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Aon Hewitt Retirement and Investment Blog

Weekly Update - 30 October 2017 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • Connections: Aon Hewitt Investment Consulting’s Newsletter for institutional investors in the non-profit sector.
MARKET MOVES
  • Global equity markets edged higher over the week, supported by stronger than expected US corporate earnings (particularly in the technology sector) and Q3 2017 economic growth data. The MSCI AC World Index rose 0.4% in local currency terms and 0.5% in sterling terms. Japan was the best performing market both in local currency terms (2.2%) and sterling terms (2.5%) as equities rallied after Prime Minister Shinzo Abe’s ruling coalition party won with a good majority in the snap elections. The UK was the worst performing market in local currency terms returning -0.2%. Developed Pacific ex Japan was the worst performing market in sterling terms (-1.0%).
  • UK gilt yields rose across all maturities as strong UK economic growth in Q3 2017 raised expectations for an interest rate rise by the Bank of England in the upcoming monetary policy meeting. The 10 year UK gilt yield rose by 2bps to 1.39% and the 20 year UK gilt yield rose by 1bp to 1.92%. The 10 year US treasury yield rose by 5bps to 2.43%. German bund yields fell by 7bps to 0.39% and French government bond yields fell by 6bps to 0.64% as the European Central Bank (ECB) extended its quantitative easing programme (from January to September 2018) however reducing monthly bond purchases to €30bn from €60bn. Spanish bond yields fell by 8bps to 1.59% as Spanish government dissolved the Catalan parliament to implement a direct rule after the latter declared independence and passed a vote to become a separate republic.
  • UK real yields rose over the week. Both the 20 year real yields and the Over 5 year real yield rose by 5bps each to -1.51% and -1.50% respectively. 20 year breakeven inflation fell by 3bps to 3.34%.
  • The US high yield bond spread over US treasury yields rose by 2bps to 344bps. The spread of USD denominated EM debt over US treasury yields finished the week 2bps higher at 282bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was unchanged at 103bps.
  • The S&P GSCI rose by 2.4% in USD terms over the week. The energy sector rose by 3.5% as the price of Brent crude oil sharply increased by 4.4% to $60/BBL (the highest level in more than two years). Industrial metals fell by 0.1% as copper prices decreased by 1.7% to $6,801/MT. Agricultural prices rose by 1.1% whilst gold prices fell by 1.0% to $1,270/ounce.
  • Sterling depreciated against major currencies (except for the euro) over the week. The US dollar appreciated by 0.6% against sterling, ending the week at $1.31/£. The euro weakened by 1.2% against sterling, finishing the week at €1.13/£. The Japanese yen depreciated by 0.4% against the US dollar, ending the week at ¥113.84/$.
ECONOMIC RELEASES
  • Headline GDP growth figures showed few signs of a deceleration in the US economy from the impact of hurricane season. GDP growth (quarter-on-quarter, annualised) outperformed expectations of 2.6% growth with the economy expanding by 3.0% over the third quarter; slightly lower than the previous quarter’s 3.1% growth. Disappointing consumer and construction spending was offset by strong inventory investment as US businesses anticipated higher levels of demand. A marked slowdown in orders for durable goods failed to materialise with orders rising by 2.2% over September, the most since June this year, and ahead of the forecasted 1% rise. Forward-looking indicators for the US economy were also strong as the manufacturing Purchasing Managers' Index (PMI) for October exceeded estimates of 53.4 and rose to 54.5 from 53.1. The services PMI unexpectedly increased by 0.6 points to 55.9, after being forecast to fall slightly to 55.2.
  • Economic releases in the UK last week were light on the ground. Initial third quarter growth figures were encouraging with Q3 GDP growth outperforming expectations of 0.3% and advancing by 0.4%; the fastest expansion this year. Annual GDP growth, meanwhile, was in line with forecasts at 1.5%. The level of UK Finance Loans for housing for September decreased more than expected, dropping to 41.6k from 41.8k previously. The Confederation of British Industry's (CBI) distributive trade survey was much softer in October. The retail sector, in particular, looks weak as the CBI's gauge for reported sales in the sector plummeted to -36 from +49 – the fastest drop since early 2009. Analysts had estimated the CBI's measure to decrease to +14. The outlook for UK businesses looks similarly gloomy with the CBI's business optimism measure falling to -11 from +5.
  • In Europe, the ECB announced changes to its quantitative easing programme; monetary stimulus on a monthly basis will be reduced from €60bn to €30bn from January 2018 but would also be extended until September 2018. The Eurozone’s manufacturing PMI was above consensus at 58.6 against the 57.8 forecast which marked a 10 year high. However, the services and composite PMIs were lower than expected, coming in at 54.9 (versus 55.6 expected) and 55.9 (versus 56.5 expected) respectively. Similarly in Germany, the manufacturing PMI was above expectations at 60.5 versus 60 forecasted, but both the services (55.2 against 55.5 expected) and composite PMI (56.9 against 57.5 expected) lagged forecasts. Consumer confidence in the Eurozone in October edged slightly higher to -1.0 from -1.2, the highest level since April 2001. In Germany, the October IFO survey data was also encouraging, as the business climate index unexpectedly rose to 116.7 from 115.3.
  • In Japan, consumer price inflation over the year to September met expectations and remained at 0.7%. Core consumer price inflation (which excludes fresh food and energy) was also in line with forecasts rising by 0.2% over the same period. Growth in the Japanese manufacturing sector slightly slowed down with the preliminary Nikkei manufacturing PMI falling to 52.5 in October from 52.9. Nationwide department sales over to September increased by 4.6%, up from 3.6%.
  • It was a quiet week in terms of economic releases in China. Nonetheless, data showed that the industrial sector remains very buoyant as profit growth in the sector rose to 27.2% in the year to September from 24.0% previously. Sharp increases in the prices of finished goods, such as steel and copper, helped profits increase by the most in nearly six years.
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