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Aon Retirement and Investment Blog

Weekly Update - 01 October 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets ended lower over the week with noticeable differences in regional equity market returns. The MSCI AC World Index fell 0.3% in local currency terms and 0.1%in sterling terms. Japan was the best performing major market both in local currency (1.5%) and sterling terms (1.0%) as a weakened yen benefitted exporters’ stocks. The US and Japan held talks to resume bilateral trade ties. Developed Europe ex UK was the worst performing region both in local currency (-0.6%) and sterling terms (-1.5%), dragged down by banking sector stocks after Italy’s populist coalition government agreed a budget that looks set to increase public borrowing. The diplomatic relationship between the US (-0.5%) and China (-0.8%) was further strained as Trump accused China of meddling in the upcoming US mid-term elections against a backdrop of escalating trade tensions as 10%tariffs on US$200bn of Chinese imports came into effect. In more positive trade news, Canada agreed to join a US deal with Mexico to revamp Nafta under a new name, the United States-Mexico-Canada Agreement. The deal will be signed on November 30 and congress will hold a vote on the deal in 2019.
  • UK gilt yields rose across all maturities over the week. Both the 10-year and the 20-year UK gilt yield rose by 2bps each to1.57% and 1.88% respectively. The 10-year US treasury yield fell by 1bp to 3.05% in a week which saw the US Federal Reserve (Fed) raising its federal funds rate to a range of 2.0-2.5%. The Fed signaled for a more gradual rate hike path than investors had expected given recent upbeat economic data. In Europe, German bund yields rose by 2bps to 0.47% and French government bond yields rose by 3bps to 0.81%. Italian government bond yields rose sharply by 33bps to 3.18% as the country’s populist coalition agreed a budget with a fiscal deficit of 2.4%, significantly higher than finance minister Giovanni Tria’s preferred target level of a 1.6% deficit.
  • The 20-year real yield in the UK was unchanged at -1.56% whilst the Over 5-year real yield rose by 1bp to -1.46%. 20-year breakeven inflation rose by 2bps to 3.39%.
  • The US high yield bond spread over US treasury yields fell by 1bp to 324bps and the spread of USD denominated EM debt over US treasury yields fell by 8bps to 335bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) remained unchanged at 119bps.
  • The S&P GSCI rose by 2.7% in USD terms over the week. The energy sector rose by 4.4%as the price of Brent Crude oil rose by 5.0% to US$83/BBL. Crude oil prices touched the highest level since November 2014 after OPEC declined to increase production amid reducing supply due to the ongoing Iranian sanctions. Industrial metals fell 0.9% as copper prices fell by 0.4% to US$6,180/MT. Agricultural prices fell by 1.5% and gold prices fell by 1.0% to US$1,187/Oz.
  • Sterling appreciated against major currencies (except for the US dollar) over the week. The US dollar appreciated by 0.4% against sterling, ending the week at $1.30/£. The euro depreciated by 0.8% against sterling, finishing the week at €1.12/£. The Japanese yen depreciated by 0.9% against the US dollar, ending the week at ¥113.59/$.
ECONOMIC RELEASES
  • The US Federal Reserve further tightened monetary policy with the federal funds rate target increasing to 2.00%-2.25%. This move marks the first time in over a decade where the federal funds rate will be above the Fed's preferred measure of inflation, the core Personal Consumption Expenditure price index, which remained as expected at 2.0% for August. Upbeat labour market outlooks helped consumer confidence in the US rise to its highest levels in over eighteen years. The Conference Board's Consumer Confidence index increased to 138.4; defying expectations of a slight weakening in the reading to 132.1 from 134.7. Whilst durable goods orders surged by 4.5% over August, orders for US capital non-defense goods excluding aircraft (a proxy for business spending) unexpectedly dipped by 0.5% following four consecutive month of strong gains. Analysts expected a 0.4% increase.
  • UK economic releases were broadly negative over the last week. The final reading for Q2 year-on-year GDP growth was revised down slightly by 0.1% to 1.2%. Household consumption rose faster than first thought but a significant downward revision to total business investment, which fell 0.7% in the second quarter against the initial reading of a 0.5% increase, dragged down the year-on-year growth figure. Elsewhere, the Q2 2018 current account balance shifted to its largest deficit since Q2 2017 at £20.3bn, as the goods deficit rose by £2.7bn and the primary income deficit rose by £2.1bn.
  • In Europe, year-on-year M3 money supply growth slowed to 3.5% in August versus market expectations of 3.9% and 4.0% in July. September inflation data was mixed with headline consumer price inflation increasing slightly to 2.1% but core CPI falling back to 0.9%, below expectations of a 0.1% increase to 1.1%. This accompanied a pickup in German harmonized consumer price inflation which increased to 2.2% in September from 1.9% in August. The German IFO business climate index fell 0.2 points to 103.7 in September as a drop in manufacturing sentiment outweighed gains across services, retailers and construction. In more positive news, German unemployment fell 23k in September, better than market expectations of a 9k fall. This took the unemployment claims rate to 5.1%, its lowest level since German reunification in 1990.
  • In Japan, the jobless rate for August stood at 2.4%, slightly lower than the market expectation of it remaining unchanged at 2.5%. The job-to-applicant ratio remained unchanged at 1.63, its highest level since 1974. Retail sales rose by 2.7% over the year to August, ahead of the forecasted 2.0% increase and 1.5% reading for July. Japanese industrial production rebounded by 0.7% in August based on preliminary data. Although the reading showed a pickup from the 0.1% decline in July, August's reading remained short of the 1.4% forecasted increase.
  • Chinese economic data was generally disappointing as escalating US-China trade tensions continue to impact the world’s second largest economy. Industrial profit growth slowed for a fourth consecutive month to 9.2% over the year to August, sharply down from the previous reading of 16.2%. The official Chinese manufacturing PMI for September fell by 0.5 points to 50.8 – below expectations of 51.2.  The gauge for new export orders contracted for the fourth consecutive month by falling to 48, the lowest reading since 2016. However, the non-manufacturing PMI rose to 54.9 from 54.2, against the estimated fall to 54. The Caixin Manufacturing PMI, which is more focused on private Chinese businesses, fell by 0.6 points to 50.0, the lowest level for 15 months.
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