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Aon Retirement and Investment Blog

Weekly Update - 29 October 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets fell sharply over the week with all the regions posting negative returns. The MSCI AC World Index fell by 3.6% in local currency terms and 2.1% in sterling terms with all sectors generating negative returns. The index is now down -0.2% year-to-date and -7.7% in Q4 2018. A variety of factors were behind the recent falls such as poor technology stock performance following reported revenue slowdown for Alphabet and Amazon in Q3 2018 as well as continued fears over Chinese growth and heightened geopolitical tensions. The CBOE Volatility Index (VIX), which measures volatility in the US equity market, was again close to its highest level in more than six months as it crossed its long-term average of 20.
  • The UK was the best performing region last week in local currency terms as it fell the least at -1.6%, with companies with international earnings doing well due to weak sterling. Emerging Market equities were the best performing region in sterling terms, falling only -1.6%. Japan was the worst performing market both in local currency (-5.5%) and sterling terms (-2.9%) with all sectors generating negative returns. Poor performance in the highly-weighted Industrial and Information Technology stocks.
  • Globally, bond yields fell across all major developed markets as demand for safe-haven assets increased. UK gilt yields fell across all maturities over the week in which the 10-year UK gilt yield fell by 17bps to 1.38% and the 20-year UK gilt yield fell by 14bps to 1.77%. The 10-year US treasury yields fell by 12bps to 3.07% over the week in which the US posted encouraging economic growth data. In Europe, bond yields fell across the region in a week in which the Eurozone manufacturing growth hit an over 2-year low. Both the German bund and French government bond yields fell by 8bps each to 0.35% and 0.73% respectively. Italian government bond yields fell by 17bps to 3.45% in a week where Moody’s downgrading the country’s credit rating but changed its outlook to stable. As widely expected, the European Union rejected Italy’s draft budget and gave the country three weeks to submit a new budget plan.
  • The UK 20-year real yield fell by 13bps to -1.68% and the Over 5-year real yield fell by 10bps to -1.59%. 20-year breakeven inflation fell by 3bps to 3.39%.
  • Credit spreads widened over the week. The US high yield bond spread over US treasury yields rose by 34bps to 385bps and the spread of USD denominated EM debt over US treasury yields rose by 16bps to 365bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) rose by 3bps to 126bps.
  • The S&P GSCI fell by 1.4% in USD terms over the week. The energy sector fell by 2.1% as the price of Brent Crude oil fell by 2.7% to US$78/BBL. Industrial metals fell by 0.8% as copper prices declined by 0.5% to US$6,159/MT. Agricultural prices fell by 0.7% whilst gold prices rose by 0.5% to US$1,234/Oz.
  • Sterling depreciated against major currencies over the week. The US dollar appreciated by 1.7% against sterling, ending the week at $1.28/£. The euro appreciated by 0.6% against sterling, finishing the week at €1.13/£. The Japanese yen appreciated by 1.0% against the US dollar, ending the week at ¥111.44/$.
ECONOMIC RELEASES
  • Although slowing from the 4.2% growth recorded in the previous quarter, the initial reading for third quarter US GDP growth showed that the US economy expanded by 3.5%; above expectations of a slightly slower 3.3% increase. Purchasing Managers’ Index (PMI) data, which can be used as leading indicator for future growth, pointed towards further economic strength with both manufacturing and services PMI’s exceeding analyst forecasts and increasing to 55.9 and 54.7 from 55.6 and 53.5, respectively. Orders for durable goods defied expectations of a 1.5% decline in September and edged 0.8% higher, although this is markedly down from August’s 4.6%. However, once the more volatile transportation component has been excluded, durable goods orders increased by just 0.1%.
  • UK economic releases continued to come in below expectations. The Confederation of British Industry’s (CBI) Business Optimism indicator for Q4 2018 unexpectedly fell to -16 from -3 in Q2 – its lowest level since the -47 reading that followed the EU referendum. Underlying the fall was a sharp decline in export prospects, which fell at their fastest pace since the Eurozone crisis. The CBI industrial orders balance was also down in October, moving to -6 from -1 in September and below market expectations of +2. Elsewhere, mortgage approvals continued their decline in September as they fell to 38,505 from 39,241 in August. The reading was below expectations of 39,000 and marked a 6.7% fall from a year earlier.
  • In Europe, the October Markit Eurozone Manufacturing PMI fell to 52.1 from 53.2 in September, below market expectations of a more modest fall to 53.0. This marked the lowest reading in 26 months, as new orders fell for the first time since November 2014 and business confidence hit its lowest level since December 2012. The Markit Services PMI also disappointed at 53.3 versus expectations 54.5 and the previous 54.7 reading in September. German PMIs were also disappointing, as Manufacturing PMI fell to 52.3 from 53.7 whilst Services PMI fell to 53.6 from 55.9. Moreover, the IFO Business Climate index for Germany fell to 102.8 in October from 103.7 in September, as sentiment deteriorated in all sectors bar construction.
  • In Japan, growth in the manufacturing sector accelerated in October with the preliminary Nikkei PMI manufacturing index rising to 53.1 from September’s reading of 52.5. Retail sales slowed to 2.1% over the year to September and thereby matched consensus estimates. On a seasonally-adjusted basis, sales declined by 0.2% in September from August’s 0.9% reading. The final reading for machine tool orders for the year to September was increased slightly to 2.9% from 2.8%.
  • Against a backdrop of elevated US-China trade tensions, the yuan fell to its weakest level in a decade. In a week that was light of economic releases, industrial profit growth slowed for a fifth consecutive month to 4.1% over the year to September, down from the previous reading of 9.2%. According to the National Statistics Bureau, downward pressure on earnings was exerted by a slowdown in both production and sales as well as slower price increases.
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