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Aon Hewitt Retirement and Investment Blog

Weekly Update - 25 September 2017 (UK/Europe)

UPCOMING EVENTS 
  • Please join us for the Global Pension Risk Survey Webinar on September 28. As one of Aon Hewitt’s highest profile research studies, we will present our results and findings on pension design, settlement activity, and other risk management strategies being employed by corporate pension plan sponsors. The webinar will be held three different times to accommodate all time zones—APAC, EMEA, and Americas. Register now!
MARKET MOVES
  • Global equity markets generated modest returns over the week as the US Federal Reserve (Fed) suggested it would begin trimming its $4.5 trillion balance sheet in October and signaled another interest rate hike this year. Geopolitical tensions prevailed with the US President Donald Trump imposing new sanctions on North Korea as leader Kim Jong Un threatened to detonate a hydrogen bomb in the Pacific. The MSCI AC World Index rose 0.5% in local currency terms and 0.8% in sterling terms. All the regions posted positive returns both in local currency and sterling terms. Japan was the best performing market both in local currency (1.8%) and sterling terms (1.4%) as a weaker yen benefitted exporters’ stocks and sentiment. Developed Pacific ex Japan remained flat in local currency terms whilst it returned the least at 0.4% in sterling terms.
  • UK gilt yields rose across all maturities. The 10 year UK gilt yield rose by 4bps to 1.40% and the 20 year UK gilt yield rose by 5bps to 1.93%. The 10 year US treasury yield rose by 6bps to 2.26% over increased expectations of another rate hike by the Fed this year. Most Eurozone government bond yields rose over the week. German bund yields rose by 1bp to 0.45% and French government bond yields rose by 2bps to 0.74%. Portuguese bond yields sharply fell by 38bps to 2.44% after S&P raised the nation’s credit rating to investment grade from junk status.
  • UK real yields fell over the week. 20 year real yields fell by 2bps to -1.56% and the Over 5 year real yield fell by 3bps to -1.53%. 20 year breakeven inflation rose by 6bps to 3.39%.
  • The US high yield bond spread over US treasury yields fell by 9bps to 364bps. The spread of USD denominated EM debt over US treasury yields finished the week 2bps higher at 290bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was unchanged at 105bps.
  • The S&P GSCI rose by 0.6% in USD terms over the week. The energy sector rose by 0.8% as the price of Brent crude oil increased by 1.8% to $57/BBL. Industrial metals rose by 0.9% despite copper prices decreasing by 0.7% to $6,416/MT. Agricultural prices fell by 0.5% and gold prices fell by 2.0% to $1,296/ounce.
  • Sterling depreciated against major currencies, except for the yen, over the week. The US dollar appreciated by 0.5% against sterling, ending the week at $1.35/£. The euro strengthened by 0.5% against sterling, finishing the week at €1.13/£. The Japanese yen depreciated by 0.8% against the US dollar, ending the week at ¥111.94/$.
ECONOMIC RELEASES
  • The US Federal Reserve (Fed) announced last week that it will start to reverse its multi-trillion dollar balance sheet starting in October. However, the Fed voted to leave the target Federal target rate range unchanged at 1.00-1.25%. As expected, manufacturing sector surveyed activity picked up slightly with the Markit manufacturing Purchasing Managers' Index (PMI) inching 0.2 points higher to 53.0. There was further positive news as business sentiment, according to the Philadelphia Federal Reserve's Business Outlook survey, rose to its highest level in three months. The business sentiment index outperformed expectations and advanced to 23.8 from 18.9 above the 17.1 forecasted. US current account data disappointed slightly as the current account deficit widened to $123.1bn from a revised $113.5bn over the second quarter of 2017; the highest level since 2008. The deficit was expected to increase more modestly to $116.0bn.
  • In the UK, retail sales data for August surprised on the upside with sales (excluding auto and fuel) growing by 1.0% over the month, ahead of consensus expectations of 0.1% and the previous upwardly revised reading of 0.7%. For the year to August, retail sales (excluding auto and fuel) grew by 2.8%, twice the forecasted 1.4% increase. The Rightmove house price index pointed to a softening in the housing market, with nationwide asking prices falling 1.2% over September, dragged down predominantly by inner London prices. As a result, annual house price growth slowed to 1.1%. August data for the fiscal deficit was modestly lower than expected, with Public Sector Net Borrowing (PSNB) excluding banking groups at £5.7bn, versus an expected £7.1bn. A £0.7bn surplus was recorded in July.
  • The Eurozone Markit flash PMIs for Germany and the wider Eurozone was above market expectations in September. In Germany, the composite PMI ticked up two points to 57.8 against expectations of 55.7, which marked a seventy-seven month high. The Eurozone’s composite PMI was also up one point to 56.7, ahead of the estimated 55.6 and just below this year’s cyclical highs. Solid growth for the region was driven by both the manufacturing (58.2 versus 57.2 expected) and services sectors (55.6 versus 54.8 expected). The Eurozone’s confidence index also edged up 0.3 points to a sixteen year high of -1.2 which beat the forecasted -1.5. In Germany, the September ZEW economic sentiment survey was above market expectations in the lead up to German parliamentary elections. The reading for the current situations component was 87.9, against forecasts of 86.2 and the expectations component was also higher at 17.0 versus estimates of 12.0. The ZEW survey for Eurozone expectations rose to 31.7 from 29.3 previously.
  • Japanese economic data was encouraging over the week. As expected, the Bank of Japan kept its monetary policy unchanged. The trade surplus fell to ¥113.6bn in August from a revised trade surplus of ¥421.7bn in the previous month. However, this was still above expectations of ¥104.4bn. Exports surged by 18.1% over the year to August (the largest gain in almost four years) while imports rose by 15.2% over the same period.
  • Chinese property prices slowed over August amid curbs imposed to dampen excessive demand. The average house price in China's major seventy cities rose by 0.2% which was lower than the previous month's reading of 0.4% and markedly lower than the 8.3% growth seen a year earlier.
     
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