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Aon Retirement and Investment Blog

Weekly Update - 18 June 2018

NEW INTELLECTUAL CAPITAL

  • Global Perspectives on Responsible Investing. Aon conducted a global survey of institutional investors from November 2017 to early March 2018, gleaning responses and insights from 223 endowments, foundations, public and corporate pensions and defined contribution plans around the world. This report summarizes key findings.
MARKET MOVES (Week ending June 17, 2018)
Equities
  • Global equity markets broadly moved sideways in a week dominated by major central bank meetings and trade war concerns. The US Federal Reserve (Fed) hiked its federal funds rate by 25bps to a range of 1.75%-2.0%. This was expected by markets but the accompanying statement highlighted a more aggressive interest rate path with most of the FOMC members indicating a further two rate rises by the end of the year. The European Central Bank (ECB) announced a reduction in its asset purchases from €30bn to €15bn from the start of October with a view to halting its asset purchases altogether by the end of 2018. Trade tensions escalated after the US imposed tariffs on $50bn worth of Chinese imports. The S&P 500 Index rose by 0.1% outperforming the MSCI World Index which fell by 0.1%. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (4.9% vs. 2.8%). 
  • Small Cap stocks outperformed the US Large Cap stocks over the week as the Russell 2000 Index rose by 0.7% while the S&P 500 Index rose by 0.1%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (10.3% vs. 4.9%). Growth stocks outperformed Value stocks over the week as Growth stocks rose by 0.6% while Value stocks fell by 0.4%, as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (11.0% vs. -0.7%).
Bonds
  • The 10-year US treasury yield fell by 1bp to 2.92% despite the Fed’s hawkish outlook as it signaled four rate hikes in 2018. The 30-year US treasury yield fell by 4bps to 3.05%. 
  • The 20-year TIPS yield fell by 2bps to 0.88% whilst the 20-year breakeven remained unchanged at 2.10%.
  • The spread of the Bloomberg Barclays Capital Long Credit Index over the yield on US treasuries remained unchanged at 165bps while the Bank of America Merrill Lynch US Corporate Index credit spread fell by 1bp to 121bps.  The US high yield bond spread over US treasury yields fell by 12bps to 333bps over the week. The spread of USD denominated EM debt over US treasury yields rose by 12bps to 354bps.
Commodities       
  • The S&P GSCI fell by 2.6% in USD terms over the week. The energy sector fell by 2.5% as the price of WTI Crude oil declined by 1.0% to US$65/BBL. Industrial metals fell by 3.7% following the decline in copper prices which fell by 1.7% to US$7,136/MT. Agricultural prices fell by 3.8% and gold prices fell by 1.0% to US$1,285/ounce. 
Currencies
  • The US dollar appreciated against major currencies over the week. The US dollar appreciated by 0.9% against sterling, ending the week at $1.33/£. The US dollar appreciated by 1.3% against the euro, finishing the week at €1.16/£. The Japanese yen depreciated by 1.0% against the US dollar, ending the week at ¥110.50/$. The Canadian dollar weakened by 1.7% over the week to close at C$1.32/US$. 
Economic Releases
  • In another strong week for US data, the Federal Open Market Committee (FOMC) raised interest rates by a further 25bps to a range of 1.75%-2.0% at its June meeting. The rate rise followed strong inflation data as US Consumer Price Inflation (CPI) accelerated to 2.8% in the year to May, in line with market expectations. This marked the highest inflation rate since February 2012. Over the month of May prices rose in line with market expectations of a 0.2% increase as rising gasoline and shelter prices led the index higher. Core CPI increased by 2.2% in May. Producer price index also increased by 0.5% in May following a 0.1% increase in April. US retail sales rose by 0.8% in May 2018, following an upwardly revised 0.4% advance in April, beating market expectations of a 0.4% gain but industrial production came in below expectations, falling 0.1% from an upwardly revised 0.9% increase in April. 
  • It was a quieter week for economic data in Europe. The ECB left interest rates unchanged at its June meeting. Euro area annual inflation accelerated in line with expectations to 1.9% in May, mainly due to a rise in oil prices. Core inflation was unchanged at 1.1%. Industrial production for the Euro Area rose by 1.7% over the year to April 2018, its smallest increase since last April. This marked a sharp decrease from March’s upwardly revised 3.2% gain and was below market expectations of a 2.8% increase. Year-on-year employment growth in the Euro area slowed over the first quarter to 1.4%. In Germany, the ZEW indicator of economic sentiment dropped by 7.9 points to -16.1 in June. This was the lowest reading since September 2012, reflecting worries over Italy and the trade dispute with the US. The ZEW current economic situation index also declined to 80.6 from 87.4 in May, though it still remains at a high level. German EU Harmonized inflation was unchanged at 2.2% in May.
  • In Japan, industrial production rose for the third consecutive month, increasing by 0.5% in April, an increase on the initially reported increase of 0.3%. Core machine orders recovered in April after a 3.9% decline in March, growing by 10.1%. This was far ahead of consensus estimates of 2.4% growth. Over the year to May, the producer price index increased by 2.7%, ahead of forecasts and 2.1% growth in April. The Tertiary Industry index rebounded in April as it rose by 1.0%, ahead of the expected 0.6% increase. 
  • In China, industrial production for the year to May increased by 6.8%, below the 7.0% previously recorded and forecasted. Retail sales growth decelerated from 9.4% in April to 8.5% in May while fixed asset investment increased by 6.1% for the year to May, down from 7.0% in the previous month.
Sources: 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. 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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