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Aon Retirement and Investment Blog

Weekly Update - 11 June 2018

NEW INTELLECTUAL CAPITAL

  • U.S. Discount Rate Update. Average discount rates decreased slightly during May, as Treasury rates dropped across the curve and spreads widened. In early June, rates have increased by 9 basis points through Thursday, June 7th.
MARKET MOVES (Week ending June 10, 2018)
Equities
  • 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 S&P 500 Index rose by 1.7% outperforming the MSCI World Index which rose by 1.4%. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (4.8% vs. 3.0%).
  • US Large Cap stocks outperformed the Small Cap stocks over the week as the S&P 500 Index rose by 1.7% while the Russell 2000 Index rose by 1.5%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (9.5% vs. 4.8%). Growth stocks marginally outperformed Value stocks over the week as Growth stocks rose by 1.7% while Value stocks rose by 1.6%, as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (10.4% vs. -0.3%).
Bonds
  • The 10 year US treasury yield rose by 5bps to 2.94% and the 30 year US treasury yield rose by 4bps to 3.08%.
  • The 20 year TIPS yield rose by 1bp to 0.90% and the 20 year breakeven rose by 3bps to 2.10%.
  • The spread of the Bloomberg Barclays Capital Long Credit Index over the yield on US treasuries rose by 2bps to 165bps and the Bank of America Merrill Lynch US Corporate Index credit spread also rose by 1bp to 122bps. 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.
Commodities       
  • 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 WTI crude oil decreased by 0.1% to US$66/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.
Currencies
  • The US dollar depreciated against major currencies over the week with exception of the Canadian dollar. The US dollar depreciated by 0.5% against sterling, ending the week at $1.34/£. The US dollar depreciated by 0.9% against the euro, finishing the week at €1.18/£. The Japanese yen appreciated by 0.2% against the US dollar, ending the week at ¥109.36/$. The Canadian dollar slipped by 0.1% over the week to close at C$1.30/US$.
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.
  • 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 annualized 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. 
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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