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Aon Retirement and Investment Blog

Weekly Update - 14 November 2016 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • Radar. Provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health. A French version of the October 27th issue is also now available. 

MARKET MOVES

  • Global equity markets rose over the week as uncertainties over the outcome of the US Presidential elections ended with a surprising victory for the Republican candidate Donald Trump. The MSCI AC World Index rose 2.6% in local currency terms. Returns halved to 1.3% in sterling terms due to sterling strength. All the regions posted positive returns except for Emerging markets and MSCI AC Asia Pacific. The US was the best performing market in both local currencies (3.8%) and sterling terms (3.5%) as investors expect fiscal stimulus under Donald Trump’s presidency. Emerging markets was the worst performing region in both local currencies (-1.5%) and sterling terms (-3.8%) as Trump’s protectionist stance threatens global trade.
  • UK gilt yields rose across all maturities in line with the broad based global bond sell-off. The 10 year and the 20 year UK gilt yields rose by 22bps to 1.36% and 1.90% respectively. The 10 year US treasury yield rose sharply by 37bps to 2.15% on expectations of higher inflation. European government bond yields rose across the region except for Greece. German bund yields rose by 17bps to finish the week at 0.23% while French government bond yields rose by 28bps, ending the week at 0.74%. Greek government bond yields continued to decline, falling by 43bps to 7.33% amid growing optimism over the review of the country’s bailout program.
  • UK real yields rose over the week. The UK 20 year index-linked yield rose by 18bps to -1.58% and the Over 5 year index-linked yield rose by 14bps to -1.63%. 20 year breakeven inflation rose by 6bps to 3.48%.
  • The US high yield bond spread over US treasury yields ended the week 23bps lower at 497bps. The spread of USD denominated EM debt over US treasury yields finished the week 1bp lower at 349bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was unchanged at 123bps.
  • The S&P GSCI fell by 1.1% in USD terms over the week. The energy sector fell by 2.1% as the price of Brent crude oil fell 2.7% to USD 44/BBL. Industrial metals rose sharply by 5.4% as copper prices increased by 11.3% to $5,541/MT. Expectations of vast spending in the US Infrastructure sector fuelled metal prices. Agricultural prices fell by 1.7% and the gold price fell sharply by 5.8% to $1,229/ounce.
  • Sterling appreciated against all major currencies. The US dollar depreciated 0.3% against sterling, ending the week at $1.26/£. The euro weakened by 2.7% against sterling on the back of reduced growth forecasts by the European Commission and the US policy threat to global trade, finishing the week at €1.16/£. The Japanese yen depreciated by 3.4% against the US dollar, ending the week at ¥106.60/$.

ECONOMIC RELEASES

  • In the US, news flow was dominated by the Presidential election. Consumer confidence in the period prior to the election soared from 87.2 to 91.6, on the back of expectations of a brighter economic outlook. The budget deficit, likely to significantly increase by anticipated expansionary fiscal policies during the Trump presidency, was significantly below expectations in the latest release at $44.2 billion. This compares to consensus estimates of $70.0 billion and the previous figure of $136.6 billion. The number of initial jobless claims fell to 254k from 265k, and below analyst forecasts of 260k.
  • In the UK, year-on-year industrial output up to September suffered an unexpected setback as it undershot analyst forecasts of a 0.8% gain and grew by just 0.3%. This comes at the same time as manufacturing production rose 0.6% in September, the biggest increase in five months. This takes the annual increase in manufacturing production to 0.2%, beating consensus estimates of a 0.1% decline. Seasonally adjusted construction output also beat expectations as it grew 0.2% over the last year, well above the forecasted 0.4% decline. The UK's trade deficit widened unexpectedly from £3.8 billion to over £5.2 billion at the end of September, despite sterling weakness since the Brexit decision.
  • It was a quiet week for economic releases in the Eurozone. Annual retail sales were up 1.1% in September, falling from 1.2% in the previous month. The Markit Eurozone Retail Purchasing Managers Index (PMI) fell for a second month in October, decreasing from 49.6 to 48.6and remaining below the 50 threshold, signaling contraction. In Germany, factory orders (month-on-month) unexpectedly fell by -0.6% in September, after 0.9% growth in the previous month. The drop in new business was driven by domestic demand, with orders within Germany's borders falling by 1.1%, while orders from abroad fell back by 0.3%.
  • In Japan, the October Economy Watchers survey's current component rose from 44.8 to 46.2 and the outlook component increased to 49.0 from 48.5, both beating consensus estimates. However, both remain below the threshold level of 50 which indicates overall optimism in the economy. According to preliminary estimates, machine tool orders continued on a downward path, falling by 8.9% over the twelve months to October. The adjusted current account balance fell to ¥1,477 billion in September from ¥1,976 billion. This was despite a widening trade surplus which rose to ¥642.4 billion from ¥243.2 billion, albeit below forecasts of ¥668.8 billion.
  • In China, the transition to a more robust economy once again took a hit as trade figures undershot predictions. The trade balance in US dollar terms rose to $49.1 billion but fell short of surveyed estimates of $51.7 billion. Export growth fell in the year to October by 7.3%, against a forecasted drop of 6.0%. The fall in exports represents the seventh consecutive month of contraction, despite a weaker Chinese yuan. On a more positive note, there were encouraging sign for businesses as the producer price index rose at an annual rate of 1.2% compared to consensus estimates of 0.9%. This is the second month of a rise after factory gate prices remained in deflationary territory for over four years.
     
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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