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Aon Retirement and Investment Blog

Weekly Update - 26 September 2016

NEW INTELLECTUAL CAPITAL

  • Radar. Provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health. 
  • Discount Rate Update. Average U.S. discount rates decreased by 4 basis points in August as investors continued to seek assets with higher yields. While Treasury rates moved higher across the curve, the average plan sponsor’s discount rate still decreased during the month as credit spreads compressed.
  • Global Invested Capital Market. The concept of a world market portfolio features prominently in many financial theories and models and serves as an important foundation of our asset allocation work for our clients. This research provides information on each asset’s share of the invested capital markets as well as illustrates the historical growth and composition of global invested capital markets since 2004.
  • Factor Investing. What’s the Big Deal with Low Volatility Equities? This paper, authored by our Global Asset Allocation team in the UK, examines low volatility investing as part of a wider Aon research project covering factor investing. An explanation of factor investing, the low volatility premium, risks and our outlook are provided.

MARKET MOVES (as of September 23, 2016)

Equities
  • Equity markets rallied globally as the US Federal Reserve (Fed) lowered their expectations for rate rises next year. The MSCI World Index rose 2.0% outperforming S&P 500 which rose 1.2% over the week. On a year to date basis, S&P 500 has outperformed MSCI World (7.6% vs. 6.2%).
  • US Small Cap stocks outperformed Large Cap stocks as the Russell 2000 rose 2.5% over the week whereas the S&P 500 rose 1.2%. On a year to date basis, Small Cap stocks have outperformed Large Cap stocks (11.6% vs. 7.6%). Growth stocks marginally outperformed Value stocks last week (1.3% vs. 1.2%) as measured by MSCI USA indices. On a year to date basis, Value stocks have outperformed Growth stocks, returning (9.6% vs. 5.6%).
Bonds 
  • 10 year US Treasury yield fell by 7bps to 1.62% over the week. 30 year US Treasury yield fell by 10bps to 2.35% over the same period. Yields fell after the US Fed left its interest rate unchanged and lowered projections for future rate hikes.
  • 20 year TIPS yields fell by 15bps to 0.29% over the week. 20 year Breakeven rose by 7bps to 1.47%.
  • Credit spreads fell over the week. Barclays Capital Long Credit Index spread over treasury yields fell by 4bps and the Merrill Lynch US Corporate Index spread fell by 2bps, thus ending the week at 195bps and 141bps respectively. The US high yield bond spread over US treasury yields ended the week 17bps lower at 510bps. The spread of USD denominated EM debt over US treasury yields finished the week 14bps lower at 332bps.
Commodities
  • The S&P GSCI rose by 1.0% in USD terms over the week. The energy sector rose by 1.0% due to the 3.1% increase in WTI crude oil prices, ending the week at USD 44/BBL. The increase was driven by progressive talks between Saudi Arabia and Iran regarding scaling back production. Industrial metals rose by 2.8% as copper prices increased by 1.3% to $4,833/MT. Agricultural prices rose 0.5% and gold prices rose 2.2%, finishing the week at $1,340/ounce.
Currencies
  • The US dollar depreciated against major currencies over the week except for the sterling. The US dollar appreciated 0.9% against sterling, ending the week at $1.30/£. US dollar depreciated 0.5% against the euro, finishing the week at $1.12/€. The Japanese yen appreciated by 1.3% against the US dollar, ending the week at ¥100.96/$.
Economic Releases
  • US jobless claims fell by 8k to 252k, the largest drop since early July which surprised analysts who were expecting a small increase. Filings have been below 300,000 for 81 straight weeks - the longest streak since 1970 and typical of a healthy labor market. US housing activity declined, after two straight months of solid increases, as housing starts fell slightly short of expectations (1.14m vs 1.19m expected).
  • In Europe, provisional figures for the Markit Manufacturing Purchasing Managers' Index (PMI) showed an increase over the month from 51.7 to 52.6. The provisional Services PMI fell from 52.8 to 52.1, in line with what analysts were expecting and the overall composite fell by 0.3 to 52.6. It still remains over 50, signaling growth in the economy. The EU wide consumer confidence survey rose by 0.3 points to -8.2 and remains above the long term average of -12.5. In Germany, the provisional composite PMI fell from 53.3 to 52.7. The provisional Manufacturing PMI increased from 53.6 to 54.3 whilst the services PMI fell from 51.7 to 50.6.
  • The Japanese preliminary manufacturing PMI for September entered expansionary territory for the first time in seven months as the index rose to 50.3 from 49.5 in August. Exports fell by 9.6% in the year to August whereas imports fell by 17.3% over the same period. This led to an adjusted trade surplus of ¥408bn in August, lower than the consensus expectation of ¥494bn, as exports declined more sharply than imports incorrect. Consumption data was weak as department store sales fell sharply by 6.0% over the twelve months to August and sales in the capital also fell sharply by 5.9%. Similarly, supermarket sales also fell 2.9% over the same period.
  • There was very little data from China in the week. Average month-on-month growth of new home prices accelerated to 2.2% in August, a rebound from a low of 1.3% in June. The MNI China Business Sentiment Indicator rose from 54.1 to 55.8 in September leaving confidence at the highest level since August 2015.

Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

The information contained above should be regarded as general information only. That is, your personal objectives, needs or financial situation were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of acting on this information, particularly in the context of your own objectives, financial situation and needs. Nothing in this document should be treated as an authoritative statement of the law on any particular issue or specific case. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal, tax or investment advice. Please consult with your independent professional for any such advice. The information contained within this blog is given as of the date indicated and does not intend to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information since the date of publication, or any obligation to update or provide amendments after the original publication date. The blog content is intended for professional investors only.


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