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Aon Retirement and Investment Blog

Weekly Update - 15 May 2017 (UK/Europe)


  • Global equity markets changed little over the week as Emmanuel Macron won the French elections with a better than expected majority alongside solid corporate earnings reports. The MSCI AC World Index rose 0.4% in local currency and 0.8% in sterling terms. Emerging markets were the best performing region both in local currency (2.2%) and sterling terms (3.0%) as the election of a new South Korean President raised hopes of easing geopolitical tensions over the Korean peninsula. Latin American markets also gained as Brazilian inflation reached its lowest level in 10 years. Developed North America was the worst performing region in local currency terms (-0.3%) and Developed Europe ex UK was the worst performing region in sterling terms (0.0%).
  • UK gilt yields fell across all maturities, in tandem with other government bond yields across major developed markets. The 10 year UK gilt yield fell by 4bps to 1.03% and the 20 year UK gilt yield fell by 5bps to 1.74%. The 10 year US treasury yield fell by 1bp to 2.34%. Yields fell on Friday after US inflation and retail sales data fell short of market expectations. European government bond yields were mixed across the region. German bund yields fell by 2bps to finish the week at 0.40% whilst French government bond yields remained flat at 0.84%. Greek government bond yields continued their decline as yields fell by 26bps amid increased expectations of the International Monetary Fund's participation in the Greek bailout.
  • UK real yields fell over the week. The 20 year real yield fell by 9bps and the Over 5 year real yield fell by 8bps to end the week at -1.74% and -1.73% respectively. The 20 year breakeven inflation rate rose by 4bps to 3.40%.
  • Credit spreads fell over the week. 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 sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 3bps to 113bps.
  • 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 Brent crude oil increased by 2.7% to $51/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.
  • Sterling had a mixed performance against major currencies over the week. The US dollar appreciated by 0.5% against sterling, ending the week at $1.29/£ after the Bank of England kept its interest rate unchanged. The euro weakened by 0.1% against sterling, finishing the week at €1.18/£. The Japanese yen weakened by 0.5% against the US dollar, ending the week at ¥113.24/$.
  • 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.
  • In the UK, the Bank of England maintained the base interest rate at 0.25%, as expected. Month-on-month industrial and manufacturing production both contracted in March; industrial production (which accounts for 15% of the UK's output) shrank by 0.5% against expectations of a 0.4% decline. Similarly, manufacturing output fell by 0.6% against forecasts of a milder 0.2% decrease. Following their decline in March, the British Retail Consortium reported a strong rebound in year-on-year retail sales over April as sales grew by 5.6%; the fastest rate for 11 years. The unexpectedly sharp increase (analysts had forecast only a 0.5% increase) was partially attributed to the late time of Easter holidays in 2017. Retail spending is responsible for a significant portion of overall UK consumer spending and has been the key driver of economic growth in recent years.
  • 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.
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