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Aon Retirement and Investment Blog

Weekly Update - 28 November 2017 (UK/Europe)


  • Global equity markets rose over the week with all regions generating positive returns in local currency terms. In the Eurozone, German coalition talks between the Free Democratic Party and Angela Merkel’s Christian Democratic Union party failed, raising the prospects for a new snap election. The MSCI AC World Index rose 0.9% in local currency terms and 0.2% in sterling terms. The MSCI AC Asia Pacific ex Japan was the best performing region in local currency terms (1.2%). Developed Europe ex UK was the best performing region in sterling terms (1.0%) predominantly due to euro strength against sterling. The UK returned the least in local currency terms at 0.5% whilst Developed North America fell 0.2% in sterling terms, driven by US dollar weakness.
  • UK gilt yields fell across all maturities over the week. The 10 year UK gilt yield fell by 5bps to 1.29% and the 20 year UK gilt yield fell by 7bps to 1.79%. The 10 year US treasury yield fell by 3bps to 2.34% in a week in which the US Federal Reserve (Fed) meeting minutes indicated that policy makers remained concerned about low US inflation. German bund yields rose by 1bp to 0.37% whilst French government bond yields fell by 1bp to 0.57%.
  • UK real yields fell over the week. The 20 year real yield fell by 4bps to -1.67% and the Over 5 year real yield fell by 5bps to -1.66%. 20 year breakeven inflation fell by 2bps to 3.38%.
  • The US high yield bond spread over US treasury yields fell by 9bps to 367bps. The spread of USD denominated EM debt over US treasury yields finished the week 3bps lower at 292bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was unchanged at 105bps.
  • The S&P GSCI rose by 1.4% in USD terms over the week. The energy sector rose by 1.8% as the price of Brent crude oil increased by 1.4% to $63/BBL due to increased hopes of an announcement of further production cuts in the upcoming OPEC meeting. Industrial metals rose by 2.5% as copper prices increased by 3.5% to $6,980/MT. Agricultural prices were flat whilst gold prices rose by 0.1% to $1,289/ounce.
  • Sterling appreciated against major currencies, except for the euro, over the week. The US dollar depreciated by 1.1% against sterling, ending the week at $1.34/£. The euro strengthened by 0.2% against sterling, finishing the week at €1.12/£. The Japanese yen appreciated by 0.7% against the US dollar, ending the week at ¥111.50/$.
  • A number of economic releases in the US disappointed over the course of last week. Momentum in capital goods orders slowed over October following three months of strong gains. Orders fell by 1.2% over the month against expectations of a 0.3% increase and a previous (upwardly revised) reading of 2.2%. Although remaining firmly in expansionary territory, the flash reading of the US manufacturing Purchasing Managers’ Index (PMI) unexpectedly slipped to 53.8 for November from 54.6 against anticipations of a 0.4 point increase. The services PMI similarly missed analyst forecasts and fell to 54.7 from 55.3. However, there was more positive news as the Conference Board’s Leading Economic Index outperformed expectations of a 0.8% increase and moved 1.2% higher in October. This followed an upwardly revised 0.1% reading in September.
  • In the UK, net borrowing data was modestly higher than expectations with underlying private sector net borrowing at £8.0bn in October against £7.1bn expected. Meanwhile, public sector net borrowing came in at £7.5bn versus the £6.5bn expected. Housing finance approvals moved lower and undershot expectations at £40.5bn for October. Elsewhere, the Confederation of British Industry’s (CBI) industrial trends survey posted a 19 point rebound in the new orders index to 17 in November; the strongest reading since 1988. The CBI’s retailing sales survey similarly recovered to 26 after October’s reading of -36.
  • Data releases in the Eurozone were positive over the week. In Germany, the headline IFO business climate reading trended higher, reaching 117.5 in November against expectations of the index remaining at 116.7. The IFO expectations index was also well above analyst forecasts at 111 against 108.8 expected; the highest level since November 2010. November Eurozone PMIs were strong and generally ahead of consensus. The composite PMI rose to a six and a half year high of 57.5, from 56.0 previously, when it was expected to remain at 56.0. The strength was driven by the manufacturing sector with the manufacturing PMI rising 1.5 points to 60.0, against 58.2 expected. Meanwhile, the services PMI also outperformed, up to 56.2 from 55.0 and 55.2 forecasted. A similar trend was observed in Germany with the composite PMI advancing to 57.6 from 56.6. Consumer confidence in the Eurozone also held strong in November, advancing to a new sixteen-year high of 0.1 from -1.1 and above estimates of -0.8.
  • The Japanese trade balance for the month of October remained positive, boosted by an increase in exports to China, but fell to a surplus of ¥285.4bn from a revised trade surplus of ¥670.2bn in the previous month. Both export and import growth for the year to October missed analyst forecasts as exports rose by only 14.0% compared to consensus estimates of 15.7% while imports rose by 18.9% against forecasts of 20.2%. Growth in the Japanese manufacturing sector picked up with the preliminary Nikkei manufacturing PMI rising from 52.8 to 53.8 in November. The All Industry Activity index dipped by 0.5% in September, lower than the previous growth rate of 0.2% and expectations of a 0.4% decline.
  • There were no major economic data releases from China last week.
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