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Aon Retirement and Investment Blog

Weekly Update - 02 October 2017 (UK/Europe)

  • Global equity markets generated modest returns over the week. The MSCI AC World Index rose 0.6% in local currency terms and 1.0% in sterling terms. Europe ex UK was the best performing market in local currency terms (1.2%), with sterling returns slightly lower, at 0.9%. The US was the strongest performing region in sterling terms (1.5%) over the week. Emerging Markets were the worst performing region both in local currency (-1.2%) and sterling terms (-1.0%).
  • UK gilt yields were flat across all most maturities. The 10 year UK gilt was flat at 1.40% and the 20 year UK gilt yield fell marginally (by 1bp) to 1.92%. The 10 year US treasury yield rose by 6bps to 2.33%. Most Eurozone government bond yields were flat or marginally increased over the week. German bund yields and French government bond yields both rose by 1bp to 0.46% and 0.75% respectively. Spanish bond yields fell by 2bps to 1.6% as the Catalan referendum vote loomed closer.
  • UK real yields fell over the week. 20 year real yields fell by 2bps to -1.54% and the Over 5 year real yield fell by 3bps to -1.53%. 20 year breakeven inflation rose by 3bps to 3.36%.
  • The US high yield bond spread over US treasury yields fell by 10bps to 354bps. The spread of USD denominated EM debt over US treasury yields finished the week 3bps lower at 287bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) narrowed slightly by 1bp to 104bps.
  • The S&P GSCI rose by 0.3% in USD terms over the week. The energy sector rose by 0.9% as the price of Brent crude oil increased by 1.3% to $58/BBL. Industrial metals fell by 0.2% despite copper prices increasing by 0.3% to $6,432/MT. Agricultural prices fell by 1.0% and gold prices fell by 0.9% to $1,284/ounce.
  • Sterling depreciated against both the dollar and yen over the week, but appreciated against the euro. The US dollar appreciated by 0.8% against sterling, ending the week at $1.34/£. The euro weakened by 0.4% against sterling, finishing the week at €1.13/£. The Japanese yen depreciated by 0.6% against the US dollar, ending the week at ¥112.57/$.
  • The final reading of economic growth in the US over the second quarter of 2017 was unexpectedly revised up to 3.1% (quarter-on-quarter, annualised) from 3.0% where analysts had predicted it to remain unchanged. Both the Conference Board's and University of Michigan's measures of consumer confidence fell over September. The former unexpectedly dropped from a revised 120.4 to 119.8, below expectations of a milder decrease to 120.0. The final reading of the University of Michigan's consumer sentiment index slipped to 95.1 from 95.3. Orders for durable goods exceeded consensus estimates of 1.0% and rebounded slightly by 1.7% in August after dropping 6.8% in July. Core Personal Consumption Expenditure (PCE), the Federal Reserve's preferred measure of inflation, slowed to 1.3% in the year to August from 1.4% in the previous month. Core inflation was forecasted to be unchanged at 1.4%.
  • In the UK, economic data was stable over the week. Final Q2 QDP was unchanged quarter-on-quarter at 0.3%, translating into an annual gain of 1.5% for the year, down from 1.7%. Nationwide house price data for September showed marginally higher than expected growth, rising 0.2% for the month, reversing the 0.1% decline of last month. The GfK Consumer Confidence reading for September surprised on the upside, moving from -10 to -9, ahead of the -11 expected. Following August's 0.1% decline, house prices rebounded by 0.2% in September which was above forecasts of a price correction of just 0.1%. The current account deficit widened over the second quarter of 2017 from £22.3bn to £23.2bn.
  • In the Eurozone, measures of economic confidence were positive across the board. The economic sentiment index rose by 1.1 point to a ten-year high of 113, against 112 expected. Both the business climate (1.34 versus 1.12 expected) and industrial confidence components (6.6 versus 5.2 expected) surpassed consensus estimates. Meanwhile, the final reading for consumer confidence was unchanged at -1.2. The Eurozone flash estimate for annual consumer price inflation for September was unchanged at 1.5%, just shy of the forecast of 1.6%. However data for Germany was less encouraging over the week. The IFO business climate index, a widely followed gauge of the current German business climate and of expectations for the next six months, pulled back to 115.2 in September from 115.9 previously and below the expected level of 116. Similarly, retail sales figures for August came in short of expectations, declining 0.4% month-on-month against expectations of a 0.5% increase.
  • Industrial production in Japan rebounded strongly in August, to rise by 2.1%, surpassing forecasts of 1.8% growth. Production fell by 0.8% in the previous month. The jobless rate met expectations and stood firm at 2.8%. The job-to-applicant ratio was also unchanged at 1.52, slightly below consensus estimates of 1.53. Amid a tight job market, annual consumer price inflation ticked higher to 0.7% from 0.4% thereby outperforming expectations of a 0.6% increase in prices. Retail sales fell by more than expected over August. Sales slumped by 1.7%, below forecasts of a 0.5% fall while overall household spending growth for the year to August improved to 0.6% from a 0.2% fall in the year to July.
  • Industrial profits in China increased by the most in four years as profits jumped by 24.0% in the year to August; up from the previous reading of 16.5%. Elsewhere, the final reading of the current account surplus narrowed from $52.9bn to $50.9bn.
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