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Aon Retirement and Investment Blog

Weekly Update - 4 November 2016 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • Radar. Provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health.

MARKET MOVES

  • Global equity markets sold off sharply over the week driven by falling energy prices and uncertainties around the outcome of the upcoming election in the US. The MSCI AC World Index fell 2.5% in local currency terms. Sharp appreciation of sterling compounded weak returns, pushing down the returns in sterling terms to -5.0%. All the regions posted negative returns with developed Asia pacific ex Japan falling the least in both local currency (-1.6%) and sterling terms (-4.0%). The UK was the worst performing region in local currency terms (-4.3), and Emerging markets fell the most in sterling terms (-5.7%).
  • UK gilt yields fell across all maturities, despite the Bank of England (BOE) indicating diminishing chances for a further rate cut. The 10 year UK gilt yield fell by 11bps to 1.14% and the 20 year UK gilt yield fell by 9bps to 1.68%. The 10 year US treasury yield fell by 6bps to 1.78%. European government bond yields were mixed. German bund yields fell by 3bps to finish the week at 0.06% while the French government bond yields rose by 4bps, ending the week at 0.46%. Greek government bond yields fell sharply by 56bps to 7.75% amid growing optimism that a review of the country’s bailout programme will be completed soon.
  • UK real yields fell over the week. The UK 20 year index-linked yield fell by 6bps to     -1.75% and the Over 5 year index-linked yield fell by 7bps to -1.77%. 20 year breakeven inflation fell by 5bps to 3.42%.
  • Credit spreads rose over the week. The US high yield bond spread over US treasury yields ended the week 44bps higher at 520bps. The spread of USD denominated EM debt over US treasury yields finished the week 13bps higher at 350bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 1bp to 123bps.
  • The S&P GSCI fell by 5.6% in USD terms over the week. The energy sector fell by 9.3% as the price of Brent crude oil fell 9.2% to USD 46/BBL, as data indicated that US crude oil inventories rose sharply and concerns rose about tightening US election polls. Industrial metals rose by 1.6% as copper prices increased by 3.0% to $4,978/MT. Agricultural prices fell by 1.1% while gold prices rose by 2.7% to $1,304/ounce.
  • Sterling appreciated sharply against all the major currencies on the back of reduced expectation for a further rate cut by the BOE and the high court ruling requiring parliamentary approval for initiating Brexit procedures. The US dollar depreciated 3.2% against sterling, ending the week at $1.25/£. The euro weakened by 1.5% against sterling, finishing the week at €1.13/£. The Japanese yen appreciated by 2.3% against the US dollar, ending the week at ¥103.02$.

ECONOMIC RELEASES

  • In the US, there was a particular focus on labour market data. Nonfarm payrolls increased by 161k which was slightly below consensus estimates of 173k and the previous increase of 191k. The unemployment rate did, however, meet analyst forecasts as the rate fell to 4.9% - the lowest level since February 2008. The October Jobs report also revealed an increase in annual wage growth, measured by the year-on-year change in average hourly earnings, which rose by 2.8%; the highest level since June 2009. The increase was above survey estimates of 2.6% growth. There was a positive revision away from the jobs market with the Markit US Manufacturing Purchasing Managers' Index (PMI) increasing to 53.4 from 53.2. The reading was also the best recorded for the year.
  • In the UK, the Bank of England maintained its base rate at 0.25%. The Markit Purchasing Managers Index (PMI) for manufacturing (seasonally adjusted) fell from 55.5 to 54.3 in October, a slightly greater fall than expected by analysts but remains above the 50 mark which signals growth in the sector. The Markit/CIPS UK Construction PMI hit a seven-month high in October, unexpectedly rising from 52.3 to 52.6. Similarly, the Services PMI jumped from 52.6 to 54.5, its highest level since January. As a result, the overall composite PMI confounded expectations of a fall and rose from 53.9 to 54.8.
  • In the Eurozone, advance figures for seasonally adjusted GDP were released. The annual increase in GDP as at the end of Q3 was estimated to be 1.6% and the quarterly increase was estimated at 0.3%; both measures matching consensus estimates. The CPI inflation estimate was 0.5%, up from 0.4% in the previous month. Advance Core CPI inflation (which excludes volatile food and energy prices) was in line with expectations at 0.8%. In October's final PMI numbers, services were unexpectedly revised down from 53.5 to 52.8 whilst figures for the manufacturing sector surprisingly rose from 53.3 to 53.5. The overall composite, however, fell from 53.7 to 53.3. In Germany, the number of people unemployed fell by 13k, well ahead of the expected 1k fall.
  • Japanese economic data was mixed. The Bank of Japan kept the monetary policy unchanged. The Nikkei Japan Services PMI returned to expansionary territory in October by rising to 50.5 from the previous reading of 48.2. This was predominantly driven by an increase in new orders.  This also led to the Nikkei Japan Composite PMI rising to 51.3 in October from 48.9. Industrial production stalled over the twelve months to September rising by only 0.9% which fell short of the consensus estimates for a rise of 1.9% and a previous increase of 4.5%.
  • The latest PMI figures from China pointed towards a stabilising economy. The Caixin China Services PMI rose to 52.4, growing at the strongest pace in four months. A similar increase was seen for the manufacturing sector with the Caixin China Manufacturing PMI beating analyst expectations, rising to 51.2 compared to consensus estimates of 50.1. There was also an improvement in the current account balance over the third quarter, as provisional figures showed the balance rising to $71.2 billion to the end of September from $64.1 billion at the end of June.
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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