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Aon Retirement and Investment Blog

Weekly Update - 05 November 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets rebounded over the week. The MSCI AC World Index rose by 3.1% in local currency terms and 2.0% in sterling terms with all regions posting positive returns.
  • The MSCI AC Asia pacific ex Japan was the best performing index both in local currency (5.4%) and sterling terms (5.3%), predominantly driven by Chinese equities in a week in which China’s leadership signaled a fresh round of stimulus measures to support the slowing economy. The UK returned the least in local currency terms (2.1%). In the latest budget announcement, UK Chancellor Philipp Hammond set out plans for higher public spending and income tax cuts while the office for Budget responsibility upgraded its growth forecasts for 2019 and 2020. Japan returned the least in sterling terms (1.2%).
  • Reports of constructive trade talks between the US president Donald Trump and Chinese president Xi Jinping ahead of the G20 summit in Argentina later this month improved market sentiments. In Europe, German Chancellor Angela Merkel announced that she is resigning as head of the ruling Christian Democratic Union (CDU), following the poor performance of the party in a series of recent regional elections. Elsewhere, Brazilian stocks rose following the election of market-favourite Jair Bolsonaro in the country's presidential election. MSCI Brazil is now up 17.4% in local currency terms and 9.9% in Sterling terms year to date.
  • UK gilt yields rose across all maturities over the week. The 10-year UK gilt yield rose by 11bps to 1.49% and the 20-year UK gilt yield rose by 9bps to 1.85%. The 10-year US treasury yield rose by 14bps to 3.21% over a week where US employment data came in stronger than expected with wages growing at the fastest pace since 2009. In Europe, German bund yields rose by 8bps to 0.43% and French government bond yields rose by 5bps to 0.79% in a week in which the Eurozone economy recorded the slowest pace of GDP growth since 2014. Italian government bond yields fell by 10bps to 3.35%, following the S&P’s decision to leave the country’s credit rating unchanged amidst ongoing budget uncertainties.
  • The UK 20-year real yield rose by 6bps to -1.62% and the Over 5-year real yield rose by 5bps to -1.54%. 20-year breakeven inflation rose by 1bp to 3.40%.
  • The US high yield bond spread over US treasury yields fell by 13bps to 372bps and the spread of USD denominated EM debt over US treasury yields fell by 10bps to 355bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) rose by 1bp to 127bps.
  • The S&P GSCI fell by 3.7% in USD terms over the week. The energy sector fell by 5.8% as the price of Brent Crude oil fell by 6.2% to US$73/BBL due to an increase in US crude oil inventories. Industrial metal prices were unchanged whilst copper prices rose by 1.6% to US$6,255/MT. Agricultural prices rose by 0.9% whilst gold prices fell by 0.1% to US$1,232/Oz.
  • Sterling appreciated against major currencies over the week. The US dollar depreciated by 1.1% against sterling, ending the week at $1.30/£. The euro depreciated by 1.0% against sterling, finishing the week at €1.14/£. The Japanese yen depreciated by 1.5% against the US dollar, ending the week at ¥113.11/$.
ECONOMIC RELEASES
  • While the headline unemployment rate stood steady at 3.7%, the US economy added a further 250k jobs in October; exceeding estimates of 200k and well above September's downwardly revised reading of 118k. Tightness in labour markets appears to have fed through to wages with annual wage growth accelerating to 3.1% - the fastest pace of wage gains since 2009. The robust labour market (even prior to the positive non-farm and wage growth releases) continues to be supportive for the US consumer, as the Conference Board's Consumer Confidence index rose to an eighteen year high of 137.9 from a revised 135.3 reading. There was less stellar news for other areas of the US economy as the Institute of Supply Management's (ISM) manufacturing index fell by 2.2 points to 57.7 against analyst estimates of a more modest 0.8 point fall.
  • UK data continued to point to a slowing in UK economic activity as data largely disappointed. The Markit Manufacturing Purchasing Managers' Index (PMI) fell to 51.1 in October from 53.6 in September and below market expectations of 53.0. This marked the slowest expansion in factory activity since July 2016, as output growth slowed while new orders and employment declined for the first time since the EU referendum. The Services PMI also declined, falling to 52.2 from 53.9 and below expectations of 53.3. On a brighter note, the Construction PMI rose to 53.2–the second highest reading in 16 months–though business expectations fell to a near 6-year low amidst Brexit uncertainty. Consumer confidence took a further hit as the GfK Consumer Confidence index slipped to -10 from -9. Elsewhere, annual house price growth slowed to its slowest rate since May 2013 at 1.6% in October, according to the Nationwide House Price Index.
  • Euro Area GDP expanded by just 0.2% in Q3 2018, the weakest rate since Q2 2014 and below market expectations of 0.4%, as Italy's economy stalled for the first time in four years. This took year-on-year GDP growth to 1.7% from 2.2% seen in the previous quarter. Despite weaker growth, inflation continued to rise with headline consumer price inflation accelerating by 0.1% to 2.2%, the highest rate since December 2012, and core inflation increasing by 0.2% to 1.1%. German inflation also continued to increase with the EU-harmonized Consumer Price Index increasing by 2.4% year-on-year. Elsewhere, German retail sales fell 2.6% in the year to September 2018, the biggest fall since May 2014, as sales grew just 0.1% in September while August's reading was revised lower by 0.2% to -0.3%.
  • Based on preliminary data, Japanese industrial production contracted by 1.1% in September, disrupted in part by a series of typhoons and earthquakes. It was worse than the forecasted 0.3% decline and August's 0.2% increase. As expected, retail sales dropped by 0.2% over September from the 0.9% growth recorded in August. Japan’s labour market continued to tighten as the jobless rate for September fell to 2.3%, against expectation of it remaining at 2.4% and the job-to-applicant ratio inched higher to 1.64 from 1.63. The consumer confidence index in October fell marginally to 43.0 from 43.4.
  • In China, the official Chinese manufacturing PMI for October fell to 50.2 from 50.8, the weakest level since July 2016 and marginally above the level which reflects expansionary activity in the sector. This reading was much weaker than the forecasted 0.2 point decline. Sentiment within the service sector also deteriorated with the non-manufacturing index falling to 53.9 from 54.9 over the month. The Caixin manufacturing PMI, which focuses more on small and mid-sized Chinese businesses, edged up to 50.1 in October against expectations of it remaining at 50.
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