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Aon Retirement and Investment Blog

Weekly Update - 04 September 2017 (UK/Europe)


  • Global equity markets advanced for a second consecutive week despite ongoing geopolitical concerns in the Korean peninsula and destruction caused by Hurricane Harvey in the US. Encouraging economic data, particularly in the manufacturing sector, across major economies supported global equities. The MSCI AC World Index rose by 1.0% in local currency terms. All the regions posted positive local returns over the week. The US market returned the most at 1.5% while emerging markets returned the least at only 0.3%. Gains made in technology stocks, alongside solid economic growth data, helped to support US equities. Broad sterling strength dragged down the MSCI AC World Index returns to 0.3% in sterling terms. In sterling terms, the Developed North America region was the best performer (0.7%) whilst the Developed Europe ex UK region was the worst performer (-0.4%).
  • Initially, worries about nuclear testing in North Korea dragged down government bond yields of major developed markets. Yields rose later in the week, as these concerns abated. UK gilt yields were broadly unchanged across all maturities. The 10 year UK gilt yield was unchanged at 1.11% whilst the 20 year UK gilt yield rose by 1bp to 1.70%. The 10 year US treasury yield fell by 1bp to 2.16%. European government bond yields were mixed over the week. German bund yields rose by 7bps to 0.38% whilst French government bond yields remained unchanged at 0.69%.
  • UK real yields inched up over the week. Both the 20 year real yield and the Over 5 year real yield rose by 1bp each to -1.73% and -1.69% respectively. 20 year breakeven inflation stayed at 3.33%.
  • Credit spreads fell over the week. The US high yield bond spread over US treasury yields fell by 7bps to 382bps. The spread of USD denominated EM debt over US treasury yields finished the week 7bps lower at 295bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 1bp to 107bps.
  • The S&P GSCI rose by 2.0% in USD terms over the week. The energy sector rose by 2.5% as the price of Brent crude oil increased by 0.9% to $53/BBL. Industrial metals rose by 3.1% as copper prices increased by 2.3% to $6,805/MT. Agricultural prices rose by 0.7% and gold prices rose by 2.2% to $1,322/ounce.
  • Sterling appreciated against major currencies over the week. The US dollar depreciated by 0.7% against sterling, ending the week at $1.30/£. The euro weakened by 0.7% against sterling, after its recent strong run, closing the week at €1.09/£. The Japanese yen depreciated by 0.9% against the US dollar to end the week at ¥110.20/$.
  • Economic releases in the US were fairly mixed over last week. GDP growth (quarter-on-quarter annualised) over the second quarter of 2017 was revised up to 3.0% from 2.6% on the back of higher than initially estimated consumer and federal government expenditure. The manufacturing sector expanded at a faster pace than forecasted as the Institute of Supply Management's (ISM) manufacturing index showed an increase to a six year high of 58.8 from 56.3. Analysts had forecasted a milder 0.2 point increase to 56.5. US labour market data was disappointing with the change in nonfarm payrolls underperforming expectations, growing by only 156k against consensus estimates of 180k. The unemployment rate missed expectations and rose to 4.4% from 4.3% and annual wage growth remained at 2.5% (below the expected 2.6% growth).
  • In the UK, economic data remains broadly resilient as growth in the manufacturing sector continues to be robust. The manufacturing Purchasing Managers' Index (PMI) reached a four month high of 56.9 from 55.3 and outperformed expectations of 55.0. The GfK consumer confidence index defied expectations of a 1 point decline over August and increased to -10. The same optimism was, however, not shared by British businesses as the Lloyds Business Barometer dropped by 13 points to 17 from 30. House prices, as estimated by the Nationwide House Price Index, dipped by 0.1% over August, below forecasts of prices remaining unchanged and down from the 0.2% increase in July. Over the year, the housing market has cooled with prices rising by 2.1% after increasing by 2.9% previously.
  • Eurozone economic confidence rose to 111.9 from 111.3; the highest level since the onset of the Financial Crisis. The increase was largely driven by improving sentiment in the industrial and services sector over August. Annual consumer price inflation for the Eurozone region exceeded expectations of 1.4% as prices rose by 1.5% over the year; up from 1.3% recorded in July. Core inflation, however, was unchanged at 1.2%. As expected, Eurozone unemployment was unchanged at 9.1% in July. In Germany, retail sales fell by 1.2% over July, missing expectations of a milder 0.6% decline.
  • Japanese economic data was mixed over the week. The provisional release for industrial production growth showed a decline of 0.8% over the year to July, down from the 2.2% increase seen in June and below the estimated 0.3% decrease. The jobless rate remained unchanged at 2.8% in July. However, the job-to-applicant ratio continued on an upward trend by rising to 1.52 over the same period – the highest level since February 1974. Retail sales outperformed expectations of 1.0% growth by rising 1.9% over the year to July, following 2.2% growth in June. This result was despite overall household spending declining by 0.2% over the same period.
  • In China, PMI releases painted a fairly mixed picture of the economy. While still being in expansionary territory, the official non-manufacturing PMIs moved lower to 53.4 from 54.5, indicating a deceleration in the sector. Meanwhile, the manufacturing PMI bounced back to 51.7 from 51.4 and above expectations of a slight decrease to 51.3. Similarly, the Caixin manufacturing PMI, which focuses more on small and mid-sized businesses, unexpectedly rose over July, moving to 51.6 from 51.1. Analysts had predicted a small decrease to 51.0.
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