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Aon Retirement and Investment Blog

Weekly Update - 09 October 2017 (UK/Europe)


  • Global equity markets made gains for a fourth consecutive week last week, supported by solid manufacturing data across major economies. The MSCI AC World Index rose 1.2% in local currency terms. UK Prime Minister Theresa May’s keynote speech at the Conservative Party was viewed as disappointing toward the end of the week which led to growing calls for her resignation, putting downward pressure on sterling. This resulted in the MSCI AC World Index returning 3.6% in sterling terms. All the regions posted positive returns both in local currency and sterling terms over the week. Emerging markets were the best performing region both in local currency (2.3%) and sterling terms (4.8%), driven in part by a rally in Chinese equities. Developed Europe ex UK was the worst performing region in local currency terms (0.5%) as political instability in Spain due to the Catalonian independence referendum grew. The UK returned the least in sterling terms at 2.1%.
  • The 10 year UK gilt yield was unchanged at 1.40% whilst the 20 year UK gilt yield rose by 3bps to 1.95%. The 10 year US treasury yield rose by 4bps to 2.37% as solid wage growth data increased expectations for another interest rate hike this year. German bund yields were unchanged at 0.46% whilst French government bond yields fell by 1bp to 0.74%. Spanish bond yields rose by 6bps to 1.67% as there was a sell-off due to increasing concern over Catalonia’s possible independence declaration from Spain.
  • UK real yields fell over the week. 20 year real yields fell by 3bps to -1.57% and the Over 5 year real yield fell by 5bps to -1.56%. 20 year breakeven inflation rose by 6bps to 3.43%.
  • The US high yield bond spread over US treasury yields fell by 2bps to 352bps. The spread of USD denominated EM debt over US treasury yields finished the week 3bps lower at 284bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was unchanged at 104bps.
  • The S&P GSCI fell by 1.9% in USD terms over the week. The energy sector fell by 3.6% as the price of Brent crude oil decreased by 3.8% to $55/BBL. Industrial metals rose by 2.4% as copper prices increased by 2.9% to $6,617/MT. Agricultural prices fell by 0.5% and gold prices fell by 0.9% to $1,272/ounce.
  • Sterling depreciated against major currencies over the week as political uncertainty escalated. The US dollar appreciated by 2.7% against sterling, ending the week at $1.31/£. The euro strengthened by 2.0% against sterling, finishing the week at €1.11/£. The Japanese yen depreciated by 0.2% against the US dollar, ending the week at ¥112.81/$.
  • The impact from Hurricane Harvey and Irma distorted the September US jobs report. The US labour market saw the first monthly drop in employment with a decline of 33,000 jobs (mostly in the leisure and retail sectors) in September against expectations of an 80,000 gain. Despite the decline in employment and the increase in the labour force participation rate (up to 63.1% from 62.9%), the unemployment rate unexpectedly fell to 4.2% from 4.4% which was below forecasts of an unchanged unemployment rate. Wage growth also accelerated with average hourly earnings in the year to September up 2.9% from 2.7% recorded in August and ahead of estimates of a 2.6% increase. Aside from the relatively positive jobs report, the US economy looks to have accelerated in September as the Institute of Supply Management's manufacturing index rose to a thirteen-year high of 60.8 from 58.8. Analysts had expected a slight slowdown, predicting a 0.7 point decrease in the index.
  • In the UK, economic data was mixed over the week. The Markit UK manufacturing Purchasing Managers' Index (PMI) showed a slowdown in activity as the index fell to 55.9 in September. This was short of the consensus forecast of 56.2 and down from 56.7 previously. The construction PMI moved into contractionary territory (index level below 50) for September, down to 48.1 from 51.1 previously. The Markit UK Composite PMI index, however, increased by 1 point to 54.1 in September, ahead of the 53.8 expected. This was largely driven by a surprise increase in the services PMI, which increased to 53.6. It was expected that the index would be unchanged at 53.2. The Halifax house price index grew ahead of expectations of no growth over September, up 0.8% month-on-month, but below the 1.5% growth recorded in August.
  • In the Eurozone, the final Markit manufacturing PMI reading for September was down 1 point to 58.1, with the final composite index remaining unchanged at 56.7. Retail sales data for the Eurozone was weaker than expected, falling 0.5% over August, down from a 0.3% decrease in July and expected growth of 0.3%. In the year to August, sales grew at a disappointing 1.2%, down from 2.3% in July and 2.6% as forecasted by analysts. The unemployment rate in the area remained at 9.1% in August, below consensus estimates of a slight decrease to 9.0%. Encouragingly, factory orders in Germany grew 3.6% over the month of August, rebounding from the previous 0.4% decrease and far exceeding expectations of 0.7%. The Producer Price Index for Europe also beat market expectations at 2.3% for the year to August, with prices increasing by 2.5% from 2.0% recorded in July.
  • Japanese economic data was generally positive. The Bank of Japan’s Q3 2017 Tankan survey revealed an optimistic outlook for the Japanese manufacturing sector. The Tankan large manufacturer’s index rose to 22 from the previous reading of 17. Wage growth data was encouraging as labour cash earnings rose by 0.9% in the year to August, due to bonus payments, against a forecasted increase of 0.5%. Real wages, which take inflation into consideration, rose by 0.1% over the same period after decreasing by 1.1% previously.
  • The official Chinese manufacturing PMI came in higher at 52.4 from 51.7 and above forecasts of a slight decrease to 51.6. Conversely, the Caixin manufacturing PMI, which focuses more on small and mid-sized businesses, moved to 51.0 from 51.6 and below expectations of 51.5. The services sector accelerated strongly with the non-manufacturing index increasing by 2 points to 55.4.
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