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Aon Retirement and Investment Blog

Weekly Update - 21 November 2016 (UK/Europe)

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
  • 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 AC world index rose 0.9% in local currency terms. However, sterling depreciated sharply against the US dollar pushing up returns in sterling terms to 2.3%. Japan was the best performing region in local currency terms (3.6%) driven by stronger than expected GDP data in Q3 2016 and weakness in the yen. Developed North America was the best performing region in sterling terms (3.3%), owing to the strength of the US dollar. Developed Asia Pacific ex Japan was the worst performing region in local currency terms (-0.3%) and developed Europe ex UK returned the least in sterling terms (0.0%).
  • UK gilt yields rose across all the maturities except at the short end of the curve. The 10 year UK gilt yield rose by 12bps to 1.48% and the 20 year UK gilt yield rose by 9bps to 1.99%. In the US, 10 year treasury yields rose by 19bps to 2.34% on the back of expectations that the Fed may hike interest rates next month. European government bond yields were mixed. German bund yields fell by 2bps to finish the week at 0.20% whilst French government bond yields rose by 2bps, ending the week at 0.75%. Greek government bonds continued to rally with the yields falling by 22bps to 7.10%, as economic growth data was better than expected, improving the outlook for the economy.
  • UK real yields rose over the week. The UK 20 year index-linked yield rose by 7bps to -1.50% and the Over 5 year index-linked yield rose by 9bps to -1.54%. 20 year breakeven inflation was unchanged at 3.47%.
  • Credit spreads were mixed over the week. 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. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 1bp at 124bps.
  • 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 Brent crude oil rose 4.5% 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.
  • Sterling appreciated against all major currencies except the US dollar. The US dollar sharply appreciated by 2.2% against sterling, ending the week at $1.23/£, driven by the likelihood of an interest rate rise by the Fed in its December meeting. The euro weakened by 0.4% against sterling, finishing the week at €1.16/£. The Japanese yen depreciated by 3.7% against the US dollar, ending the week at ¥110.66/$.

ECONOMIC RELEASES

  • In the US, there was continued tightening in labour 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 UK, annual CPI inflation unexpectedly dropped to 0.9% in October, down from 1.0% in the previous month and against consensus expectations of a small rise of 1.1%. Core CPI inflation (which excludes volatile energy and food prices) was 1.2%, similarly down from the previous month's 1.5% and behind expectations of 1.4%. Retail sales grew at their fastest pace in 14 years, as sales volumes rose by 7.4% in the year to October on the back of winter clothes and Halloween purchases. The number of people claiming unemployment benefits rose in October by 9.8k, the biggest increase since May. This rise was unexpected as forecasts suggested a more modest 2k rise. September's figure was revised up from 0.7k to 5.6k.
  • 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 annualised 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%.
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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