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Aon Retirement and Investment Blog

Weekly Update - 16 May 2016 (UK/Europe)

NEW INTELLECTUAL CAPITAL

Reassessing the Pension Protection Act  – The Pension Protection Act (PPA) heralded the most significant changes to the nation’s pension laws since the Employee Retirement Income Security Act (ERISA) of 1974.  As the law approaches its 10th anniversary, we turn a critical eye toward how the PPA has impacted employers and employees — both positively and negatively — and take a look at actions that CFOs and CIOs can take to further strengthen their companies’ plans.  This article originally appeared on CFO.com and was written by Clint Cary; head of North America delegated solutions and chair of the global investment committee at Aon Hewitt Investment Consulting.

2016 Universe Benchmark Report – This report includes defined contribution plan data from more than 125 plans covering roughly 3.5 million eligible participants. Included are average participation rates, saving rates, plan balances, investment and trading activity, and account actions (e.g., loans, withdrawals, cash outs, and rollovers). This information could be valuable for benchmarking your plan’s data, redesigning your plan, and communicating with participants.

Sample Annuity Rates - Monthly update for pricing of annuity purchases as of 31 May 2016.  

 

MARKET MOVES

  • Global equity markets closed lower in an eventful week. Markets plunged sharply on Friday in local currency terms as UK decided to part ways with the European Union in a historic EU referendum. The MSCI AC World Index fell 1.2% in local currency terms. However, sterling returns were positive at 3.4% due to broad sterling weakness. Developed Asia Pacific ex Japan was the best performing region in sterling terms with a return of 5.2% due to a sharp decline in sterling against the Australian dollar, while the UK was the best performing market in local currency terms with a return of 2.1%. Despite this, in sterling terms, the UK was the worst performing market due to a sharp drop in the pound on the back of Brexit. Japan was the worst performing region in local currency terms (-3.7%) as the weak trade data and soaring yen hit the exporters.
  • UK nominal gilt yields fell across all maturities followed by the other major developed markets as the UKs uncertain future after Brexit increased the demand for gilts. The 10 year UK gilt yield fell by 5bps to 1.22% while the 20 year UK gilt yield fell by 6bps to 1.83%. The 10 year US treasury yield fell by 4bps to 1.58%. European government bond yields had a mixed tone across the region. German bund yields fell by 8bps to -0.06%, thus ending the week in negative territory as demand for safe haven bonds increased post Brexit. French government bond yields also fell by 5bps to 0.37%.
  • UK real yields fell over the week. The 20 year real yield fell by 12bps to finish the week at -1.16% and the Over 5 year real yield fell by 11bps to -1.22%. 20 year breakeven inflation rose by 4bps to 2.91%.
  • Credit spreads were mixed over the week. The US high yield bond spread over US treasury yields rose by 12bps to 633bps and the spread of USD denominated EM debt over US treasury yields finished the week 5bps lower at 400bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 13bps, ending the week at 156bps.
  • The S&P GSCI fell by 2.0% in USD terms over the week. The energy sector fell by 1.1% despite a marginal increase of 0.6% in the price of Brent crude oil which ended the week at USD 49/BBL. Industrial metals rose by 1.6% as copper prices rose by 3.3% to $4,690/MT. Agricultural prices took a major hit as they fell 7.1% and the gold price sharply rose 2.1%, finishing the week at $1,314/ounce.
  • Sterling weakened against major currencies over the week. The US dollar appreciated by 4.9% against sterling, ending the week at $1.36/£, as dollar hit a 31 year high against sterling. The euro sharply appreciated by 3.7% against sterling, finishing the week at €1.23/£. The Japanese yen rose 2.1% against the US dollar, going past the 100 level before recovering and ending the week at ¥102.17/$.

ECONOMIC RELEASES

  • US economic data was light last week. Durable goods orders fell by 2.2% over May according to preliminary estimates, offsetting most of the 3.3% rise seen the previous month. However, the Markit manufacturing Purchasing Managers’ Index (PMI) for June came in above expectations, rising to 51.4. Lastly, housing data was mixed; existing home sales rose by 1.8% over May but sales of new homes fell by 6.0%, sharply disappointing versus the small expected rise.
  • In the UK, the Public Sector Net Current Requirement was higher than expected (£9.7bn vs £9.5bn). The weakness has been driven by slow growth of tax receipts and Chancellor of the Exchequer George Osborne faces a significant challenge in delivering a reduction in the deficit (of 1% of GDP) this year. Public Sector Net Borrowing was lower than expected at £9.1bn. The BBA Loans Approved for House Purchase was ahead of expectations (42,187). A lot of progress has been made in lowering funding costs for banks since 2012 which has in turn prompted a surge in consumer credit growth.
  • The Markit Eurozone Manufacturing PMI (seasonally adjusted) was ahead of expectations at 52.6; Germany's Manufacturing PMI in particular did well ending on 54.4 vs survey estimates of 52.0. In contrast, the Eurozone Services PMI was behind survey estimates at 52.4 and the overall composite fell below expectations at 52.8. The European Commission Consumer Confidence Indicator was below expectations (-7.3 vs -7.0) but still remains at a decent level, well above its 10 year average of -12.3. Brightening conditions in the labour markets and relatively cheap oil are continuing to support consumption.
  • Japanese economic data had a weak tone over the week. The preliminary manufacturing PMI for June showed slight improvement to 47.8 from 47.7 but still continues to be in contraction territory due to effects from the April earthquakes. Trade continued to contract in May due to low global demand; exports fell by 11.3% over the twelve months to May (biggest fall in 4 months) while imports fell by 13.8% over the same period. This led to an adjusted trade surplus of ¥270bn in May, which was higher than the consensus expectation of ¥113bn. Consumption data continued to be weak as department store sales fell by 5.1% over the 12 months to May, and sales in the capital also fell by 4.5% over the same period. Supermarket sales fell by 1.3% over the 12 months to May.
  • In China, the business conditions index rose to 54.5 in June, which represents a significant rise into expansion territory from neutral territory. 
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.

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. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given “as of the date” indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.
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. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given “as of the date” indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.
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. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given “as of the date” indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.


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