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Aon Retirement and Investment Blog

Weekly Update - 20 October 2014 (UK/Europe)


  • 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.
  • U.S. Hedging Views. Updates on views on pricing and efficacy of liability-hedging instruments, including our outlook on interest rates.
  • What’s In a Name: White Label-Funds in DC Plans. Many fund options in a DC lineup do not have a link between the name and the objective…but what if they did? White-label funds can be more effective for participants by incorporating investment options that work well in a portfolio context as a consolidated option with simpler decisions for the participant. This paper is designed to provide plan sponsors with a blueprint to guide the design and the implementation of a lineup consisting of white-label funds.
  • Global equity markets continued their recent sell off in another volatile week, with the weakening European economy again driving concerns. The MSCI AC World Index returned -1.3% in sterling terms. All regions again recorded negative returns with the exception of Asia Pacific ex Japan which returned 1.1% and 0.9% in local and sterling terms respectively. Japan was the weakest performer in both local (-5.4%) and sterling (-4.7%) terms, although this was largely a timing issue as it missed a rebound in European and US markets on Friday.
  • UK government bond yields continued to move lower over the week at all maturities. The 10 year UK gilt yield was 3 bps lower at 2.19% whilst the 20 year gilt yield fell by 2 bps to 2.75%. The 10 year US Treasury yield fell by 10 bps to 2.20%.
  • UK real yields fell over the week. The UK 20 year real yield fell by 5 bps to     -0.46% and the Over 5 year real yield fell by 4 bps to -0.48%. 20 year breakeven inflation rose by 2 bps to finish the week at 3.20%.
  • Credit spreads widened over the week. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) moved 7 bps higher to 121 bps. US high yield bond spreads over Treasuries rose by 2 bps to 468 bps. The Emerging Market ($) bond spread over Treasuries rose by 6 bps to 319 bps.
  • The S&P GSCI Commodity Index fell by 2.5% in USD terms over the week, driven by falling oil prices after Saudi Arabia refused to reduce production significantly. The Energy sector was down by 3.9% with the price of Brent crude oil down by 4.3% at $85/BBL. Industrial Metals were unchanged over the week with the copper price down 0.2% to $6,689/MT. Agricultural prices rose 2.0%. Gold rose 0.9% to $1,233/ounce.
  • 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 $1.61/£ but the euro finished the week 0.7% higher at €1.26/£. The Japanese yen appreciated by 1.2% against the US dollar, moving to ¥106.67/$.
Economic Releases
  • The past week’s economic dataflow was mixed in tone, with some indicators showing ongoing recovery while others lost some momentum. Retail sales contracted by more than expected in September, falling by 0.3% on the month compared with a consensus estimate of -0.1%. On the other hand, industrial production surprised with its strength, rising a solid 1% in September and beating expectations of a 0.4% increase. In terms of the forward looking surveys, the Philadelphia Fed Business Outlook index eased back to 20.7 in October from 22.5 but this beat expectations of a larger decline. The NAHB housing market index of the industry’s confidence fell back unexpectedly to 54 in October from 59 but these are still high figures. Finally, the University of Michigan consumer sentiment survey indicated that confidence had improved, with the index rising to 86.4 from 84.6, contrary to expectations of a small fall to 84. Overall, the picture in the US remains quite strong and we would need to see an accumulation of weaker indicators before becoming concerned about the recovery. This is not the case at the moment.
  • In the UK, consumer price inflation unexpectedly fell to 1.2% last month from 1.5% (consensus expected 1.4%), implying that the Bank of England is under less pressure to raise interest rates soon. On the other hand, the unemployment rate fell to fresh post-crisis lows in September, with the Claimant Count Rate falling to 2.8% from 2.9%.
  • In Europe, the economic dataflow was light but still pointed to a worsening of conditions. Eurozone industrial production contracted sharply in August, by 1.8% on the month and 1.9% year-on-year. The consensus had gone for smaller falls. Meanwhile, the much more timely ZEW survey of German economic activity disappointed too. The current situation component of the survey plunged to 3.2 in October from 25.4 previously, while a fall to 15 was expected by the market. Furthermore, the future expectations component fell to -3.6 from 6.9, in contrast to expectations of a fall to zero.
  • In a light week for Japanese economic data, the only noteworthy release was a downward revision to August’s industrial production growth number, from -1.5% month-on-month to -1.9%.
  • Finally, in China, exports were reported to have grown by 15.3% year-on-year in September, up from 9.4% in the previous month and better than the 12% growth rate that was expected. Imports grew too, by 7% after falling by 2.4% in August and beating the consensus estimate of a 2% drop. However, despite exports growth outpacing imports growth, the trade surplus shrunk to $30.9bn from $49.8bn, contrary to expectations of a much smaller decline to $41.1bn.

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