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Aon Hewitt Retirement and Investment Blog

Weekly Update - 20 November 2017 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • U.S. Discount Rate Update. Average discount rates decreased by seven basis points in October, as Treasury rates remained mostly unmoved while spreads tightened noticeably in the long end. In early November, rates have increased by two basis points through Tuesday, November 14th. The average plan sponsor’s discount rate has now decreased by 43 basis points in 2017.
Market Moves
  • Global equity markets edged lower again last week as the ongoing rally in the commodities and oil prices stalled. In the US, investors continued to focus on tax reform as both the House of Representatives and Senate advanced their versions of the bill. The MSCI AC World Index fell 0.3% in local currency terms but was flat in sterling terms. Emerging Markets were the best performing region both in local currency terms (0.3%) and sterling terms (0.9%), predominantly driven by Brazilian equity performance. Japan was the worst performing market in local currency terms (-2.0%) as yen strength hurt the export-oriented economy. Developed Pacific ex Japan was the worst performing region in sterling terms (-1.3%).
  • UK gilt yields fell across all maturities, except at the short end of the curve where yields were unchanged over the week. The 10 year UK gilt yield fell by 2bps to 1.34% and the 20 year UK gilt yield fell by 5bps to 1.85%. The 10 year US treasury yield fell by 4bps to 2.37%. European government bond yields also fell over the week with the exception of Greece and Spain. German bund yields fell by 5bps to 0.36% and French government bond yields fell by 6bps to 0.58%.
  • UK real yields fell over the week. The 20 year real yield fell by 4bps to -1.63% and the Over 5 year real yield fell by 2bps to -1.61%. 20 year breakeven inflation fell by 2bps to 3.39%.
  • The US high yield bond spread over US treasury yields was unchanged at 376bps, after having increased over the last few weeks. The spread of USD denominated EM debt over US treasury yields finished the week 3bps lower at 295bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 2bps to 105bps.
  • The S&P GSCI fell by 0.9% in USD terms over the week due to slightly disappointing Chinese industrial production data. The energy sector fell by 1.1% as the price of Brent crude oil decreased by 2.6% to $63/BBL. Industrial metals fell by 0.7% as copper prices decreased by 0.2% to $6,744/MT. Agricultural prices fell by 0.3% whilst gold prices rose by 0.9% to $1,288/ounce.
  • Sterling depreciated against major currencies over the week as doubts over the UK Prime Minister Theresa May’s ability in leading the Brexit negotiations weighed on the currency. The US dollar appreciated by 0.1% against sterling, ending the week at $1.32/£. The euro strengthened by 1.2% against sterling, finishing the week at €1.12/£. The Japanese yen appreciated by 0.9% against the US dollar, ending the week at ¥112.24/$.
Economic Releases
  • In the US, the Consumer Price Index (CPI) rose as expected over October; up by 0.1% but lower than the 0.5% increase recorded previously, as inflationary pressure remained muted. October industrial production data was above expectations at 0.9% month-on-month, versus 0.5% forecasted, and up 2.9% annually; the highest since January 2015. October housing starts were above expectations as they increased by 13.7% over the month, versus 5.6% expected. They increased in all major regions with the exception of the West. MBA mortgage applications for the week also rebounded to increase by 3.1%. The November Philadelphia Fed index was slightly below expectations but still robust at 22.7, against analyst forecasts of 24.6.
  • In the UK, October CPI fell marginally short of expectations at 0.1% month-on-month, while core annual inflation remained steady at 2.7%. Core retail sales (ex-auto fuel) data for October was slightly ahead of flat expectations, increasing 0.1% over the month. On an annual basis, core retail sales have decreased 0.3%, broadly in line with expectations but down from the 1.3% growth reported in September. The September unemployment rate was steady at 4.3%, remaining at a 42-year low, while average weekly earnings remains low at 2.2% year-on-year. Elsewhere, jobless claims and the claimant count rate for October were broadly similar to prior readings at £1.1k and 2.3% respectively. The November Rightmove house price index was up 1.8% year-on-year versus 1.4% expected. However, London prices were a different story as they fell by 2.4%.
  • In Germany, Q3 GDP beat expectations by growing at 0.8% over the quarter, versus 0.6% expected. On an annual basis, the economy grew 2.8%, ahead of the 2.3% forecasted, the highest in six years, largely due to positive contributions from net exports and capital investment. Encouragingly, the November ZEW survey on expectations for the Eurozone economy was higher than last month’s reading of 26.7 at 30.9. In Germany, the November ZEW survey on current situations reflected continuing positive sentiment. Finally, industrial production figures for the Eurozone in September decreased by 0.6% as expected, down from 1.4% growth in September.
  • The Japanese economy grew at an annualised rate of 1.4% in Q3; the seventh consecutive quarter of economic growth, but marginally short of estimates of 1.5%. In particular, the private consumption component of GDP shrank by 0.5% over the quarter whilst the business spending component grew 0.2% over the same period.
  • The pace of Chinese growth in the industrial sector slowed as industrial production increased by 6.2% in the year to October, down from the previous reading of 6.6% and marginally missing estimates of 6.3%. Retail sales grew by 10.0% in the year to October, down from 10.3% in September, and short of the expected 10.5%.
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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