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Aon Retirement and Investment Blog

Weekly Update - 11 June 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets gained over the week with the exception of the UK and European markets. Encouraging economic numbers coming out of the US helped lift investor sentiment. The MSCI AC World Index gained 1.2% in local currency terms and 0.7% in sterling terms. Japan was the best performing market both in local currency (1.9%) and sterling terms (1.6%) despite weak economic data. Developed Europe ex UK was the worst performing region in local currency terms (-0.3%) as trade tensions increased between European nations and the US ahead of the G-7 summit. The UK was the worst performing market in sterling terms (-0.1%).
  • UK gilt yields rose across all maturities over the week as one of the most cautious policy setters of the Bank of England indicated there could be a rate hike in August. Both the 10 year and the 20 year UK gilt yield rose by 10bps each to 1.39% and 1.85% respectively. The 10 year US treasury yield rose by 5bps to 2.94%. European government bond yields rose across the region as the European Central Bank hinted an end to its quantitative easing program by the end of 2018. German bund yields rose by 8bps to 0.45% and French government bond yields rose by 11bps to 0.81% over the week. Italian government bond yields rose sharply by 36bps to 3.05% as the new Prime Minister Giuseppe Conte promised a ‘radical change’ in policy reforms in his maiden speech.
  • The UK 20 year real yield rose by 7bps to -1.54% and the Over 5 year real yield rose by 6bps to -1.49% over the week. 20 year breakeven inflation rose by 3bps to 3.33%.
  • The US high yield bond spread over US treasury yields fell by 10bps to 345bps over the week. The spread of USD denominated EM debt over US treasury yields remained unchanged at 342bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 3bps to 118bps.
  • The S&P GSCI fell by 0.2% in USD terms over the week. The energy sector fell by 0.4% as the price of Brent crude oil declined by 0.4% to US$76/BBL. Industrial metals rose by 2.8% supported by copper prices which rose by 6.6% to US$7,263/MT. Agricultural prices fell by 2.4% while gold prices rose by 0.3% to US$1,298/ounce.
  • Sterling strengthened against major currencies, with the exception of the euro, over the week. The US dollar depreciated by 0.5% against sterling, ending the week at $1.34/£. The euro appreciated by 0.3% against sterling, finishing the week at €1.14/£. The Japanese yen appreciated by 0.2% against the US dollar, ending the week at ¥109.36/$.

ECONOMIC RELEASES
  • Momentum continued to be strong in the US economy with the forward-looking Institute of Supply Management's non-manufacturing index rising to 58.6, exceeding estimates of a 0.9 point increase to 57.7. This marked the 100th successive month that the index has remained above 50, which denotes a period of expansion in the sector. The same strength was not reflected in factory orders, however. Analysts had expected orders to fall 0.5% from the previous month's revised 1.7% increase, but April's reading disappointed with a 0.8% decrease in orders. At a time of heightened trade tension, the US trade deficit unexpectedly narrowed in April to $46.2bn from a downwardly revised $47.2bn in March.
  • In the UK, Purchasing Managers’ Index (PMI) data for UK services came in higher than expected, increasing to 54.0 in May from 52.8 in April. This was largely driven by an increase in business activity growth following snow-related disruption in the first quarter. Construction PMI was unchanged from April's reading of 52.5 – remaining in expansionary territory. When combined with last week's increase in the manufacturing PMI, the latest readings have pushed up the UK composite PMI to 54.5 in May from 53.2 in April. The Halifax House Price Index increased by 1.5% in May on a monthly basis rebounding from a 3.1% fall in April. The index increased 1.9% in the three months to May 2018 on a year-on-year basis reflecting support from a strong labour market but a softening in mortgage approvals.
  • The final readings for Eurozone GDP confirmed the earlier estimate of 2.5% growth on a year-on-year basis for the first quarter. However, Eurozone retail sales growth slowed in April to 0.1% from an upwardly revised increase of 0.4% in March. The Markit Eurozone retail PMI bounced back into expansion territory at 51.7 in May following a low reading of 48.6 in April. Eurozone producer price inflation slowed to 2% for the year to April from 2.1% in March. German industrial production fell unexpectedly in April by 1.0% following an upwardly revised increase of 1.7% in March, as output fell in all sectors except for the construction sector. German factory orders also fell, decreasing by 2.5% in April thereby missing market expectations of a 0.8% increase. This marks the fourth consecutive month of declining German factory orders.
  • Japanese economic data was largely negative last week. The final reading for GDP growth in Japan was unchanged as the economy contracted by an annualised 0.6% over the first quarter. The reading was worse than the -0.4% forecasted. Japan’s current account surplus narrowed to ¥1845.1bn in the year to April, below analyst forecasts of ¥2076.5bn. This was largely due to a deficit in the services sector, which includes passenger and cargo transportation. Wage growth data in Japan disappointed. Labour cash earnings grew by 0.8% for the year to April against a forecasted increase of 1.3% while real cash earnings remained flat against an expected 0.1% increase. Household spending declined for a third straight month as it fell 1.3% in the year to April.
  • In China, the consumer price index (CPI) rose by 1.8% over the year to May, unchanged from the previous month. Exports and imports grew by 12.6% and 26.0% respectively over the year to May, higher than the consensus estimates of 11.1% and 18.0%. The sharp increase in Chinese imports compared to exports led to a narrowing of the trade surplus to US$24.92bn, well below analyst estimates of US$33.25bn.
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