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Aon Retirement and Investment Blog

Weekly Update - 26 November 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets fell over the week with major equity indices wiping out their year-to-date gains. The MSCI AC World Index fell by 2.6% in local currency terms and 2.4% in sterling terms. The heavily-weighted Information Technology (IT) sector was the worst performer with the FAANG (Facebook, Amazon, Apple, Netflix, Google parent Alphabet) stocks entering a bear market.
  • Japanese equities were the best performing region both in local currency (-0.1%) and sterling terms (0.2%) as they bounced back from recent underperformance. In a holiday shortened week, the US was the worst performing region both in local currency (-3.7%) and sterling terms (-3.5%) with all sectors recording negative returns. Poor performance in the heavily-weighted IT sector (24.9% of the index) was the main driver as US IT stocks fell 5.6%.
  • In Brexit news, European Union (EU) leaders signed off the draft withdrawal agreement struck with the UK as some last-minute issue raised by Spain over the governance of Gibraltar were eventually resolved. The focus now shifts to the 'meaningful vote' in the UK parliament which is tabled for 12 December.
  • Bond yields fell across major developed markets. Both the 10-year and the 20-year UK gilt yield fell by 4bps each to 1.37% and 1.84% respectively over the week. 10-year US treasury yields fell by 3bps to 3.04%. In Europe, German Bund yields fell by 3bps to 0.33% and French government bond yields fell by 4bps to 0.72%. Italian government bond yields fell by 7bps to 3.42%.
  • The UK 20-year real yield rose by 4bps to -1.63% and the Over 5-year real yield rose by 5bps to -1.47%. 20-year breakeven inflation fell by 8bps to 3.40%.
  • Credit spreads widened over the week. The US high yield bond spread over US treasury yields rose by 11bps to 429bps and the spread of USD denominated EM debt over US treasury yields rose by 17bps to 398bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) rose by 4bps to 142bps.
  • The S&P GSCI fell by 6.6% in USD terms over the week. The energy sector fell by 10.2% as the price of Brent Crude oil declined by 11.9% to US$59/BBL. Crude oil prices hit more than a year low and erased year-to-date gains as they slid further into a bear market due to oversupply concerns. Industrial metal prices fell by 0.4% despite copper prices rising by 0.5% to US$6,210/MT. Agricultural prices fell by 1.8% and gold prices rose by 0.1% to US$1,224/Oz.
  • Sterling depreciated against major currencies (except for the Euro) over the week. Sterling depreciated by 0.3% against the US dollar, ending the week at $1.28/£. Sterling depreciated by 0.2% against the euro, finishing the week at €1.13/£. The Japanese yen appreciated by 0.1% against the US dollar, ending the week at ¥112.78.

ECONOMIC RELEASES

  • In the US, economic releases were largely negative last week. Orders for durable goods fell more sharply than expected, dropping by 4.4% in October (the largest fall in the last fifteen months) against analyst forecasts of a 2.6% decline. This negative news was compounded by a downward revision of September's release from a 0.7% increase to a 0.1% dip. Following two consecutive months of declines, orders for non-defense capital goods (excluding aircraft), which is viewed as a proxy for business investment, was flat in October but missed consensus estimates of a 0.2% uptick. Provisional releases for Purchasing Managers' Index (PMI) data also were also disappointing with the manufacturing and services PMI falling to 55.4 and 54.4, respectively. Analysts had expected the manufacturing PMI to remain at 55.7 and growth in the services sector to accelerate to 55 from 54.8.
  • In the UK, Public Sector Net Borrowing excluding Banking Groups hit a three-year high in October with net borrowing rising by more than expected to £8.8bn from a downwardly revised £2.8bn in September and above market expectations of £6.15bn. The move came despite continued robust growth in tax receipts as government spending on goods and services and social benefits increased. The Confederation of British Industry's monthly industrial orders balance swung back into positive territory in November to 10 from -6 and above expectations of -7 as output growth expectations increased. The Rightmove House Price index fell by 1.7% in November; down from the previous reading of 1.0% increase.
  • Euro Area Markit Manufacturing PMI continued to disappoint with the November reading falling to 51.5 against market expectations that it would remain unchanged at 52.0. Export orders dropped the most since the survey began, job creation eased to a 22-month low but inflation remained high. Euro Area Markit Services PMI fared little better, falling to 53.1 from 53.7 and below expectations of 53.6, with similar underlying drivers. German PMIs also disappointed with both Manufacturing and Services PMI falling by 0.6 points and 1.2 points to 51.6 and 52.2, respectively. Elsewhere, Euro Area consumer confidence declined to -3.9 in November from -2.7 in October.
  • In Japan, growth in the manufacturing sector hit a two-year low in November with the preliminary Nikkei PMI manufacturing index falling to 51.8 from October’s reading of 52.9. Headline consumer price inflation edged up to 1.4% from 1.2% for the year to October. However, Japan’s core consumer price index, which excludes more volatile food but not energy prices, was unchanged from September’s 1.0% reading. Both inflation readings met consensus estimates but remained below the central bank’s 2.0% target. The final reading for machine tool orders growth (year-on-year basis) was revised slightly higher to -0.7% from -1.1%. Meanwhile, the All Industry Activity Index moved 0.9% lower in September, meeting expectations but lower than the downwardly revised 0.4% increase in August.
  • There were no Chinese economic releases this week. Attention will be focused on the upcoming G20 summit in Buenos Aires towards the end of this week on which direction of trade talks may go between the US and China.

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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