Set Regional Preference
Required Field*
Set geographic preferences to highlight topics of greatest interest of you, written in your base currency.


Aon Retirement and Investment Blog

Weekly Update - 02 May 2017 (UK/Europe)


  • U.S. Discount Rate Update as of March 31, 2017. Average discount rates increased by 5 basis points in March as corporate spreads widened at the increased uncertainty of policy reforms by the new U.S. administration. The Fed increased the Fed Funds target rate by 25 basis points and Treasury rates rose slightly across the curve. In April, rates have decreased by 7 basis points through Wednesday, April 26. The average plan sponsor’s discount rate has now decreased by 12 basis points in 2017.

  • Global equity markets continued their upward momentum encouraged by Eurozone developments. Pro-Europe candidate Emmanuel Macron’s lead over Marine Le Pen in opinion polls, strong European corporate earnings and Q1 2017 economic growth data supported the equity rally. The MSCI AC World Index rose 0.9% in local currency and 0.8% in sterling terms. Developed Europe ex UK continued to be the best performing region both in local currency (2.9%) and sterling terms (3.6%). Developed Asia Pacific ex Japan was the worst performing region both in local currency (-0.8%) and sterling terms (-1.6%) as poor earnings from major Australian banks and falling commodity prices dragged markets lower.
  • UK gilt yields rose across all maturities following the government bond yields of major developed markets. The 10 year UK gilt yield rose by 4bps to 1.06% and the 20 year UK gilt yield rose by 6bps to 1.79%. The 10 year US treasury yield rose by 7bps to 2.35% after the US Federal Reserve (Fed) kept interest rates unchanged in their latest monetary policy meeting. The Fed’s comment that slow first quarter growth was “transitory” and a strong US employment release increased prospects of another interest rate hike in June. European government bond yields were mixed across the region. German bund yields rose by 10bps to finish the week at 0.42% and French government bond yields rose by 8bps to 0.85%. Greek government bond yields fell by 46bps as an agreement was reached with its creditors for the distribution of bail-out funds.
  • UK real yields rose over the week. The 20 year real yield rose by 14bps and the Over 5 year real yield rose by 15bps to end the week at -1.66% and -1.65% respectively. The 20 year breakeven inflation rate fell by 7bps to 3.36%.
  • The US high yield bond spread over US treasury yields rose by 7bps to 382bps. The spread of USD denominated EM debt over US treasury yields finished the week 2bps lower at 301bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 2bps to 116bps.
  • The S&P GSCI fell by 3.1% in USD terms over the week. The energy sector fell by 5.1% as the price of Brent crude oil declined by 4.7% to $49/BBL. Crude oil prices fell due to concerns over OPEC’s stance on an output cut which will be decided at the next OPEC meeting later in the month. Industrial metals fell by 1.9% as copper prices decreased by 2.6% to $5,563/MT. Agricultural prices rose by 0.6% whilst gold prices fell by 3.2% to $1,228/ounce.
  • Sterling strengthened against major currencies (except for the euro) over the week. The US dollar depreciated by 0.2% against sterling, ending the week at $1.30/£. The euro strengthened by 0.7% against sterling, finishing the week at €1.18/£. The Japanese yen weakened by 1.0% against the US dollar, ending the week at ¥112.64/$.

  • US employment rebounded after March's lacklustre reading with nonfarm payrolls increasing by 211k In April. As a result, the unemployment rate unexpectedly slipped to a near 10-year low of 4.4% amid expectations of a slight increase from 4.5% in the previous month to 4.6%. However, the tighter labour market conditions were not reflected in annual wage growth which missed expectations of a modest increase and cooled to 2.5% from 2.6%. The keenly watched Institute of Supply Management (ISM) manufacturing index (a gauge of national factory activity) also disappointed, dropping by 2.4 points to 54.8 – the second consecutive monthly fall after reaching a more than two year high in February. Conversely, growth in the service sector picked up over April as the ISM non-manufacturing index outperformed expectations and rose by 2.3 points to 57.5, retracing most of the 2.4 point fall in the previous month.
  • In the UK, there were some positive surprises in the latest Purchasing Managers' Index (PMI) data from Markit. In April, both manufacturing and services PMI unexpectedly rose to 57.3 (a three year high) and 55.8 respectively. This dragged the overall composite up from 54.8 to 56.2; a level above 50 suggests an expansionary economy. Meanwhile, UK mortgage approvals over March fell to a 6 month low of 66.8k which was 0.4k short of forecasts. Year-on-year new car registrations sharply declined in April, falling by 19.8% (the worst April since 2012), as consumers brought forward registrations to avoid the increase in vehicle tax effective from 1 April.
  • In the Eurozone, the advance GDP growth figures for Q1 2017 showed that the economy grew by 0.5% over the quarter as expected and 1.7% on an annualised basis. Retail sales grew for a third month in a row in March, rising by 0.3% despite rising prices. This was ahead of the 0.1% expected over the period. Unemployment remained at an eight-year low of 9.5% in March, 0.1% higher than analyst forecasts. In Germany, despite beating flash estimates, the Services PMI fell from 55.6 to 55.4. The manufacturing PMI, meanwhile, was unchanged and remains near a six-year high at 58.2.
  • In Japan, there were few economic releases last week due to public holidays. The final reading of the Nikkei composite PMI was revised down to 52.6 in April from 52.9. Both the services and manufacturing PMI were revised downwards to 52.6 and 52.7 from 52.9 and 52.8 respectively. Whilst not a keenly watched economic release, year-on-year vehicle sales growth eased considerably from 13.8% to 5.4%.
  • The Caixin PMI, which focuses more on smaller and medium-sized companies, echoed the disappointment from last week's official PMI readings. The Caixin manufacturing PMI dropped to 50.3 which was below consensus estimates of a modest 0.1 point rise to 51.3. Whilst still in expansionary territory (above the 50 level threshold), April's reading marks the slowest pace of growth since September 2016. Similarly, growth in the service sector slowed to its lowest level in nearly a year with the Caixin services PMI falling from 52.2 to 51.5.

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.

Share:Add to Twitter Add to Facebook Add to LinkedIn   Print