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Aon Retirement and Investment Blog

Weekly Update - 09 October 2017 (UK/Europe)


  • U.S. Discount Rate Update. Average discount rates increased by three basis point in September, as rising Treasury rates were largely offset by tightening spreads. In early October, rates have decreased by one basis point through Tuesday, October 10th. The average plan sponsor’s discount rate has now decreased by 39 basis points in 2017.
  • Global equity markets advanced in a week in which the International Monetary Fund (IMF) upgraded global economic growth forecasts. The MSCI AC World index rose 0.4% in local currency terms. However, sterling strength pushed down returns to -1.0% in sterling terms. Emerging markets were the best performers in local currency terms (1.4%), driven in part by a rally in South Korean equities, as geopolitical tensions in the Korean peninsula eased. Developed Pacific (excluding Japan) was the best performing region in sterling terms (0.4%). The US was the worst performing market both in local currency terms (0.1%) and sterling terms (-1.7%).
  • UK gilt yields were broadly unchanged. The 10 year UK gilt yield remained at 1.40% while the 20 year UK gilt yield fell by just 1bp to 1.93%.
  • UK real yields fell over the week. Both the 20 year real yield and the Over 5 year real yield fell by 3bps to -1.60% and -1.59% respectively. 20 year breakeven inflation rose by 1bp to 3.44%.
  • The 10 year US treasury yield fell by 9bps to 2.28% as the Federal Open Market Committee meeting minutes revealed that many policymakers were concerned about sluggish US inflation amid a tight labour market.
  • European government bonds rallied after the European Central Bank (ECB) president Mario Draghi indicated that interest rates would remain lower for longer. According to a Bloomberg report, the ECB may extend its quantitative easing programme (from January to September 2018) with monthly bond purchases reducing to €30.0bn from €60.0bn. German bund yields fell by 6bps to 0.40% and French government bond yields fell by 7bps to 0.67%. Spanish bond yields fell by 7bps to 1.60% as political uncertainty eased in Spain after Catalan leader Carles Puigdemont refrained from formal declaration of Catalonia independence.
  • The US high yield bond spread over US treasury yields rose by 8bps to 360bps. The spread of USD denominated EM debt over US treasury yields ended the week 3bps higher at 287bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 1bp to 103bps.
  • The S&P GSCI rose by 2.6% in USD terms over the week. The energy sector rose by 3.6% as the price of Brent crude oil increased by 3.2% to $57/BBL as Saudi Arabia seeks to cut future oil exports to reduce surplus inventories. Industrial metals rose by 1.6% as copper prices increased by 3.7% to $6,859/MT. Agricultural prices rose by 0.8% and gold prices rose by 2.2% to $1,300/ounce.
  • Sterling appreciated against major currencies over the week. The US dollar depreciated by 1.9% against sterling, ending the week at $1.33/£. The euro weakened by 1.0% against sterling, finishing the week at €1.12/£. The Japanese yen appreciated by 0.8% against the US dollar, ending the week at ¥111.93/$.
  • The disruption caused by the recent hurricane season in the US was evident in September's inflation figures. Consumer price inflation for the year to September rose to 2.2% from 1.9% in the previous month; surging gasoline prices accounted for three-quarters of the increase in the Consumer Price Index (CPI). However, inflation narrowly missed expectations of 2.3%. For a fifth consecutive month, core inflation remained at 1.7%. Although falling short of a forecasted 1.7% increase, retail sales bounced back strongly following a disappointing August (a revised 0.1% drop), rising by 1.6% in September. There was also unanticipated improvement in consumer confidence with the University of Michigan's Consumer Sentiment index rising sharply by six points to 101.1. Analysts had expected a 0.1 point decline to 95.0.
  • Economic releases in the UK were mixed over the course of last week. For the third successive month, the UK's industrial sector improved with production rising by 1.6% in the year to August. This was above the expected 0.9% growth and the previous annual increase of 1.1%. The increase in the industrial sector was largely driven by the strong rise in manufacturing production which rose by 2.8% over the same period – ahead of consensus estimates of a 1.9% increase. The sluggish construction sector outperformed expectations of no change in production over the month of August and rose by 0.6%. This, however, does not fully undo the 1.0% decline experienced over July. Elsewhere, the trade deficit widened by a further £1.4bn to £5.6bn in August while the trade deficit in goods reached an all-time high. Analysts had forecasted the overall trade deficit to narrow to £2.8bn.
  • Similar to the UK, industrial production in the Eurozone exceeded expectations by a wide-margin and rose by 1.4% in August. This was above the revised 0.3% increase recorded in July and also ahead of an estimated 0.6% increase. In particular, German industrial production was strong, rising by 2.6% over August after slightly contracting by 0.1% in the previous month. International trade in Germany was also a positive with exports growing strongly by 3.1% (against forecasts of 1.1% growth) following a mild 0.2% expansion in July. Import growth slowed down to 1.2% from a revised 2.4% in August, but was ahead of consensus estimates of 0.5%. Investor sentiment in the wider Eurozone, as measured by the Sentix Investor Confidence index, surpassed forecasts of a modest 0.3 point increase and rose from 28.2 to a ten-year high of 29.7.
  • In Japan, core machine orders beat expectations of a 1.0% increase and rose by 3.4% in August. This was a second consecutive month of growth although it was a marked deceleration from last month's impressive 8.0% increase. The Tertiary Industry Index slipped by 0.2% in August, below the previous and expected growth rate of 0.1%. The current account surplus outperformed expectations of a narrowing of ¥96.7bn and widened by over ¥60.0bn to ¥2380.4bn. The Economy Watchers’ survey current index rose to 51.3 in September while the outlook component rose to 51.0. Both beat analyst forecasts.
  • Similar to the slowing trend observed in the manufacturing sector for small and mid-sized businesses recorded last week, the Caixin services Purchasing Managers' Index (PMI) fell from 52.7 to 50.6. Although falling short of a 10.0% increase, export growth rose to 8.1% in the year to September, up from a revised 5.1%. Imports meanwhile surged by 18.7%, up from an upwardly revised 13.5% and beating an expected 14.7% increase. As a result, the trade surplus missed forecasts of a fall to $38.0bn and moved even lower to $28.5bn.
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