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Aon Retirement and Investment Blog

Weekly Update - 22 October 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets ended up being unchanged over the week. The MSCI AC World Index was flat in local currency terms. However, sterling weakness pushed up returns to 0.7% in sterling terms. US corporate earnings reports were encouraging, particularly in the financial sector. The Consumer Staples sector was the biggest mover in sterling terms, rising 3.7%, whilst Energy stocks underperformed, falling 0.5%.
  • The UK was the best performing region last week in local currency terms (0.8%), pushed up by the Consumer Staples and Healthcare sectors. Broad sterling weakness also provided support for more internationally-focused blue-chip stocks. There was little progress on Brexit negotiations despite a meeting of European leaders on Wednesday with talks still deadlocked over the Irish 'backstop' and the political declaration on the future relationship. Developed Pacific ex Japan was the best performing region in sterling terms (1.3%). Emerging Market equities were the worst performing region both in local currency (-1.0%) but flat in sterling terms (0.0%) in a week in which the Chinese economy reported its slowest quarterly growth in almost a decade.
  • UK gilt yields fell across all maturities over the week in which the UK posted weak inflation and retail sales data. Both the 10-year and 20-year UK gilt yield fell by 9bps each to 1.55% and 1.91% respectively. 10-year US treasury yields rose by 6bps to 3.20% over a week which saw the US Federal Reserve (Fed) signaling at further interest-rate rises which could surpass the Fed’s ‘neutral level’ for more restrictive policy. In Europe, German bund yields fell by 7bps to 0.43% and French government bond yields fell by 4bps to 0.82%. Italian government bond yields rose by 10bps to 3.62% after the European Commission raised concerns about the country’s budget not complying with EU spending rules. The spread between yields on 10-year Italian and German bonds briefly reached the highest level since 2013, ending the week at 319bps. Portuguese sovereign bond yields fell by 1bp to 2.03% in a week in which the Moody’s upgraded the country’s credit rating to investment grade.
  • The UK 20-year real yield fell by 3bps to -1.55% and the Over 5-year real yield fell by 7bps to -1.49%. 20-year breakeven inflation fell by 4bps to 3.42%.
  • 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. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) rose by 2bps to 123bps.
  • The S&P GSCI fell by 1.2% in USD terms over the week. Energy prices fell by 1.5% as the price of Brent Crude oil fell by 0.8% to US$80/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% whilst gold prices rose by 0.7% to US$1,228/Oz.
  • Sterling depreciated against major currencies over the week, falling by 0.9% against the US dollar, 0.3% against the euro and 0.5% against the yen. The Japanese yen depreciated by 0.3% against the US dollar, ending the week at ¥112.50/$. The Euro was the best performing major currency, appreciating by 0.6% versus the US dollar.
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.
  • A number of UK economic releases fell short of expectations last week as the CPI inflation rate fell to 2.4% for the year to September versus 2.7% in August and market expectations of 2.6%. Core CPI inflation declined to 1.9% from 2.1% in the previous month. Elsewhere, the ILO unemployment rate remained at 4.0% in the three months to August 2018 but employment data disappointed market expectations and declined by 5,000; the first fall in nearly a year. Retail sales data also came in below consensus estimates with sales falling 0.8% in September – though August's release was revised up slightly to 0.4%. This marked the largest decline since March as food purchases fell 1.5%, the most since October 2015.
  • 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%.
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