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Aon Retirement and Investment Blog

Weekly Update - 17 May 2016

NEW INTELLECTUAL CAPITAL

  • Radar.  Provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health. A French version is also available.
  • Discount Rate Update. The Discount Rate Update is produced by the US practice. Average discount rates fell during April as credit spreads tightened significantly amid the continued “risk-on” rally. The average plan sponsor’s discount rate decreased 8 basis points in April, to 4.05%. In early May, rates have decreased by an additional 3 basis points through Thursday, May 12th.

UPCOMING EVENTS 

  • The DC Decumulation Challenge: A Global View.  While the growth and development of defined contribution plans vary from market to market, every country and plan provider is challenged with how best to guide plan participants in converting their accumulated plan savings into income that will support them in retirement. This webinar will consider the objectives and typical trade-offs involved, and provide a truly global view into how different countries are approaching this challenge, and provide real-time insights from our global Aon Hewitt Thought Leaders and clients on how they are thinking about and taking on this challenge. This webinar will provide food for thought that will help you navigate the optimization of plan features that efficiently address decumulation, from plan design through to retirement readiness. Register today by selecting the session you would like to attend.

MARKET MOVES - Week Ending May 13, 2016
Equities

  • Global equities edged marginally higher as economic data releases were mixed and corporate earnings by US retailers were uninspiring. The MSCI World Index fell 0.3% over the week outperforming S&P 500 which fell by 0.4%.On a year to date basis, S&P 500 has outperformed MSCI World (1.0% vs. -0.4%).
  • US Small Cap stocks underperformed Large Cap stocks as the Russell 2000 fell 1.1% over the week compared to 0.4% fall by S&P 500. On a year to date basis, Large Cap stocks have outperformed Small Cap stocks (1.0% vs. -2.4%). Growth stocks underperformed the Value stocks last week (-0.5% vs. -0.3%) as measured by MSCI USA indices. However, Value stocks have outperformed Growth stocks, returning (2.3% vs. -1.0%) on a year to date basis. 
Bonds
  • 10 year and 30 year US Treasury yields both fell by 8bps, ending the week at 1.70% and 2.55% respectively.
  • 20 year TIPS yields fell by 7bps to 0.38% over the week. 20 year Breakeven were unchanged at 1.53%.
  • Credit spreads were mixed over the week. The Barclays Capital Long Credit Index spread over treasury yields was unchanged at 211bps and the Merrill Lynch US Corporate Index spread ended the week 1bp higher at 157bps. The US high yield index spread over US treasury yields continued to fall, ending 7bps lower at 641bps. US high yield bond spreads are now around 250bps lower than their February highs. While the spread of USD denominated EM debt over US treasury yields finished the week 4bps lower at 397bps.
Commodities 
  • The S&P GSCI rose by 2.6% in USD terms over the week. The energy sector rose by 4.2% as the price of WTI crude oil was up 3.7% to USD 46/BBL. Weak import data from China hurt mining and resource stocks as Industrial metals fell by 3.5% over the week and copper prices decreased by 3.9% to $4,636/MT. Agricultural prices were 2.8% higher and gold prices fell 1.5%, finishing the week at $1,271/ounce. 
Currencies 
  • The US dollar appreciated against the major currencies over the week. The US dollar appreciated 0.6% against sterling, ending the week at $1.43/£. The US dollar strengthened 1.1% against the euro finishing the week at $1.13/€. The Japanese yen halted its rise against the US dollar and depreciated by 2.2%, ending the week at ¥109.10/$. 

ECONOMIC RELEASES

  • US data was generally encouraging. The University of Michigan Consumer Sentiment index rose to 95.8 according to preliminary May numbers, well above the consensus expectation of 89.5, and up by a similar magnitude on April’s reading. Retail sales were up by 1.3% in March, more than offsetting the 0.3% fall seen in March. Once auto and gas sales are excluded, the rise was smaller, at 0.6%, although this was still better than expected. Producer prices were flat over the year to April, but this was largely down to the volatile elements of food and energy. If these prices are stripped out, the underlying growth rate was 0.9%. Import prices fell by 5.7% over the year to April as the trade-weighted dollar, despite softening recently, remains up on its value one year ago.
  • Eurozone quarter-on-quarter GDP growth for the first quarter was revised down to 0.5%, marginally behind expectations of 0.6%. Consequently, the year-on-year growth rate fell slightly to 1.5% from 1.6%. The Sentix investor confidence index rose from 5.7 to 6.2, ahead of predictions of a rise to 6.0. Industrial production fell from 1.0% to 0.2% for the 12 months to March, as German production fell from 2.0% to 0.3%.
  • Japanese economic data was mostly encouraging over the last week. Labour market data continued to be strong due to bonus payments in March. Labor cash earnings grew by 1.4% over the twelve months to March, the highest reading in two years and more than the consensus estimate of 0.6%. Real wages also rose by 1.4% over the same period, up from 0.4% for February and the highest since September 2010. The adjusted current account surplus for March was ¥1894bn, up from the revised ¥1687bn for February, but this failed to meet the consensus expectation of ¥1910bn. The trade surplus grew to ¥927bn due to cheap energy imports. Weakening consumer confidence for April (40.8 from 41.7 in March but just above consensus estimates of 40.7) was mirrored by the economy watchers survey, whose outlook component fell to 45.5 in April from 46.7, lower than the consensus estimates of 46.2. The current conditions component also fell to 43.5 in April from 45.4 over the same period. 
  • Chinese exports were up by 4.1% as imports fell by 5.7% over the year to April in yuan (CNY) terms. These figures led to a hefty increase in the trade surplus from CNY194bn to CNY298bn. CPI inflation was 2.3% over the year to April, as expected, but producer price inflation was negative at -3.4%. Foreign direct investment rose by 6.0% in CNY terms over the same period, but aggregate financing fell sharply to CNY751bn from CNY2336bn the previous month. 
Source: 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, nor should it be treated as investment advice. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.


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