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Aon Retirement and Investment Blog

Weekly Update - 11 March 2019 (UK/Europe)

KEY NEWS AND EVENTS
  • Talks between the EU and UK over the backstop broke down last week with the EU unwilling to meet UK demands for an enhanced arbitration mechanism or unilateral exit clause – the EU did propose a unilateral exit excluding Northern Ireland, but this was rejected by the UK last year. As a result, the focus has now shifted away from the second meaningful vote on Tuesday, which is widely expected to fail, and towards the conditions the EU would impose on any requested extension – for example, the UK could lose its rebate (£13.5bn a year) and lose its vote on EU laws.
  • The ECB announced plans to introduce a new set of Targeted Long-Term Refinancing Operations (TLTROs) from September 2019. TLTROs are cheap long-term loans for banks. The ECB also guided that interest rates will be unchanged through 2019 or beyond. This coincided with the sharpest cut in ECB growth forecasts since the introduction of QE with the 2019 economic growth forecasts cut to 1.1% from 1.7%.
  • US-China trade talks took a step back last week with conflicts over enforcement arrangements leading to the proposed end-March summit between Presidents Trump and Xi being pushed back. The US also announced plans to end preferential treatment for India and Turkey who are both currently treated as emerging markets and therefore are qualified for zero-tariff status.
MARKET MOVES
  • Global equity markets fell over the week amidst weaker than expected trade data out of the US and China. The MSCI AC World Index fell by -1.7% in local currency terms and fell by -0.4% in sterling terms. The Utilities sector was the best performer at (+0.6%) in local currency terms. The Consumer Discretionary sector was the worst performer at (-2.7%) in local currency terms.
  • UK equities were the best performing region in local currency terms (+0.2%), driven mainly by heavily weighted Consumer Staples sector which rose about 4%. Japanese equities were the worst performing region in local currency terms (-2.6%). Asia Pacific equities were the best performing region in sterling terms (+0.7%). European equities were the worst performing region in sterling terms (-0.6%).
  • The 10-year gilt yield fell by 13bps to 1.18% and the 20-year gilt yield fell by 12bps to 1.63%. 10-year US treasury yields fell by -12bps to 2.63% over a week which saw a sharp slowdown in US non-farm jobs growth. German Bund yields fell by -13bps to 0.07% and French government bond yields fell by 18bps to 0.40% in a week in which the European Central Bank pushed back its interest rate hike, at the earliest, to 2020 and announced a second set of cheap long-term loans to banks (TLTROs) to help support the economy.
  • The Over 5-year real yield fell by 10bps to -1.69% and the UK 20-year real yield fell by 13bps to -1.77%. 20-year breakeven inflation rose by 3bps to 3.41%.
  • US high yield underperformed over the week, returning -0.5%, as weaker economic data led to wider spreads. The US high yield bond spread over US treasury yields rose by 32bps to 418bps over the week. The spread of USD denominated EM debt over US treasury yields rose by 20bps to 361bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) rose by 1bps to 134bps over the week.
  • The S&P GSCI index was unchanged in USD terms over the week. The S&P GSCI Energy index rose by 0.7% as the price of Brent Crude oil rose by 1.0% to US$66/BBL. Industrial metal prices fell by 2.0% as copper prices fell by 2.6% to US$6,399/MT. Agricultural prices fell by 2.4% and gold prices fell by 1.2% to US$1,297/Oz.
  • Sterling depreciated by -0.1% on a trade weighted basis over the week. Sterling weakened by 1.7% against the US dollar and fell 0.4% against the euro, ending the week at $1.3/£ and €1.16/£. The US dollar decreased by 0.7% against the Japanese yen, ending the week at ¥111.14.
ECONOMIC RELEASES
  • Last week's jobs report underscored slowing economic momentum in the US, as a fairly paltry 20k new jobs were added over February compared to the previous reading of 311k and expectations of 180k. Alongside the unemployment rate falling from 4.0% to 3.8%, and year-on-year growth in average hourly earnings accelerating to 3.4% from 3.1%, the jobs report reflected limited slack in the economy. The latter marked the fastest pace of growth since April 2009. The trade deficit rose to 10-year high of $59.8bn in December, well ahead of the deficit of $57.9b expected by analysts and $50.3bn recorded in November. Whereas the activity in the manufacturing sector has been on a downward trend, the Institute of Supply Management's (ISM) Non-Manufacturing index, a measure of activity in the services sector, rose by 3-points to 59.7 in February and outperformed expectations of a more modest 0.7-point increase.
  • Economic activity in the UK services sector, as measured by the Services Purchasing Managers' Index (PMI), rose to 51.3 in from 50.1, against expectations of it marginally falling into contraction territory at 49.9, in February. However, the unemployment sub index fell to 48.2 from 49.7, the lowest level since 2011. Construction PMI fell into contraction territory for the first time in 11 months as the index fell to 49.5 from 50.6, well below forecasts of it marginally falling to 50.5. Elsewhere, the Halifax House Price index rose 2.8% in the three months to February 2019, defying expectations for a 1% increase and well ahead of the previous reading of 0.8%.
  • In the Euro Area, the final reading for fourth quarter GDP growth was marginally revised lower to 1.1% year on year from 1.2%. Retail sales rebounded by 1.3% in January following December's upwardly revised 1.4% fall, which took the year-on-year growth to 2.2% from the 0.3% growth recorded previously. In Germany, factory orders sharply fell by 2.6% in January from the upwardly revised 0.9% growth recorded in December. This was the sharpest fall since June 2018 and was mainly driven by falling foreign demand (-3.6%), particularly from outside of the EU (-4.2%), though domestic orders also fell (-1.2%).
  • In Japan, the final reading for fourth quarter GDP growth was upwardly revised to an annualized 1.9% from 1.4% and above consensus estimates of 1.7% growth. This was supported by increased business spending which rose to 2.7% from the initial 2.4% previously recorded. Labour cash earnings disappointed with year-on-year growth declining to 1.2% in January from the downwardly revised 1.5% growth in the previous month. Once adjusted for inflation, real wages rose by 1.1% in the year to January, unchanged from the downwardly revised 1.1% growth recorded in the previous month. The current account surplus widened from ¥452.8bn to ¥600.4bn in January and were significantly above forecasts of ¥161.0bn. Elsewhere, the Nikkei Services PMI increased to 52.3 in February from 51.6 whilst the overall composite PMI edged lower to 50.7 from 50.9 over the same period, due to the slowdown in manufacturing sector.
  • In China, exports sharply contracted by 20.7% in the year to February, worse than analyst forecasts of a 5.0% decline and significantly below 9.1% increase seen in the previous month. Over the same period, imports shrank by 5.2%, worse than the previous decline of 1.5% and below the estimated 0.6% decrease. Consequently, the trade surplus narrowed sharply to US$4.12bn from US$39.16bn and came in short of analyst estimates of a US$26.20bn surplus. Elsewhere, consumer price inflation slowed from 1.7% to 1.5% in the year to February, meeting analyst forecasts. Amid a backdrop of greater efforts by the central government to stimulate the economy, new loans in China failed to meet expectations and fell to ¥885.8bn, after surging to a record high in January with ¥3,230bn loans.
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