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Aon Retirement and Investment Blog

Weekly Update - 29 May 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets edged lower over the week amid heightened geopolitical tensions and continuing trade uncertainties. Prominent amongst these tensions, US President Donald Trump called off the Singapore summit with his North Korean counterpart Kim Jong-un. The MSCI AC World Index fell 0.3% in local currency terms. However, broad sterling weakness pushed up the returns to 0.8% in sterling terms. The US was the best performing market both in local currency (0.3%) and sterling terms (1.5%). Japan was the worst performing market in local currency terms (-2.5%) due to yen strength which hurt the export-oriented economy. Developed Europe ex UK was the worst performing region in sterling terms (-0.7%).
  • UK gilt yields fell across all maturities over the week on the back of weak inflation and economic growth data. The 10-year UK gilt yield fell by 21bps to 1.31% and the 20-year UK gilt yield fell by 17bps to 1.75%. The 10-year US treasury yield fell by 13bps to 2.93% as the US Federal Reserve reiterated its plans for a gradual rate hike path. Greater uncertainty in the Eurozone, triggered by political developments in Italy, saw a greater divergence in core and peripheral European government bond yields. German bund yields fell by 20bps to 0.39% and French government bond yields fell by 14bps to 0.70% over the week. Italian government bond yields rose by 33bps to 2.53% as anti-establishment parties named an ‘unknown’ Italian professor as their choice for Prime Minister. Spanish bond yields rose by 8bps to 1.50% as the Spanish Socialist Workers’ Party (the country’s largest opposition party) filed a no-confidence motion against Prime Minister Mariano Rajoy on corruption charges.
  • The UK 20-year real yield fell by 8bps to -1.56% and the Over 5 year real yield fell by 4bps to -1.50%. 20-year breakeven inflation fell by 6bps to 3.27%.
  • The US high yield bond spread over US treasury yields rose by 12bps to 353bps over the week. The spread of USD denominated EM debt over US treasury yields fell by 5bps to 323bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 6bps to 117bps.
  • The S&P GSCI fell by 1.4% in USD terms over the week. The energy sector fell by 3.3% as the price of Brent crude oil decreased by 2.6% to US$76/BBL. Crude oil prices fell following reports that OPEC and Russia would increase production to replace lost supply from Iran and Venezuela once the US sanctions are imposed. Industrial metals rose by 0.2% as copper prices increased by 1.5% to US$6,886/MT. Agricultural prices rose by 3.2% and gold prices rose by 1.2% to US$1,304/ounce.
  • Sterling weakened against major currencies over the week. The US dollar appreciated by 1.2% against sterling, ending the week at $1.33/£. The euro appreciated by 0.2% against sterling, finishing the week at €1.14/£. The Japanese yen appreciated by 1.3% against the US dollar, ending the week at ¥109.28/$.

ECONOMIC RELEASES

  • Purchasing Managers' Index (PMI) data reflected an improvement in US economic activity with both the manufacturing and services sectors improving in May. The manufacturing PMI inched 0.1 points higher to 56.6 while the services PMI surpassed forecasts of a 0.4 point increase to 55.0 and rose to 55.7. Analysts had expected the former to remain at 56.5. There was less positive news with durable goods orders which declined by 1.7% over April; below consensus estimates of a 1.3% fall and March's upwardly revised 2.7% increase. This was largely driven by a sharp fall in demand for transportation equipment, which dropped 6.1% over the month. Excluding goods in the transportation sector, orders for durable goods exceeded expectations of 0.5% growth and increased by 0.9%.
  • UK economic releases were fairly mixed over the week. Retail sales rebounded in April following a decline in March, rising by 1.4% on a year on year basis and outperforming market expectations of a 0.2% increase. Annual CPI inflation decreased slightly in April at 2.4%, slightly below expectations of 2.5% and March's reading of 2.5%. Similarly, core inflation missed consensus estimates of 2.2% and moved lower to 2.1% from 2.3% previously. Conversely, the pace of producer price inflation defied expectations of slowing as producer prices accelerated from a previous reading of 2.4% to 2.7% for the year to April. House price growth continued to slow as the Rightmove House Price Index increased by 1.1% in May; down from the 1.6% growth recorded in May.
  • Economic releases in the Eurozone largely came in below expectations over the week. Eurozone PMI data continued to fall during May despite expectations that they would remain steady. The manufacturing PMI fell from 56.2 to 55.1 while the services PMI fell from 54.7 to 53.9 during May. Consumer confidence also unexpectedly fell over May with the consumer confidence index falling to 0.2 from April’s downwardly revised reading of 0.3. Analysts had forecasted a slight improvement in the index to 0.5. German PMI data also disappointed; the largest fall was seen in the manufacturing sector with the sector’s PMI falling from 58.1 to 56.8. This continued the negative trend in German manufacturing over the year. Similarly, the German services PMI disappointed and fell from 54.6 to 53.1.
  • In Japan, the manufacturing sector grew at a slower rate in May with the preliminary Nikkei PMI manufacturing index falling to 52.5 from April’s reading of 53.8. The trade surplus fell to ¥626 billion in April from ¥797 billion in March but came in above expectations of ¥440 billion. Exports grew by 7.8% for the year to April and imports rebounded over the same period, growing by 5.9%. Meanwhile, the All Industry Activity Index missed estimates of 0.1% and was flat over March.
  • In a very light week for Chinese economic releases, industrial profits for the year to April increased by 21.9% from the 3.1% growth reported in the previous month. April's reading marked the fastest growth in six months and eased concerns about a slowing economy.

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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