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Aon Hewitt Retirement and Investment Blog

Weekly Update - 11 September 2017 (UK/Europe)

NEW INTELLECTUAL CAPITAL

  • Hurricane Harvey Relief – IRS and DOL Guidance.  On August 30, the U.S. Department of Labor (DOL) issued News Release 17-1216-NAT, which provides compliance guidance for U.S. retirement plans with administrative procedures and processes which may have been disrupted by Hurricane Harvey. (The DOL also issued FAQs for Participants and Beneficiaries Following Hurricane Harvey.) Much of the DOL relief comes in the form of a general position on delayed, limited, or non-enforcement for certain compliance failures attributable to Hurricane Harvey. 
MARKET MOVES
  • Geopolitical concerns in the Korean Peninsula continued to overshadow global equity markets after North Korea successfully tested a hydrogen bomb. Meanwhile, destruction caused by Hurricane Harvey and concerns over the impact of Hurricane Irma weighed on the US market. The MSCI AC World Index fell 0.6% in local currency terms and 1.6% in sterling terms. All regions delivered negative returns, both in local currency and sterling terms with the Developed Europe (excluding UK) region falling the least, returning -0.1% and -0.5% respectively. Upgraded economic growth forecasts by the European Central Bank (ECB) supported continental European equities. Japan fell the most in local currency terms (-1.4%) with yen strength impacting on the price competitiveness of Japanese exports. The US fell the most in sterling terms (-2.2%) due to the sharp depreciation of the US dollar against sterling.
  • UK gilt yields generally fell across all maturities following government bond yields of major developed markets. The 10 year UK gilt yield fell by 5bps to 1.06% and the 20 year UK gilt yield fell by 7bps to 1.63%. The 10 year US treasury yield fell by 10bps to 2.05% over the reduced prospects of another rate hike by the US Federal Reserve this year. European government bond yields also fell over the week after the ECB kept monetary policy unchanged and downgraded their inflation forecasts. Both 10 year German bund yields and French government bond yields fell by 6bps each to 0.32% and 0.62% respectively.
  • UK real yields fell over the week. The 20 year real yield fell by 10bps to -1.83% and the Over 5 year real yield fell by 11bps to -1.80%. 20 year breakeven inflation rose by 2bps to 3.36%.
  • Credit spreads rose over the week. The US high yield bond spread over US treasury yields rose by 10bps to 392bps. The spread of USD denominated EM debt over US treasury yields finished the week 1bp higher at 296bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) rose by 1bp to 108bps.
  • The S&P GSCI rose by 0.2% in USD terms over the week. The energy sector rose by 0.2% as the price of Brent crude oil increased by 2.6% to $54/BBL. Industrial metals fell by 2.8% as copper prices decreased by 1.9% to $6,672/MT. Agricultural prices rose by 1.1% and gold prices rose by 1.8% to $1,346/ounce.
  • Over last week, sterling appreciated against major currencies, with the exception of the yen. The US dollar depreciated by 1.6% against sterling, ending the week at $1.32/£. The euro weakened by 0.4% against sterling, finishing the week at €1.10/£. The Japanese yen appreciated by 2.1% against the US dollar and closed the week at ¥107.91/$.
ECONOMIC RELEASES
  • Economic releases had a weaker tone in the US over the course of last week. Although expected, US factory orders tumbled by 3.3% in July after increasing by 3.2% in the previous month. In particular, orders for transportation equipment sharply dropped by 19.2% over the month. Whereas the Institute of Supply Management's (ISM) manufacturing index rose to a six-year high in the previous week, the ISM non-manufacturing index missed expectations of 55.6 and slipped to 55.3 from 55.9. The reading is still above 50 which indicates expansion in the service sector. Jobless claims increased by the most since 2012 on the back of the devastation from Hurricane Harvey. Initial jobless claims rose to 298k from 236k, well above consensus estimates of an increase to 246k. The US trade deficit edged higher to $43.7bn from $43.5bn but lower than the expected deficit of $44.7bn.
  • In the UK, there were contrasting fortunes for the manufacturing and service sectors. Manufacturing output increased by 1.9% over the year to July, outperforming the expected growth of 1.7% and well above the pace of growth in the previous month (0.3%). Industrial production growth also quickened in the year to July, meeting forecasts of 0.4% growth which was up from 0.3% in the previous period. However, growth in the service sector decelerated to its slowest pace in nearly a year, as the Markit/CIPS Services Purchasing Managers' Index (PMI) fell from 53.8 to 53.2. Analysts had expected a more modest decrease to 53.5. The construction sector did not fare well either with construction output contracting over the year by 0.4%, compared with a 0.9% increase in the year to June and also below estimates of 0.2% growth. Moreover, the Markit/CIPS Construction PMI failed to meet expectations of a 0.1 point increase and slipped to 51.1 from 51.9 in August.
  • There was positive news in the Eurozone last week, as GDP growth over the year to June was revised upwards to 2.3% from 2.2%. Investor confidence in the region remains buoyant with the Sentix Investor Confidence index unexpectedly increasing from 27.7 to 28.2, above forecasts of a decline to 27.0. Although meeting expectations, retail sales decreased by 0.3% in July, down from the upwardly revised 0.6% growth in June. The finalised Markit Eurozone Services PMI for August was revised lower to 54.7 after an initial reading of 54.9. Within Germany, industrial production was flat in July and failed to meet expectations of 0.5%. This followed a 1.1% decline seen in June. Meanwhile, factory orders unexpectedly fell by 0.7% compared to estimates of 0.2% growth and 0.9% increase recorded in June.
  • The Japanese economy grew at an annualised rate of 2.5% over the second quarter of 2017, down from the preliminary estimate of 4.0% and less than consensus estimates of 2.9%. This was mainly due to softer capital expenditure which only rose by 0.5% instead of 2.4%. Wage growth data disappointed as labour cash earnings fell by 0.3% in the year to July against a forecasted increase of 0.5%, due to a fall in bonus payments. Real wages, which take inflation into consideration, fell by 0.8% over the year to July. The services PMI fell to 51.6 in August from 52.0.
  • In China, consumer price inflation accelerated as the Consumer Price Index (CPI) rose by 1.8% in the year to August; up from the 1.4% increase seen in the year to July. The Caixin Services PMI rose to 52.7 from 51.5. The trade surplus, however, narrowed to $42.0bn from $46.7bn. Import growth rose by 13.3% over the year to August against forecasts of 10.0% growth while the pace of export growth disappointed, slowing to 5.5% from 7.2% previously.
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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