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Aon Retirement and Investment Blog

Weekly Update - 26 March 2018 (UK/Europe)

  • 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 AC World Index fell 4.7% in local currency terms and 5.9% in sterling terms. Developed Pacific ex Japan fell by the least in local currency terms at -2.5% whilst the UK fell the least in sterling terms at -3.2%. The US continued to be the worst performing region both in local currency (-5.9%) and sterling terms (-7.4%) with technology stocks suffering major losses on the back of revelations regarding misuse of personal data by social media firms.
  • UK gilt yields rose at short to medium term maturities and fell at longer maturities over the week, as the Bank of England voted to keep its interest rate unchanged but signaled for a rate hike as early as May. The 10 year UK gilt yield rose by 3bps to 1.48% whilst the 20 year UK gilt yield fell by 4bps to 1.76%. The 10 year US treasury yield ended 2bps lower at 2.83% after touching multi-year highs in a week in which the US Federal Reserve increased interest rates to 1.50-1.75%. European government bond yields fell over the week. German bund yields fell by 4bps to 0.53% and French government bond yields fell by 6bps to 0.64%.
  • The UK 20 year real yield fell by 2bps to -1.61% whilst the Over 5 year real yield was unchanged at -1.60%. 20 year breakeven inflation fell by 1bp to 3.33%.
  • Credit spreads widened over the week. 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 sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 4bps to 113bps.
  • The S&P GSCI rose 2.4% in USD terms over the week. The energy sector rose by 5.1% as the price of Brent crude oil increased by 6.2% to US$70/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.
  • Sterling appreciated against major currencies over the week. The US dollar depreciated by 1.6% against sterling, ending the week at $1.42/£. The euro weakened by 1.0% against sterling, finishing the week at €1.14/£. The Japanese yen appreciated by 1.2% against the US dollar, ending the week at ¥104.88/$.
  • 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 UK, inflation data for February was softer than expected. Consumer price inflation eased over the month, to 2.7% in annual terms, from January's 3.0% level and 2.8% expected. Retail sales in the UK unexpectedly picked up in February, with sales excluding auto-vehicles and fuel increasing 0.8% over the month from the downwardly revised 0.2% decline in January, and beating market expectations of 0.4% growth. Employment data showed the UK unemployment rate falling back to near record lows of 4.3% for the 3 months to January, reversing the previous 0.1% increase. Wage growth accelerated to its fastest pace in nearly two-and-a-half years in the 3 months to January with UK wages, excluding bonuses, increasing by 2.6% over the period. The upturn in wage growth has strengthened the case for an interest rate rise by the Bank of England in May.
  • 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).
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