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Aon Retirement and Investment Blog

Weekly Update - 16 May 2017


  • U.S. Corporate Pension Liability Hedging Views. This update from the U.S. practice provides corporate pension liability hedging views as of April 30, 2017.
  • U.S. Discount Rate Update. Average discount rates decreased by 8 basis points in April as stocks and bonds rallied and inflation expectations fell. Credit spreads saw modest compression despite significant issuance, after spreads had widened in March. In early May, rates have increased by 2 basis points through Friday May 12th. The average plan sponsor’s discount rate has now decreased by 11 basis points in 2017.
  • Does Currency Hedging Matter in DC? Written by our colleagues in the UK, this paper examines how currency hedging can impact portfolio volatility and discusses factors that should be considered when considering currency risk in defined contribution plans.  
MARKET MOVES - Week Ending May 12, 2017
  • Despite Emmanuel Macron winning the French elections with a better than expected majority alongside solid corporate earnings reports, global equity markets changed little over the week. The MSCI World Index fell by 0.1% over the week, outperforming S&P 500 which fell 0.3% over the same period. On a year to date basis, MSCI World has outperformed S&P 500 (9.2% vs. 7.6%).
  • US Small Cap stocks underperformed Large Cap stocks as the Russell 2000 fell by 1.0% over the week whereas S&P 500 fell 0.3% over the week. On a year to date basis, S&P 500 has outperformed Russell 2000 (7.6% vs. 2.3%). Growth stocks outperformed Value stocks last week (0.2% vs. -0.8%) as measured by MSCI USA indices. On a Year to date basis, Growth stocks have outperformed Value stocks (12.8% vs. 2.9%).
  • 10 year US Treasury yield fell by 2bps and the 30 year US Treasury yield rose by 1bp to 2.33% and 2.99% over the week respectively. 10 year US Treasury yield fell on Friday after US inflation and retail sales data fell short of market expectations.
  • 20 year TIPS yield fell by 1bp to 0.60% over the week. 20 year Breakeven fell by 1bp to 1.84%.
  • Barclays Capital Long Credit Index spread over treasury yields fell by 4bps to 161bps over the week. The Merrill Lynch US Corporate Index fell by 3bps to end the week at 118bps. The US high yield bond spread over US treasury yields fell by 5bps to 377bps. The spread of USD denominated EM debt over US treasury yields finished the week 2bps lower at 299bps.
  • The S&P GSCI rose by 2.0% in USD terms over the week. The energy sector rose by 3.5% as the price of WTI crude oil increased by 3.5% to $48/BBL. Industrial metals fell by 0.7% as copper prices decreased by 0.4% to $5,539/MT. Agricultural prices rose by 0.1% and gold prices rose by 0.2% to $1,230/ounce.
  • The US dollar appreciated against all major currencies over the week. The US dollar appreciated by 0.5% against sterling, ending the week at $1.29/£. US dollar strengthened by 0.6% against the euro, finishing the week at $1.09/€. The Japanese yen weakened by 0.5% against the US dollar, ending the week at ¥113.24/$.
Economic Releases
  • Monthly US consumer price inflation, measured by the Consumer Price Index (CPI), returned to positive territory in April as energy prices rebounded following sharp falls in March. As expected, monthly consumer price inflation stood at 0.2% whilst annual CPI inflation crept lower to 2.2% from 2.4%. Advance retail sales figures for April missed consensus estimates (0.4% against expectations of 0.6%) but rose more strongly than the previous two months of sluggish retail sales. Meanwhile, consumer confidence remained at post-election high levels, with the University of Michigan's Consumer Sentiment index outperforming expectations and rising to 97.7 from 97. The US labour market remains tight as the number of jobless claims continues to be at near record lows; falling slightly from 238k to 236k.
  • Industrial production in the Eurozone contracted in March (on a month-on-month basis) and fell by 0.1% compared with expectations of a 0.3% increase. On a year-on-year basis, it grew by 1.9% but similarly fell short of expectations by 0.4%. Meanwhile, German industrial production over the month also contracted but was better than expected; over March it contracted by 0.3% points less than expected at -0.4%. Germany factory orders increased by 1% on the previous month and similarly beat expectations by 0.3% points. The Eurozone Sentix Investor Confidence survey rose from 23.9 to 27.4 in May, ahead of the 25.2 forecast. It is the fourth consecutive month that it has risen, signaling stronger investor sentiment.
  • Japanese economic data was fairly mixed last week. Wage growth data continued to disappoint as nominal labour earnings fell by 0.4% over the year to March whilst real wages, which take inflation into consideration, fell by 0.8% over the same period. This was the biggest decline in real wages since June 2015. In contrast, the current and outlook components of the Economy Watchers Survey index, a sentiment-based indicator for businesses that directly service consumers, increased by 0.7 points to 48.1 and 48.8 respectively in April.
  • Whilst producer prices continued to slow in China (rising by 6.4% over the year in April from 7.6% in the previous month), annual CPI inflation rose at a faster pace to 1.2% from 0.9%. Both export and import data came in below forecast at only 8% and 11.9% respectively, compared to estimates of 11.3% export growth and 18% import growth. The sharper deceleration in import growth led to a widening of the trade surplus to US$38.1bn from a revised US$23.9bn. Meanwhile, the extension of 1.1 trillion yuan in new loans in April, which was above expectations of 815 billion yuan in new loans, added to concerns of excessive credit in the Chinese economy.
Sources: 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. 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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