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Aon Retirement and Investment Blog

Weekly Update - 05 March 2018 (UK/Europe)


  • Global equity markets fell over the week in which upbeat comments from the new US Federal Reserve Chair Jerome Powell led to speculation that there could potentially be four rate hikes in 2018. US President Donald Trump also announced that he would impose import tariffs on steel and aluminum which escalated global trade tensions. The MSCI AC World Index fell 2.2% in local currency terms. Sterling weakness after UK Prime Minister Theresa May rejected Brussels’ first draft of Brexit proposals limited the fall to 1.0% in sterling terms. Developed Pacific ex Japan was the best performing region both in local currency terms (-0.5%) and sterling terms (0.3%). Developed Europe ex UK fell the most in local currency terms at -3.4%. The UK fell the most in sterling terms returning -2.4%.
  • UK gilt yields fell across maturities over the week, except at the shortest end of the curve. Both the 10 year and the 20 year UK gilt yield fell by 5bps each to 1.49% and 1.88% respectively. The 10 year US treasury yield ended 2bps lower at 2.86%. German bund yields rose by 5bps to 0.65% whilst French government bond yields fell by 3bps to 0.79% over the week. The Italian bond market was calm for most of the week in advance of Sunday’s Italian elections with yields down over the week although yields spiked up on Friday. The UK 20 year real yield fell by 4bps to -1.55% and the Over 5 year real yield fell by 3bps to -1.58%. 20 year breakeven inflation was unchanged at 3.37%.
  • Credit spreads rose over the week. The US high yield bond spread over US treasury yields rose by 7bps to 365bps. The spread of USD denominated EM debt over US treasury yields finished the week 3bps higher at 290bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 2bps to 107bps.
  • The S&P GSCI fell by 2.2% in USD terms over the week. The energy sector fell by 3.7% as the price of Brent crude oil decreased by 4.6% to US$64/BBL. Industrial metals decreased by 2.0% as copper prices fell by 2.8% to US$6,864/MT. Agricultural prices rose by 3.6% whilst gold prices fell by 0.6% to US$1,320/ounce.
  • Sterling fell against major currencies over the week. The US dollar appreciated by 1.5% against sterling, ending the week at $1.38/£. The euro strengthened by 1.6% against sterling, finishing the week at €1.12/£. The Japanese yen appreciated by 1.1% against the US dollar, ending the week at ¥105.48/$.
  • The second reading of Q4 real GDP growth showed the US economy was slightly less strong than initially thought. GDP growth was revised down to 2.5% from 2.6%, as stronger consumer spending led to greater import demand as well as inventory depletion. Durable goods orders contracted for a second successive month, falling by a further 3.7% in January after December's 2.6% decline. Analysts had expected a smaller 2.0% decrease to start the year. Similarly, new home sales unexpectedly fell for a second month in a row; decreasing by a further 7.8%, below forecasts of a 3.5% increase and also more than December's 7.6% fall. A measure of manufacturing activity, the Institute of Supply Management's manufacturing index, however, pointed to further economic momentum in the US with the index reaching 60.8; the highest level since May 2004, above the previous reading of 59.1. Core consumer price inflation (CPI), as measured by the core personal consumption expenditure (PCE) price index, remained as expected at 1.5% year-on-year.
  • Purchasing Managers' Index (PMI) data for the UK manufacturing sector slipped to 55.2 in February; the second lowest reading since the June 2016 Brexit vote, although slightly ahead of expectations of 55.0. The construction PMI improved from 50.2 to 51.4, ahead of market expectations of 50.5. Both readings indicate that the two sectors remain in expansionary territory (readings over 50). Consumer confidence in the UK dipped in February as sluggish household income and rising prices weighed on consumers. As expected, the GfK consumer confidence index moved one point lower to -10. February's house price data showed a fall in prices (-0.3%) for the first time in six months against expectations of a 0.1% increase. Price growth year-on-year to February measured 2.2%, down from 3.2% in January.
  • Eurozone economic releases were largely in line with expectations this week. Preliminary Eurozone inflation estimates for February increased by 1.2% over the year, slightly lower than the 1.3% rise in January. Core inflation for February met expectations, with prices rising 1.0% over the year. In Germany, preliminary CPI data was marginally softer than expected. Inflation slowed to 1.4%. This was down from 1.6% previously and 1.5% expected. Final manufacturing PMI data for the Eurozone in February ticked up to 58.6 from 58.5. In Germany, final manufacturing PMI data was revised up to 60.6 from 60.3. Consumer confidence in the Eurozone in February met expectations and remained at 0.1. Meanwhile, Germany's GfK consumer confidence reading for March indicated slightly lower sentiment, as the index fell from 11.0 to 10.8 in February.
  • In Japan, January industrial production fell by 6.6% on a provisional basis, more than an estimated fall of 4.0% and the steepest fall since the 2011 earthquake. Retail sales growth slowed to 1.6% over the year to January, below the forecast of 2.4%. Japan's labour market tightened further with the jobless rate falling to a 24-year low of 2.4% in January from 2.7% while the job-to-application ratio remained at 1.59, below forecasts of 1.60. The final reading for February's Nikkei manufacturing PMI improved marginally to 54.1 from 54.0.
  • The official PMI releases indicated slowing economic growth in China. The manufacturing PMI unexpectedly fell to 50.3 from 51.3. Analysts expected the index to slip to 51.1. The non-manufacturing PMI fell to 54.4 from 55.3, failing to meet estimates of 55.0.
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