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Aon Retirement and Investment Blog

Weekly Update - 13 October 2014 (UK/Europe)

New Pieces of Intellectual Capital

  • Global Institutional Annuity Market Update. This report reviews the international annuity market in the second quarter of 2014, sample annuity rates in the market, and timing considerations for pension annuity settlement quotes. There is also a special announcement foreshadowing third quarter purchase activity for large U.S. pension risk annuity transfers.
  • Holistic Approach to Equity Investing. Institutional investors continue to evolve in their usage of active management as their needs and market realities change. This white paper discusses the integration of what are now called “alternative” investments into the active mainstream.
  • U.S. Hedging Views. Updates on views on pricing and efficacy of liability-hedging instruments, including our outlook on interest rates.

Market Moves

  • Global equity markets sold off heavily in what was a volatile week, driven by weak economic data in Europe with the MSCI AC World Index returning -3.0% in sterling terms. This was despite the US Federal Reserve noting in its September meeting minutes that weakness in the global economy meant near zero interest rates would be maintained for a considerable time yet. All regions recorded negative returns, with Europe the worst performer in both local (-4.3%) and sterling (-3.9%) terms. Emerging markets were the strongest performer in sterling terms (-1.1%) and Asia Pacific ex Japan was the strongest performer in local terms (-1.2%).
  • UK government bond yields moved lower over the week at all maturities. The 10 year UK gilt yield was 18 bps lower at 2.22% whilst the 20 year gilt yield fell by 13 bps to 2.77%. The 10 year US Treasury yield fell by 15 bps to 2.30%.
  • UK real yields fell over the week. The UK 20 year real yield fell by 8 bps to     -0.41% and the Over 5 year real yield fell by 7 bps to -0.44%. 20 year breakeven inflation fell by 5 bps to finish the week at 3.18%.
  • Credit spreads widened over the week, with US high yield particularly selling off. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) moved 1 bp higher to 114 bps. US high yield bond spreads over Treasuries rose by 37 bps to 466 bps. The Emerging Market ($) bond spread over Treasuries rose by 9 bps to 313 bps.
  • The S&P GSCI Commodity Index fell by 2.0% in USD terms over the week. The Energy sector was down by 3.4% with the price of Brent crude oil down by 2.3% at $89/BBL. Industrial Metals were up 0.4% over the week with the copper price up 0.3% to $6,703/MT. Agricultural prices rose 2.6%. Gold rose 2.3% to $1,222/ounce on safe haven buying.
  • Sterling was mixed over the week, appreciating against the dollar but losing ground against both the euro and yen. The US dollar depreciated by 0.4% over the week versus sterling, ending the week at $1.60/£ but the euro finished the week 0.5% higher at €1.27/£. The Japanese yen appreciated by 1.7% against the US dollar, moving to ¥107.92/$.
Economic Releases
  • US labour market conditions continued to improve with the rate of job openings rising strongly in August. New jobs increased by 4,835,000, equivalent to 3.4% of total employment. Import prices fell for the third consecutive month in September driven by the falling oil price and weak global growth. They fell by 0.5%, resulting in a fall of 0.9% over the last year. The data illustrates the concern over the disinflationary impact of weak global growth and a strong currency expressed in the minutes of the Federal Reserve’s meeting that were released last week.
  • The same two factors (weak global growth and a strong currency) impacted UK data releases last week too. Imports fell more than exports in August, resulting in a lower goods trade deficit of £9.1bn from a revised £10.4bn pounds in July, which was the biggest on record. The slowdown in the Eurozone, a key trading partner for the UK, was instrumental here and the Eurozone also impacted UK activity in August. Industrial production was unchanged and manufacturing output rose by just 0.1%. Later in the week, construction output also disappointed as it fell by 3.9% in August in contrast to expectations of a 0.5% rise (although July’s output was revised upwards by 1.9%). House-building was the weakest sector, falling by 5.5%.
  • A wave of poor German data was the main focus of concern in the Eurozone last week. German industrial production fell by 4.0% in August, leading to a 2.8% fall over the last year. August factory orders fell by 5.7% and exports fell by 5.8%. Markit’s retail purchasing man­agers’ index (PMI) fell to 47.1 from 49.4. This is the lowest level for 53 months. In the Eurozone region as a whole, the Eurozone retail PMI dropped to 44.8 and the Sentix investor confidence index fell in October to the lowest level in 17 months.
  • Japanese economic data was also disappointing on the whole. August’s adjusted trade deficit widened very marginally (to ¥832bn from ¥828bn in July) when the consensus expected a modest narrowing. The economy watchers survey for September was also discouraging; the current conditions component held at 47.4 when an increase was expected, and the outlook component dipped below 50 to 48.7 for the first time since the immediate aftermath of April’s sales tax hike. Furthermore, consumer confidence for September fell moderately to 39.9 from 41.2 in August, against expectations of a slight increase. However, on a more positive note, core machinery orders rose 4.7% in August, the third consecutive monthly increase.
  • The HSBC China services PMI dropped to 53.5 in September from a 17-month high of 54.1 in August. Retail sales slowed to 12.1% from a 13.6% rise in the same period last year. Both releases indicate that China’s economy will struggle to reach the government's growth target of around 7.5% this year.

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