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Aon Retirement and Investment Blog

Weekly Update - 26 March 2018


MARKET MOVES (Week ending March 25, 2018)
  • Global equity markets moved lower over the week, amidst escalating signs that a trade war between the US and China may be beginning. President Donald Trump announced a 25% tariff covering up to $60 billion worth of Chinese imports whilst China retaliated by announcing plans for tariffs covering up to $3 billion worth of US imports. None of this has yet been confirmed but the markets have reacted nonetheless. The MSCI World Index fell 4.5% over the week, outperforming the S&P 500 Index, which fell 5.9% over the same period. On a year-to-date basis, the S&P 500 Index has marginally underperformed the MSCI World Index (-2.8% vs. -2.7%).
  • US Large Cap stocks underperformed Small Cap stocks over the week as the S&P 500 Index fell 5.9% whilst the Russell 2000 Index fell 4.8%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (-1.4% vs. -2.8%). Value stocks outperformed Growth stocks over the week (-5.7% vs. -6.1%) as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (0.7% vs. -5.9%).
  • The 10 year US Treasury yield fell by 3bps to 2.81% and the 30 year US Treasury yield fell by 2bps to 3.06% in a week in which the US Federal Reserve increased interest rates to a range of 1.50-1.75%.
  • The 20 year TIPS yield fell by 2bps to 0.88% and the 20 year breakeven inflation rate fell by 1bps to 2.02%.
  • The spread of the Bloomberg Barclays Capital Long Credit Index over treasury yields rose by 6bps to 150bps and the Bank of America Merrill Lynch US Corporate Index credit spread rose by 5bps to 115bps. The US high yield bond spread over US treasury yields rose by 14bps to 374bps. The spread of USD denominated EM debt over US treasury yields finished the week 13bps higher at 305bps.
  • The S&P GSCI rose 2.4% in USD terms over the week. The energy sector rose by 5.1% as the price of WTI crude oil increased by 5.6% to US$66/BBL. Crude oil prices rallied on the possible extension of production curbs till 2019 and chances of a collapse of Iran nuclear deal. Industrial metals decreased by 2.5% as copper prices decreased by 3.6% to US$6,618/MT. Agricultural prices fell by 1.5% and gold prices rose by 2.6% to US$1,349/ounce.
  • The US dollar depreciated against major currencies over the week. The US dollar weakened by 1.7% against sterling, ending the week at $1.42/£. The US dollar depreciated by 0.7% against the euro, ending the week at $1.24/€. The Japanese yen strengthened by 1.2% against the US dollar, ending the week at ¥104.88/$.
Economic Releases
  • As widely expected, the US Federal Open Market Committee (FOMC) increased the benchmark federal fund rate by a further 25bps to 1.75% in Jerome Powell's first meeting as Chairman. Moreover, the FOMC appeared to have taken a more hawkish stance with additional projected interest rate increases on top of those already penciled in for 2019 and 2020, while also noting an improvement in the economic outlook. The latter was reinforced by a better than expected improvement in March's reading of the manufacturing Purchasing Managers' Index (PMI). The provisional reading topped estimates of 55.5 and increased by 0.4 points to 55.7. There was further positive news with orders for durable goods rebounding in February after the 3.5% decline to start the year. Orders exceeded expectations of a 1.6% increase and rose by 3.1% over the month with demand for transportation equipment, in particular, surging by 7.1%.
  • In the Eurozone, economic releases were mixed over the week. Preliminary PMI numbers for March broadly disappointed. The manufacturing PMI for the Eurozone measured 56.6, 2.0 points lower than February's reading, and undershooting market expectations of 58.1. The services PMI also came in 1.0 point below expectations at 55, from 56.2 previously. Preliminary PMI readings in Germany told a similar story, with the manufacturing index moving lower to 58.4, from 60.6 previously, and 59.8 expected. Germany's IFO business climate reading for March was broadly in line with expectations, declining to 114.7 from 115.4 previously. ZEW survey readings for March were also disappointing. The forward-looking expectations survey for the Eurozone moved significantly lower to 13.4 from 29.3 in February.
  • In Japan, headline consumer price inflation came in at 1.5% in February while core consumer prices grew for the fourteenth consecutive month, rising by 1.0% over the same period. Both inflation readings were in line with consensus estimates and above the previous month’s inflation rate. The trade balance swung back into a surplus in February, moving to ¥3.4 billion from a deficit of ¥944.1 billion. However, it fell considerably short of estimates of a ¥89.1 billion surplus. Exports rose for a fifteenth consecutive month, up 1.8% over the year to February, but slowed from the previous reading of 12.3%.
  • Talk of trade tariffs between the US and China dominated much of the news-flow in China, with very few economic data released last week. Tough purchasing restrictions have helped curb excesses in the housing market with house prices edging 0.2% up in February for major cities (over the year, house prices increased 5.2% from 5.0% previously).
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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