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Aon Retirement and Investment Blog

Weekly Update - 22 October 2018

NEW INTELLECTUAL CAPITAL

  • Aon’s Chief Investment Officer Newsletter. This issue of the CIO newsletter takes a look at four different interlocking cycles that make up the current “late cycle” we have mentioned before, plus our update on current positioning at the end of the quarter.
  • U.S. Corporate Pension Liability Hedging Views. This update from the U.S. practice provides corporate pension liability hedging views as of September 30, 2018.
  • U.S. Discount Rate Update. Average discount rates increased during September, as Treasury rates moved higher. In early October, rates have increased by 14 basis points through Monday, October 15th.
MARKET MOVES (Week ending October 21, 2018)
Equities
  • Global equity markets ended up being unchanged over the week. US corporate earnings reports were encouraging, particularly in the financial sector. Both the S&P 500 and MSCI World index remained unchanged over the week. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (5.1% vs. 0.1%). 
  • US Small Cap stocks underperformed Large Cap stocks over the week as the Russell 2000 index fell by 0.3% whilst the S&P 500 index remained unchanged. On a year-to-date basis, the Russell 2000 Index has underperformed the S&P 500 Index (1.4% vs. 5.1%). Growth stocks fell by 0.9% while Value stocks rose by 0.9% over the week as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (9.1% vs. 0.7%).
Bonds
  • The 10-year US treasury yields rose by 6bps to 3.20% and the 30-year US treasury yield rose by 7bps to 3.38% over the week. The US Federal Reserve (Fed) signaled at further interest rate rises, potentially surpassing the Fed’s ‘neutral level’ to push rates into restrictive territory. The 20-year TIPS yield rose by 6bps to 1.18% and the 20-year breakeven remained unchanged at 2.13%. 
  • The spreads on the Bloomberg Barclays Capital Long Credit Index went up by 3bps to 158bps and the Bank of America Merrill Lynch US Corporate Index rose by 1bp to 117bps. The US high yield bond spread over US treasury yields fell by 3bps to 351bps and the spread of USD denominated EM debt over US treasury yields fell by 1bp to 349bps over the week.
Commodities   
  • The S&P GSCI fell by 1.2% in USD terms over the week. The energy sector fell by 1.5% as the price of WTI Crude oil fell by 3.1% to US$69/BBL. Industrial metals fell by 1.4% as copper prices declined by 2.1% to US$6,192/MT. Agricultural prices fell by 0.1% and gold prices rose by 0.7% to US$1,228/Ounce. 
Currencies
  • The US dollar appreciated against major currencies over the week. The US dollar appreciated by 0.9% against sterling, ending the week at $1.30/£. The US dollar appreciated by 0.6% against the euro, finishing the week at $1.15/€. The US dollar strengthened by 0.3% against the Japanese yen, ending the week at ¥112.50/$. The US dollar appreciated by 0.6% against the Canadian dollar, ending the week at C$1.31/$.  
Economic Releases
  • Disappointing restaurant receipts overshadowed an otherwise general increase in US retail sales, and ultimately led to September's release falling short of the expected 0.6% increase. Retail sales edged just 0.1% higher over the month with the effects of Hurricane Florence cited as a possible cause for the miss in expectations. While industrial production increased for the fourth successive month and outperformed analyst forecasts in the process (0.3% vs. 0.2%), momentum continues to slow in the industrial sector. For the third quarter, industrial output grew at an annualised rate of 3.3%, down from the 5.3% posted over Q2. Despite broader economic strength, the US housing market continues to struggle with existing home sales falling by the most in two years in September. Sales dropped by 3.4% over the month and with it extended the fall in sales to six straight months. 
  • In Europe, The ZEW indicator of economic sentiment for the Euro Area came in below expectations, falling to its lowest level since August 2012 in October at -19.4 from -7.2 in September. The equivalent German reading was no better, also falling to its lowest level since August 2012 at -24.7 from -10.6 and below market expectations of -12. Elsewhere, the Euro Area trade surplus continued to narrow in August, falling to €11.7bn from €15.2bn a year earlier, as imports (+8.4% YoY) advanced faster than exports (+5.1% YoY). In more positive news, Euro Area construction output rose 2.5% year-on-year in August, above expectations of 1.7% and 2.2% in July.
  • In Japan, headline consumer price inflation slowed from 1.3% to 1.2% for the year to September and came in below consensus estimates of 1.3% increase. However, Japanese core CPI inflation, which excludes more volatile food but not energy prices, rose by 1.0% matching consensus estimates. Japan posted a trade surplus of ¥139.6 billion in September, rebounding from August’s ¥444.6 billion deficit and higher than analyst forecasts for a ¥45.1 billion deficit. Export growth contracted by 1.2% for the year to September, significantly lower than the 6.6% growth posted in the previous month and below expectations of 2.1% growth. Imports rose by 7.0% over the same period, less than half of 15.4% increase seen in August and well below the estimated 13.7% increase. 
  • Concerns on the impact of escalating trade tensions continue to present headwinds in China. Chinese economy recorded the slowest pace of economic growth since the global financial crisis, with the economy decelerating from an annualised 6.7% to 6.5% over the third quarter of 2018. A similar trend was observed with industrial production, as production growth slowed to 5.8% for the year to September; down from 6.1% in the previous month and below 6.0% forecasted. Conversely, fixed asset investment grew by 5.4% for the year to September, beating economist forecast of 5.3% growth. In addition, retail sales growth accelerated to 9.2% over the year to September, beating analyst forecasts of growth remaining at 9.0%.
 Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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