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Aon Retirement and Investment Blog

Weekly Update - 21 November 2016

NEW INTELLECTUAL CAPITAL

  • U.S. Discount Rate Update. Average discount rates increased by 26 basis points in October as Treasury rates rose across the curve. In early November, rates have increased by 32 basis points through Monday. The average plan sponsor’s discount rate has now decreased by 19 basis points in 2016.
  • 'Trumpenomics' and market impact.  Aon Hewitt’s Global Asset Allocation Team provides an update regarding recent market action and potential policy impacts under the incoming administration.
  • Radar. Provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health. A French version of the November 3rd issue is also now available.
MARKET MOVES - Week Ending November 18, 2016

Equities
  • Global equity markets were focused on the clarity, or lack thereof, over U.S economic policy under Donald Trump’s administration and the upcoming interest rate decision by the US Federal reserve (Fed). The MSCI World Index rose 0.1%, underperforming S&P 500 which rose 0.9% over the week. On a year to date basis, S&P 500 has outperformed MSCI World (8.9% vs. 4.6%).
  • US Small Cap stocks outperformed Large Cap stocks as the Russell 2000 rose 2.6% over the week whereas the S&P 500 rose 0.9%. On a year to date basis, Small Cap stocks have outperformed Large Cap stocks (17.3% vs. 8.9%). Value stocks outperformed Growth stocks last week (1.0% vs. 0.9%) as measured by MSCI USA indices. On a year to date basis, Value stocks have outperformed Growth stocks, returning (12.2% vs. 5.2%).
Bonds
  • 10 year US Treasury yield rose sharply by 20bps and 30 year US Treasury yield rose by 9bps to 2.35% and 3.03% respectively over the week on the back of expectations that the Fed may hike interest rates next month.
  • 20 year TIPS yields rose by 14bps to 0.67% over the week. 20 year Breakeven rose by 4bps to 1.81%.
  • Credit spreads were mixed over the week. Barclays Capital Long Credit Index spread over treasury yields and the Merrill Lynch US Corporate Index spread were unchanged at 184bps and 136bps respectively. The US high yield bond spread over US treasury yields ended the week 13bps lower at 484bps. The spread of USD denominated EM debt over US treasury yields finished the week 11bps higher at 360bps.
Commodities
  • The S&P GSCI rose by 2.4% in USD terms over the week. The energy sector rose by 4.5% as the price of WTI crude oil rose 5.3% to USD 46/BBL, driven by hopes of a production cut by the OPEC nations. Industrial metals fell by 1.6% as copper prices fell by 2.3% to $5,412/MT. Agricultural prices fell by 0.2% and the gold price fell by 1.7% to $1,208/ounce.
Currencies
  • The US dollar appreciated against all the major currencies over the week driven by the likelihood of an interest rate rise by the Fed in its December meeting. The US dollar sharply appreciated by 2.2% against sterling, ending the week at $1.23/£. US dollar further strengthened 2.6% against the euro, finishing the week at $1.06/€. The Japanese yen sharply depreciated by 3.7% against the US dollar, ending the week at ¥110.66/$.
Economic Releases
  • In the US, there was continued tightening in labor markets as initial jobless claims fell to their lowest level since November 1973. Claims dropped to 235k from 254k reported last week and below forecasts of 257k. This also represented 89 consecutive weeks that the number of claims has been below the 300k threshold – the longest streak since 1970. Housing starts grew at their strongest pace since 2007, surging 25.5% in October, which was well above the 10.4% estimated growth. Annual CPI inflation came in at expectations with prices increasing by 1.6%, slightly higher than September's inflation figure of 1.5%. The consumer sector continues to be buoyant in the US economy as advance retail sales increased by 0.8% in October, above consensus estimates of 0.6%. This followed an upward revision of September's figures to 1.0%.
  • In the Eurozone, provisional Q3 seasonally adjusted annual GDP was 1.6%, unchanged from the previous quarter and in line with consensus expectations. The quarter-on-quarter change was 0.3% whilst Germany grew 0.2% over the same period. Eurozone CPI inflation month-on-month in October was 0.2%, down 0.4% points from the previous quarter and below survey estimates of 0.3%. In Germany, the ZEW survey showed a sharp improvement in economic sentiment as the index climbed to 13.8 points from 6.2 points in the previous month. The index is based on a survey of 206 analysts and investors conducted between 31 October and 14 November.
  • Japanese economic data was strong last week. The economy grew at a quarter-on-quarter annualized rate of 2.2% in Q3 2016, driven by a surge in exports despite yen appreciation. It was above a forecast rise of 0.8% and represented the third consecutive quarter of expansion. The increase in industrial production was revised upwards to 1.5% over the twelve months to September from the initial estimate of a 0.9% rise. However, deflation continues to be a persistent issue as the GDP deflator was down 0.1% on the year to the end of October, against expectations of a 0.3% increase.
  • It was a quiet week for economic releases in China. The year-on-year increase in industrial production remained unchanged at 6.1% compared to forecasts of 6.2% growth. Fixed asset (ex-rural) investment, a gauge of infrastructure spending, increased by 8.3% over the year to October, which was marginally above expectations of 8.2% growth. The transition to a more consumer-led economy, however, took a hit as annual retail sales growth came in below expectations at 10.0% compared to survey estimates of 10.7%. 
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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