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Aon Retirement and Investment Blog

Weekly Update - 12 March 2018

NEW INTELLECTUAL CAPITAL

  • U.S. Discount Rate Update. Average discount rates increased in February, as Treasury rates rose across the curve. Volatility increased significantly during the month and equities fell, ending 15 consecutive months with positive S&P 500 returns. The average plan sponsor’s discount rate increased 23 basis points in February. In early March, rates have further increased by 2 basis points through Thursday, March 8th and are now up 39 basis points this year.
MARKET MOVES (Week ending March 11, 2018)
Equities
  • Global equity markets gained over the week as fears over a global trade war receded and geopolitical tensions eased in the Korean Peninsula after North Korean leader Kim Jong Un offered to halt his nuclear program and hold talks with US President Donald Trump. In Europe, political uncertainty eased in Germany after the Social Democratic Party agreed to a coalition government with Angela Merkel’s Christian Democratic Union party. The MSCI World Index rose 2.9% over the week, underperforming the S&P 500 Index, which rose 3.6% over the same period. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (4.6% vs. 2.6%).
  • US Small Cap stocks outperformed Large Cap stocks over the week as the Russell 2000 Index rose 4.2% whilst the S&P 500 Index rose 3.6%. On a year-to-date basis, the S&P 500 Index has outperformed the Russell 2000 Index (4.6% vs. 4.2%). Growth stocks outperformed Value stocks over the week (4.0% vs. 3.1%) as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (8.4% vs. 1.0%).
Bonds
  • The 10 year US Treasury yield rose by 3bps to 2.89% and the 30 year US Treasury yield rose by 2bps to 3.16%.
  • The 20 year TIPS yield rose by 4bps to 0.92% and the 20 year breakeven inflation rate fell by 3bps to 2.07%.
  • The spread of the Bloomberg Barclays Capital Long Credit Index over treasury yields was unchanged at 140bps whilst Bank of America Merrill Lynch US Corporate Index credit spread rose by 1bp to 106bps. The US high yield bond spread over US treasury yields fell by 12bps to 353bps. The spread of USD denominated EM debt over US treasury yields finished the week 4bps lower at 286bps.
Commodities       
  • The S&P GSCI rose by 0.6% in USD terms over the week. The energy sector rose by 1.3% as the price of WTI crude oil increased by 1.4% to US$62/BBL. Industrial metals decreased by 0.5% despite copper prices increasing by 1.1% to US$6,938/MT. Agricultural prices fell by 0.9% whilst gold prices rose by 0.1% to US$1,322/ounce.
Currencies
  • The US dollar depreciated against major currencies (except for yen) over the week. The US dollar weakened by 0.7% against sterling, ending the week at $1.39/£. The US dollar depreciated by 0.1% against the euro, ending the week at $1.23/€. The Japanese yen weakened by 1.4% against the US dollar, ending the week at ¥106.96/$.
Economic Releases
  • A very positive US jobs report enhanced the likelihood of an impending rate hike by the US Federal Reserve. Non-farm payrolls data showed that the US economy added 313k jobs in February; the largest increase in more than eighteen months. The latest reading exceeded expectations of a 205k increase and was also higher than January's upwardly revised 239k reading. Despite the impressive job growth, an uptick in the labor market participation rate meant that the unemployment rate remained at 4.1% and missed forecasts of a slight reduction to 4.0%. While employment data continues to be robust, wage growth has been somewhat more muted. The year-on-year growth in average hourly earnings came in below consensus estimates of 2.8% and slipped to 2.6% from a downwardly revised 2.8%. Away from the jobs report, US factory orders fell for the first time in six months. The 1.4% drop was, however, expected and did not fully erase the 1.8% growth in orders in December.
  • Eurozone economic releases were somewhat disappointing over the week. Final economic growth was confirmed at 0.6% over the final quarter of 2017, and 2.7% year-on-year, as expected. The final services PMI for February came in slightly behind expectations, downgraded to 56.2 from 56.7. The composite index was also revised lower to 57.1 from 57.5 previously. In Germany, the services PMI for February was confirmed at 55.3, while the composite PMI was 0.2 points ahead of expectations at 57.6. As expected, retail sales fell a further 0.1% in the Eurozone in January, adding to the 1.0% decline in December. Annual growth in retail sales was ahead of expectations, growing 2.3% from 2.1% previously. Industrial production data was lower than expected in Germany, declining 0.1% over January which was below expectations of 0.6% growth and last month's decline of 0.5
  • The Japanese economy grew at an annualized rate of 1.6% in Q4 2017, up from a preliminary estimate of 0.5% and beating forecasts of 1.0% growth. Upward revisions to capital expenditure and inventory data supported the strong growth reading. The current account surplus narrowed to ¥607.4bn in the year to January but stayed ahead of analyst forecasts of ¥437.4bn. While nominal labor cash earnings met consensus estimates and increased by 0.7% for the year to January, real wages (which account for inflation) fell by 0.9% over the same period.
  • In China, headline consumer price inflation surged to 2.9% for the year to February, nearly double the 1.5% recorded in January. Analysts had expected a degree of acceleration to 2.4%. Conversely, producer price inflation eased from 4.3% to 3.7% in the year to February; its slowest pace since late 2016. Amidst growing trade tensions with the US, China's trade surplus widened to US$33.74bn in February from US$20.35bn in January.
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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