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Aon Retirement and Investment Blog

Weekly Update - 13 October 2014 (US)

NEW PIECES OF INTELLECTUAL CAPITAL

  • Holistic 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.
     

  • 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.
     

  • U.S. Hedging Views. Updates on views on pricing and efficacy of liability-hedging instruments, including our outlook on interest rates.
UPCOMING EVENTS
  • October Investment Strategy Webinar.  Join us, Wednesday, October 15, 2014, from 10 a.m. to 11 a.m. CST, as we present an Investment Strategy Update Webcast for clients. This month, Jas Thandi, from Aon Hewitt’s Global Asset Allocation team, discusses the current economic outlook and answers your questions concerning medium-term views. Register for the live webinar here.

MARKET MOVES
 
Equities
  • Global equity markets sold off heavily in what was a volatile week, driven by weak economic data in Europe. 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. The S&P 500 index underperformed the MSCI World index last week (-3.1% vs. -2.9%). In 2014 to date, the S&P 500 has outperformed the MSCI World index with a 4.8% return vs. a 0.0% return.
  • US small cap stocks underperformed large cap stocks as the Russell 2000 returned -4.6% over the week. Year-to-date, small cap has significantly underperformed large cap with a -8.6% return. Value stocks (-2.9%) outperformed growth stocks (-3.4%) last week as measured by the MSCI USA indices. In 2014 to date, value stocks have outperformed growth stocks (4.9% vs 4.1%).
 
Bonds
  • 30 year and 10 year US yields were down 11 and 15 bps to 3.01% and 2.28% respectively last week.
  • 20 year TIPS yields moved 15 bps lower to 0.70% over the week. 20 year breakevens were 2 bps higher at 1.94%.
  • The Barclays Capital Long Credit Index spread over Treasury yields moved up 4 bps to 165 bps while the Merrill Lynch US Corporate Index spread was up by 2 bps ending the week at 123 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.
 
Commodities
  • 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.
 
Currencies
  • The US dollar depreciated by 0.9% against the euro and by 1.9 % against the yen, ending the week at $1.26/€ and ¥107.92/$ respectively. The dollar depreciated by 0.4% against sterling, finishing the week at $1.60/£.
 
ECONOMIC RELEASES
  • US labor 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.
  • 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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