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Aon Hewitt Retirement and Investment Blog

Weekly Update - 12 March 2018 (UK/Europe)


  • 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 AC World Index rose 2.8% in local currency terms and 2.1% in sterling terms. The US was the best performing region both in local currency (3.6%) and sterling terms (2.9%) whilst Japan was the worst performing region in both local currency (0.4%) and sterling terms (-1.7%).
  • UK gilt yields rose across all maturities over the week. The 10 year UK gilt yield rose by 3bps to 1.52% and the 20 year UK gilt yield rose by 4bps to 1.92%. The 10 year US Treasury yield ended 4bps higher at 2.90% supported by strong Nonfarm Payrolls data. European government bond yields fell over the week (except for Germany). The European Central Bank (ECB) voted to keep its monetary policy unchanged, although it shifted its policy bias from easing to neutral. German bund yields rose by 1bp to 0.65% whilst French government bond yields fell by 1bp to 0.78% over the week. Peripheral bond yields, such as Spain’s 10-year bond yield and Portuguese bond yields fell by 10bps and 13bps respectively to 1.44% and 1.68% after the ECB signaled for a slow exit from monetary stimulus.
  • The UK 20 year real yield rose by 4bps to -1.51% and the Over 5 year real yield rose by 6bps to -1.52%. 20 year breakeven inflation was unchanged at 3.37%.
  • Credit spreads narrowed over the week. 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. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell 1bp to 106bps.
  • 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 Brent crude oil increased by 2.4% to US$65/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.
  • Sterling appreciated against major currencies over the week. The US dollar depreciated by 0.7% against sterling, ending the week at $1.39/£. The euro weakened by 0.6% against sterling, finishing the week at €1.13/£. The Japanese yen depreciated by 1.4% against the US dollar, ending the week at ¥106.96/$.
  • 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 labour 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.
  • In the UK, industrial production data was softer than expected. Although below expectations of 1.5%, industrial production rebounded fully from December's 1.3% decline. Manufacturing production grew by just 0.1% over the month, marginally below expectations and down from 0.3% growth in December. The February Purchasing Managers' Index for the services sector ticked up 1.5 points to 54.5, ahead of market forecasts of 53.3. In turn, the final composite PMI came in at 54.5, ahead of forecasts of 53.6 and January's reading of 53.5. Trade balance data showed a widening of the UK deficit over January, albeit by less than expected, to £3.0bn. This was versus an expected deficit of £3.4 bn and the previous upwardly revised reading of £2.5bn
  • 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 annualised 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 labour 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.
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