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Aon Retirement and Investment Blog

Weekly Update - 8 May 2018

NEW INTELLECTUAL CAPITAL

CIO Newsletter First Quarter 2018.
The quarterly issue of Aon’s CIO newsletter, providing our clients and investors some perspective and context on capital markets and how we are responding on their behalf.
 
Rethink: Global Pension Risk Governance.
This paper is an interview-style piece with three of our experts on global pension risk governance, discussing how multi-national companies can effectively take a holistic approach to managing pension risk across the globe.  It discusses both theory and practical challenges. 
 
Pathways.
In this edition of Aon Hewitt Investment Consulting’s newsletter for retirement plan sponsors, we highlight DC investment program innovation with a focus on customizing the default investment alternative, active vs. passive management, corporate defined benefit interest rate hedging strategies, trends in fees for hedge funds, and client case studies.
 
2018 U.S. Annuity Settlement Market Update.
The paper provides a detailed overview of the growing pension annuity settlement marketplace which is increasingly being utilized by pension sponsors to manage cost and risk.

MARKET MOVES (Week ending May 06, 2018)
 
Equities

  • Global equity markets were broadly unchanged over the week as investors focused on US China trade talks which failed to reach any conclusion. However, both sides agreed more dialogue in the future to ease tensions. The MSCI World Index and the S&P 500 Index both fell by 0.2% over the week. On a year-to-date basis, both the MSCI World Index and the S&P 500 Index have returned 0.2%.
  • US Small Cap stocks outperformed Large Cap stocks over the week as the Russell 2000 Index rose by 0.6% whilst S&P 500 Index fell 0.2%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (2.3% vs. 0.2%). Value stocks underperformed Growth stocks over the week (-1.5% vs. 1.1%) as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (4.5% vs. -3.8%).
Bonds
  • The 10 year US treasury yield and the 30 year US Treasury yield both fell by 1bp each to 2.94% and 3.11% in a week in which the US unemployment rate fell to a 17-year low at 3.9% but wage growth data disappointed.
  • The 20 year TIPS yield was unchanged at 0.87% whilst the 20 year breakeven fell by 1bp to 2.15%.
  • The spread of the Bloomberg Barclays Capital Long Credit Index over Treasury yields rose by 8bps to 160bps and the Bank of America Merrill Lynch US Corporate Index credit spread rose by 5bps to 117bps. The US high yield bond spread over US treasury yields rose by 5bps to 349bps over the week. The spread of USD denominated EM debt over US treasury yields rose by 21bps to 329bps.
Commodities       
  • The S&P GSCI rose by 1.4% in USD terms over the week. The energy sector rose by 1.4% as the price of WTI crude oil increased by 2.4% to US$70/BBL. The oil price stayed close to multi-year highs in the run-up to an expected US announcement on whether it will withdraw from the Iranian nuclear deal. Industrial metals increased by 2.2% despite copper prices falling by 0.2% to US$6,783/MT. Agricultural prices rose by 1.8% whilst gold prices fell by 0.9% to US$1,309/ounce.
 Currencies
  • The US dollar appreciated against major currencies over the week (except the yen). The US dollar strengthened by 2.0% against sterling, ending the week at $1.35/£. The US dollar appreciated by 1.4% against the euro, ending the week at $1.19/€. The Japanese yen remained unchanged against the US dollar, ending the week at ¥109.13/$.
Economic Releases
  • The US unemployment rate fell by more than expected in April, reaching an eighteen-year low of 3.9%. Analysts had anticipated a smaller decrease in the rate from 4.1%. However, job growth remained modest with 164k jobs created in April, which was below the forecast of 190k although March's release was revised higher to 135k from 103k. Wage growth also fell short of estimates, albeit narrowly, with average hourly earnings increasing by 2.6% in the year to April. There were indications of a potential slowdown in the US economy with the Institute of Supply Management's (ISM) manufacturing index falling for a second successive month; down two points to 57.3 and also lower than the expected 58.5. Lastly, in line with expectations, core consumer price inflation (CPI), as measured by the Personal Consumer Expenditure deflator, reached the Fed's target of 2% for the first time in a year from a downwardly revised 1.7%. 
  • In the Eurozone, the final composite and service PMIs were confirmed at 55.1 and 54.7 respectively, after both being revised down marginally. Eurozone inflation data for April was softer than expected, with the headline year-on-year inflation rate ticking down to 1.2%. Core CPI inflation for April measured 0.7%, from 1.0% in the previous month, and 0.9% expected. In Germany, preliminary CPI was slightly ahead of expectations, increasing 10bp to 1.6% over the year to April. Retail sales data for Germany in March disappointed, declining 0.6% over the month, from a 0.2% upwardly-revised decline previously and the 0.8% increase forecasted.
  • The final reading for the Nikkei manufacturing PMI rose to 53.8 in April, up from the preliminary reading of 53.3, indicating a slight acceleration in Japan's economic expansion. Vehicle sales partially rebounded in April after March's sharp 4.9% fall, with sales increasing by 0.5%. The Consumer Confidence Index unexpectedly slipped to 43.6 from 44.3; analysts had expected a modest 0.2 point increase in the reading. 
  • The official Chinese manufacturing PMI for April fell marginally to 51.4 from 51.5 but ended up better than the expected 51.3, as export orders shrank, unsupported by ongoing global trade tensions. However, the non-manufacturing index improved to 54.8 from 54.6, beating consensus estimates. Provisional data showed China's current account has swung into deficit over the first quarter, moving to a deficit of $282.bn from a surplus of $62.3bn.
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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