week at ¥109.57/$.

ECONOMIC RELEASES

  • In the US, the second reading for first quarter GDP growth was lowered from the initial annualized estimate of 2.3% to 2.2% amid downward revisions to both consumer spending and inventory investment. More recent economic releases, however, point to a strong US economy. The Institute of Supply Management's (ISM) manufacturing index exceeded analyst forecasts of 58.2 and rose to 58.7 from 57.3. Underlying components of the index (employment, prices paid and new orders) all improved in May. Employment data was also positive with 223k non-farm jobs added in May; ahead of expectations of 190k jobs. The unemployment rate declined to an eighteen-year low of 3.8% and wage growth accelerated to 2.7% for the year to May 2018, reigniting inflationary concerns.
  • Purchasing Managers’ Index (PMI) data for UK manufacturing came in higher than expectations, increasing to 54.4 in May from 53.9 in April. This follows a period of lower readings from the November 2017 high. Growth in UK house prices slowed to 2.4% in May according to the Nationwide House Price index. This was below market expectations of an increase to 3.0% from April's reading of 2.4%. Mortgage approvals also fell in April despite market expectations they would increase. However, UK consumer confidence rebounded in May, according to the GfK Consumer Confidence Indicator, but it remains negative.
  • Economic releases in the Eurozone were more positive than in the previous week. Eurozone consumer prices (CPI) growth came in higher than expectations at 1.9%, a significant increase from the prior reading of 1.2%. This was largely driven by a 6.1% increase in energy prices over the month and continued high food, alcohol and tobacco price growth. Core CPI also increased in May to 1.1%. This moves inflation in the Eurozone closer to the ECB's target of below, but close to, 2%. Broad Money Supply also increased in April to 3.9%from 3.7%. German retail sales growth came in below expectations at 1.2% for April on a year-on-year basis despite a strong increase over the month. However, the previous reading was revised up from 1.3% to 1.7%.
  • Japanese industrial production inched 0.3% higher in the month of April based on preliminary data. This was, however, down from 1.4% growth in March due to lower production of electronic components. Both the jobless rate and job-to-applicant ratio for April remained unchanged at 2.5% and 1.6% respectively. Retail sales for the year to April rose by 1.6%, better than the previous reading and consensus estimates of 1.0%. The final reading for the Nikkei manufacturing PMI for May increased to 52.8 from the preliminary reading of 52.5. The consumer confidence index in May improved to 43.8 from 43.6, but missed expectations of an increase to 43.9.
  • The official Chinese manufacturing PMI for May came in ahead of forecasts of the index remaining at 51.4, by increasing to 51.9. This reflects the fastest pace that the sector has grown since October last year. Growth also accelerated in other areas of the economy with the non-manufacturing index beating consensus estimates and rising to 54.9 from 54.8 over the same period. However, the Caixin manufacturing PMI, which focuses more on small and medium-sized Chinese business, was unchanged in May at 51.1

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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