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Aon Retirement and Investment Blog

Weekly Update - 14 May 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets advanced over the week supported by an encouraging first-quarter earnings reports and rising commodity prices. All the regions generated positive returns both in local currency and sterling terms. The MSCI AC World Index rose 2.1% in local currency terms and 1.9% in sterling terms. The US was the best performing region in local currency terms (2.5%), particularly led by the financial and information technology sectors. On the geopolitical front, the United States and North Korean leaders agreed to a much anticipated summit on June 12 in Singapore. The UK returned the most in sterling terms at 2.4%. Developed Europe ex UK returned the least in local currency terms at 1.2% amidst enduring political uncertainty in Italy. Japan was the worst performer in sterling terms at 0.8%.
  • UK gilt yields rose across all maturities over the week in which the Bank of England, as anticipated, kept its interest rate unchanged. However, it lowered the UK’s growth and inflation forecasts. Both the 10 year and 20 year UK gilt yield rose by 6bps to 1.45% and 1.87% respectively over the week. The 10 year US treasury yield rose by 2bps to 2.97%. Yields touched the 3.0% mark before reversing later due to softer US inflation data. Both the 10 year German bund yield and French government bond yield rose by 2bps to 0.56% and 0.79% respectively over the week. The spread between US and German 10 year bond yields (nearly 2.5%) has hit the widest level since 1990. Italian government bond yields rose by 13bps to 1.90% due to a heavy bond sell-off as the likelihood of an anti-system 5SM and Lega coalition government increased in Italy.
  • The UK 20 year real yield rose by 4bps to -1.53% and the Over 5 year real yield rose by 5bps to -1.48%. 20 year breakeven inflation was unchanged at 3.33%.
  • The US high yield bond spread over US treasury yields fell by 9bps to 340bps over the week. The spread of USD denominated EM debt over US treasury yields fell by 6bps to 322bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was unchanged at 111bps.
  • The S&P GSCI rose by 1.2% in USD terms over the week. The energy sector rose by 2.6% as the price of Brent crude oil sharply increased by 3.0% to US$77/BBL. Crude oil prices surged due to possible US sanctions on Iran after the US withdrew from the Iran nuclear agreement. Industrial metals fell by 0.4% despite copper prices increasing by 1.3% to US$6,869/MT. Agricultural prices fell by 3.3% whilst gold prices rose by 1.1% to US$1,324/ounce.
  • Sterling appreciated against major currencies over the week. The US dollar depreciated by 0.3% against sterling, ending the week at $1.36/£. The euro weakened by 0.1% against sterling, finishing the week at €1.13/£. The Japanese yen depreciated by 0.2% against the US dollar, ending the week at ¥109.38/$.
ECONOMIC RELEASES
  • In the US, although the headline rate of consumer price inflation rose as expected to 2.5% from 2.4%, core inflation (which excludes both food and energy prices) was unchanged at 2.1%; missing forecasts of a small rise to 2.2%. Higher costs for gasoline and rental accommodation were offset by slowing health-care prices. Nonetheless, rising inflation is eating further into wages with average weekly earnings growth, adjusted for inflation, slowing to 0.4% in April from 0.9%. Consumer confidence remained robust with the provisional reading of the University of Michigan's consumer sentiment index remaining at 98.8 – analysts had expected a 0.5 point decrease in the index. Meanwhile, the National Federation of Independent Business's (NFIB) Small Business Optimism Index exceeded expectations of a slight fall to 104.5 and inched 0.1 point higher to 104.8.
  • In the UK, industrial production growth failed to meet expectations of 0.2% and remained at 0.1% over the month of March. Over the year, industrial production grew by 2.9%, up from 2.1% previously, but behind market forecasts of 3.1% growth. The manufacturing sector declined by 0.1% over March however annual growth met consensus estimates and reached 2.9% from 2.5% previously. The construction sector also declined in March, falling by 2.3% from February's upwardly revised figure of -1.0%. A sharper than expected decrease (-3.1% vs -0.2%) in UK house prices over March furthered the cooling in UK house price growth. In the three months to April from the same period last year, house prices were up 2.2% from the 2.7% increase registered in March.
  • In the Eurozone, there was little in the way of economic data releases over the week. The Markit Eurozone Retail Purchasing Managers' Index (PMI) slipped into contractionary territory, falling to 48.6 from 50.1. Industrial production data for Germany was more encouraging, rebounding by 1.0% in March from the previous month's downwardly revised 1.7% decline, and also ahead of the forecasted 0.8% growth. In annual terms, industrial production increased by 3.2% over the year to March, from the prior month's downwardly revised reading of 2.2%. Data on factory orders in Germany disappointed for March, with orders declining 0.9% over the month, missing economic forecasts of a 0.5% increase. Furthermore, February's reading was also downwardly revised to -0.2% from an initial 0.3%. Against a backdrop of heightened trade tensions, Germany's trade surplus exceeded expectations of €22.5bn and increased to €25.2bn from a revised €18.5bn.
  • Japan’s current account surplus widened to ¥3122.3bn in the year to March, beating analyst forecasts of ¥2899.0bn as investment income received from foreign subsidiaries and interest from foreign bonds increased. Wage growth data in Japan was more encouraging due to an increase in bonus payments. Labour cash earnings grew by 2.1% for the year to March against a forecasted increase of 1.0%. However, household spending declined by 0.7% in the year to March while the previous reading was revised lower from 0.1% to -0.9%.
  • In China, the consumer price index (CPI) rose by 1.8% over the year to April, down from 2.1% in March. The slowdown in inflation was predominantly due to a fall in food prices. Exports and imports improved over the year to April, growing by 12.9% and 21.5% respectively, far higher than the consensus estimates of 8.0% and 16.0%. The strong performance of Chinese exports over April helped to swing the trade balance back into surplus with a reading of US$28.78bn, higher than analyst estimates of US$27.75bn.
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