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Aon Retirement and Investment Blog

Weekly Update - 19 November 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets fell over the week. The MSCI AC World Index fell by 1.3% in local currency terms. However, broad sterling weakness pushed up returns to 0.3% in sterling terms. The heavily-weighted Information Technology and Consumer Discretionary sectors were the worst performers.
  • Brexit uncertainty increased after the UK prime minister Theresa May faced a backlash over the draft withdrawal agreement struck with the European Union. Resignations from the Brexit Secretary Dominic Raab along with several other ministers raised the prospect of a leadership challenge and whether she would be able to get the deal through parliament.
  • Emerging Market equities were the best performing region both in local currency (0.7%) and sterling terms (2.6%), driven by a rebound in Chinese and Brazilian equity markets. MSCI China was pushed up by the Information Technology sector where index-heavyweight Tencent Holdings posted strong quarterly earnings. Japan was the worst performing region in local currency terms (-2.4%) in a week in which it posted weak economic growth data. The UK was the worst performing region in sterling terms (-1.0%).
  • Bond yields fell across major developed markets as investors moved to safe-haven assets. The 10-year UK gilt yield fell by 11bps to 1.42% and the 20-year UK gilt yield fell by 4bps to 1.88% over a week in which both inflation and retail sales data came in below expectations. The 10-year US treasury yield fell by 11bps to 3.07%. In Europe, German Bund yields fell by 5bps to 0.36% and French government bond yields fell by 3bps to 0.76% in a week where the German economy contracted for the first time in 3 years. Italian government bond yields rose by 7bps to 3.48% as Italy continued to reject the European Commission's budget demands and vowed to maintain its 2.4% budget deficit.
  • The UK 20-year real yield fell by 5bps to -1.67% whilst the Over 5-year real yield rose by 2bps to -1.52%. 20-year breakeven inflation rose by 4bps to 3.48%.
  • Credit spreads widened over the week as risk aversion took hold of investors. The US high yield bond spread over US treasury yields rose by 47bps to 418bps and the spread of USD denominated EM debt over US treasury yields rose by 21bps to 382bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) rose by 11bps to 138bps.
  • The S&P GSCI fell by 2.1% in USD terms over the week. The energy sector fell by 3.8% as the price of Brent Crude oil declined by 4.9% to US$67/BBL amidst increasing US shale oil inventories. Industrial metal prices rose by 1.1% as copper prices rose by 1.5% to US$6,181/MT. Agricultural prices fell by 0.5% and gold prices rose by 0.9% to US$1,222/Oz.
  • Sterling depreciated against major currencies over the week: 1.5% against the US dollar, to $1.28/£, and 1.8% against the euro to €1.13/£. The Japanese yen appreciated by 0.8% against the US dollar, ending the week at ¥112.84/$.

ECONOMIC RELEASES

  • Consumer price inflation rose at its fastest pace in nine months in October with the Consumer Price Index (CPI) meeting expectations of a 0.3% increase following September's 0.1% rise. On an annual basis, inflation accelerated to 2.5% from 2.3% while core inflation, which excludes volatile food and energy components, missed analyst forecasts and fell back to 2.1%. Although September's reading of real average weekly earnings was revised down to 0.8%, October's release saw a pick-up in real wage growth as earnings increased by 0.9% over the year. The advance reading of US retail sales reflected a rebound in October as sales increased 0.8% after September's 0.1% decline; also surpassing consensus estimates of 0.5% growth. On a less positive note, industrial production edged just 0.1% higher in October – narrowly falling short of the expected 0.2% increase.
  • In the UK, annual consumer price inflation (CPI) remained at 2.4% in the year to October. However, this was 0.1% below expectations as rises in the cost of petrol and utility bills were offset by a slowdown in prices of food and clothing. Core inflation rate was unchanged at 1.9% as expected. CPIH, the ONS’s preferred measure of inflation which includes housing costs, came in at 2.2% and below expectations of 2.3%. The unemployment rate edged up to 4.1% in the three months to September, against expectation of it remaining at 4.0%. However, nominal wages grew by 3.2% in the three months to September, the fastest pace since 2008. Retail sales fell by 0.5% in October, falling for the second consecutive month and well below analyst expectations of a 0.2% increase.
  • In Europe, the ZEW Indicator for Economic Sentiment fell to -22.0, the lowest level since July 2012 and 2.6 points below October's reading. The German Indicator of Economic Sentiment fared better, rising by 0.6 points to -24.1, but remains in highly negative territory. Poor figures for industrial production, retail sales and foreign trade in the third quarter weighed on the ZEW Indicator for Current Situation which fell to 58.2. Elsewhere, Euro Area industrial production increased 0.9% in the year to September, a decline from the 1.1% growth in the year to August but above market expectations of a 0.3% increase.
  • Japanese economic growth declined in Q3 2018 impacted by a series of natural disasters. Preliminary readings showed that the economy contracted at an annualised 1.2%, worse than the forecasted decline of 1.0%. Japan posted a trade deficit of ¥449.3bn in October, significantly higher than analyst forecasts of a ¥70.0bn deficit and down from September’s ¥131.3bn surplus. This was due to a faster pace of import growth compared to exports. Export growth rebounded by 8.2% for the year to October, slightly below expectations of 8.9% growth. Imports rose by 19.9% over the same period, far ahead than 7.0% increase seen in September and more than the estimated 14.1% increase
  • In China, industrial production growth increased to 5.9% for the year to October; beating the previous month’s reading and consensus estimates of 5.8%. Fixed asset investment grew by 5.7% for the year to October, beating economist forecast of 5.5% growth. In addition, retail sales growth decelerated to 8.6% over the year to October, less than analyst forecasts of 9.2% growth

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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