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Aon Retirement and Investment Blog

Weekly Update - 29 March 2016 (UK/Europe)

NEW INTELLECTUAL CAPITAL

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MARKET MOVES
  • Global equities dipped lower in a holiday-shortened week, driven by hawkish comments from some Federal Reserve officials suggesting that the next interest rate hike might come as early as Q2 2016, but a slight drop in energy prices also contributed to investor nerves. The MSCI AC World Index fell 0.7% in local currency terms but returned 1.2% in sterling terms due to a weakening pound. Japan was the best performing market in both local currency (1.7%) and sterling (3.1%) terms as the weaker yen benefited exporters’ shares. Developed Asia Pacific ex Japan was the worst performing region in local currency terms (-1.8%) as mining stocks were hit due to declining commodity prices. In sterling terms, the UK was the worst performing market (with a return of -1.4%) due to a sharp drop in the pound boosting returns from other regions.
  • UK nominal gilt yields rose marginally across all maturities. The 10 year UK gilt yield was 1bp higher at 1.46% and the 20 year UK gilt yield rose by 3bps to 2.18%. The 10 year US treasury yield rose by 2bps, finishing the week at 1.89%. European government bond yields were mixed. German bond yields fell by to finish the week at 0.18% and French government bond yields fell by 3bps to finish the week at 0.46%.
  • UK real yields rose over the week. The 20 year real yield rose by 5bps to -0.88% and the real yield on the Over 5 year index finished the week 6bps higher at -0.95%. 20 year break even inflation fell by 2bps to 3.00%.
  • Credit spreads were mixed over the week. The US high yield bond spread over US treasury yields was 22bps higher at 693bps and the spread of USD denominated EM debt over US treasury yields finished the week 7bps higher at 408bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was lower by 2bps at 151bps.
  • The S&P GSCI Index fell by 2.2% in USD terms partly due to the strengthening US dollar. The energy sector fell by 2.8% as the price of Brent crude oil fell by 4.2% on the back of an increase in crude stock piles, according to DOE inventory data, finishing the week at USD 40/BBL. Industrial metals fell by 2.3% over the week as copper prices declined by 1.9% to $4,977/MT. Agricultural prices were 0.1% higher while gold prices fell by 2.6%, finishing the week at $1,221/ounce.
  • Sterling weakened against major currencies over the week as EU referendum worries continued. The US dollar appreciated by 2.6% against sterling, ending the week at $1.41/£ as the possibility of the next US rate hike occurring in April increased. The euro rose by 1.4% against sterling, finishing the week at €1.27/£. The Japanese yen depreciated against the US dollar by 1.1%, ending the week at ¥113/$.
ECONOMIC RELEASES
  • US economic data was mixed. Revised estimates of GDP growth in Q4 2015 showed a rosier picture than previously thought. Annualised quarterly growth was revised up from 1.0% to 1.4% as the personal consumption growth component was moved up. However, more timely data was less encouraging. The preliminary March manufacturing Purchasing Managers’ Index (PMI) rose slightly to 51.4 from 51.3, but fell short of the 51.9 expected reading. On the other hand, the services PMI rose more strongly, from 49.7 to 51.0, but even this failed to meet market expectations. Durable goods orders fell by 2.8% over February, a slightly smaller fall than expected, but capital goods orders fell by 1.8% over the same period when only a 0.5% fall was expected. Meanwhile, the housing market softened in February, with existing home sales falling by 7.1% and new home sales only growing by 2.0%, less than expected.
  • UK retail sales fell by a better-than-expected 0.4% in February after rising strongly by 2.3% in January. That makes the increase in sales over the last year a decent 3.8%. March’s CBI Industrial Trends Survey continued to reflect a weak manufacturing sector, with total orders at -14, up just a little from -17 in February. Export orders were unchanged at -19, indicating that sterling’s fall has yet to boost exports. Government borrowing (excluding banking groups) reached £7.1bn in February, above the consensus forecast of £5.9bn. It is now very unlikely that the fiscal year forecast will be met. Annual consumer price inflation remained at 0.3% in February with core inflation holding steady at 1.2%.
  • The preliminary Eurozone composite PMI reached 53.7 in March, higher than last month and also better than expectations largely due to improved sentiment in the services sector. The German composite PMI stayed unchanged at 54.1. Consumer confidence in the region dropped to -9.7 in March, although German consumer confidence reported by the GfK Group edged down by less. The ZEW Indicator of Economic Sentiment for Germany rose to 4.3 in March, up from a 16-month low in February (particularly hit by high global economic uncertainty) although the index remained below the expected 5.4 level and sentiment around the current situation fell.
  • Japanese CPI inflation was 0.3% over the year to February as rising food prices had a positive impact but global inflationary pressures remained low and yen appreciation reduced import prices. The “core-core” measure, which excludes food and energy, was 0.8% over the same period, meeting the consensus analyst forecast. The preliminary manufacturing PMI for March deteriorated to 49.1 from 50.1, showing a contraction for the first time in almost a year as new export orders fell sharply.
  • There were no noteworthy Chinese economic data releases.


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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