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Aon Retirement and Investment Blog

Weekly Update - 8 May 2018 (UK/Europe)


  • 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 AC World Index remained flat in local currency terms whilst it rose 1.6% in sterling terms due to broad sterling weakness. Sterling weakened as economic data was weak and Theresa May faced a setback following the UK cabinet’s rejection of the proposed “customs partnership” with the European Union. Developed Europe ex UK was the best performing region in local currency terms (1.0%), supported by positive corporate earnings and a weak euro. Developed Pacific ex Japan returned the most in sterling terms at 2.6%. Emerging Markets were the worst performing region both in local currency (-1.1%) and sterling terms (0.3%) as Brazilian equities experienced a sharp sell-off on the back of a possible default on loan guarantees by the government.
  • UK gilt yields fell across all maturities over the week. The 10 year UK gilt yield fell by 7bps to 1.39% and 20 year UK gilt yield fell by 4bps to 1.81%. The 10 year US treasury yield fell by 1bp to 2.94% in a week in which the US unemployment rate fell to a 17-year low at 3.9% but wage growth data disappointed. European government bond yields were generally mixed across the region with yields falling towards the end of the week on the back of softer Eurozone inflation data. The 10 year German bund yield fell by 3bps to 0.54% and the French government bond yield fell by 2bps to 0.77%.
  • The UK 20 year real yield fell by 4bps to -1.57% and the Over 5 year real yield fell by 6bps to -1.53%. 20 year breakeven inflation rose by 2bps to 3.33%.
  • 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. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 2bps to 111bps.
  • 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 Brent crude oil increased by 0.3% to US$75/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.
  • Sterling depreciated against major currencies over the week. The US dollar appreciated by 2.1% against sterling, ending the week at $1.35/£ as the dollar benefited from a rebound after 2017 weakness. The euro strengthened by 0.6% against sterling, finishing the week at €1.13/£. The Japanese yen remained flat against the US dollar, ending the week at ¥109.13/$.
  • 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 UK, purchasing managers index (PMI) readings for April were mixed. Data released by Markit showed a cooling in the manufacturing sector as the index moved 1 point lower to 53.9, versus expectations of 54.8. UK construction, however, rebounded after March's weather-affected reading, to beat forecasts. The construction PMI rose a full 5.5 points to 52.5, ahead of expectations of 50.5. The services PMI came in under expectations at 52.8, from 51.7 previously and analysts’ forecasts of 53.5. Finally, the composite PMI moved higher, albeit missing forecasts, reading 53.2 in April, from 52.4 previously and 53.7 forecasted.
  • 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 $ from a surplus of $62.3bn.
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