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Aon Retirement and Investment Blog

Weekly Update - 10 September 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets fell over the week as trade tensions escalated and emerging market concerns continued. The US threatened to impose additional tariffs worth US$267bn on Chinese goods. Weak Chinese economic data and trouble in South Africa and Argentina were negative drivers for emerging market equities over the week. The MSCI AC World Index fell 1.7% in local currency terms and 1.5% in sterling terms. The US was the best performing region both in local currency and sterling terms as it fell the least at -1.0% and -0.7% respectively. Developed Pacific ex Japan was the worst performing region both in local currency as well as sterling terms at -3.0% and -3.4% respectively.
  • UK gilt yields rose across most maturities over the week. The 10-year UK gilt yield rose by 2bps to 1.46% and the 20-year UK gilt yield rose by 4bps to 1.79%. The 10-year US treasury yield rose by 9bps to 2.94% after the release of strong labour market data (see below). In Europe, German bund yields rose by 5bps to 0.38% and French government bond yields rose by 2bps to 0.71%. Italian government bond yields fell by 18bps to 3.04% as several senior government figures pledged to limit their spending in the upcoming budget to meet the European Union fiscal restrictions. Greek government bond yields fell by 10bps to 4.36%.
  • The 20-year real yield in the UK rose by 3bps to -1.56% and the Over 5-year real yield rose by 4bps to -1.50%. 20-year breakeven inflation rose by 2bps to 3.29%.
  • The US high yield bond spread over US treasury yields fell by 1bp to 348bps and the spread of USD denominated EM debt over US treasury yields fell by 2bps to 368bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) remained unchanged.
  • The S&P GSCI fell by 1.6% in USD terms over the week. The energy sector fell by 2.1% as the price of Brent Crude oil fell by 0.8% to US$77/BBL. Industrial metals fell by 1.8% as copper prices declined by 2.3% to US$5,883/MT. Agricultural prices fell by 1.4% and gold prices fell by 0.3% to US$1,199/ounce.
  • Sterling weakened against major currencies (except for the euro) over the week. The US dollar appreciated by 0.4% against sterling, ending the week at $1.30/£. The euro depreciated by 0.1% against sterling, finishing the week at €1.12/£. The Japanese yen depreciated by 0.2% against the US dollar, ending the week at ¥111.12/$.

ECONOMIC RELEASES

  • US economic data continued to perform over the week with the US employment report showing a strong August nonfarm payroll growth at 201k, above market expectations of 190k and downwardly revised July reading of 147k. The unemployment rate remained at 3.9%. More notably, year-on-year average hourly earnings growth picked up from 2.7% to 2.9% in August, the largest rate of increase since June 2009. Elsewhere, the ISM Manufacturing PMI increased by 3.2 points in August to 61.3, the highest level since May 2004 and well above market expectations of 57.6. The ISM non-manufacturing PMI also picked up from 55.7 to 58.5. However, July factory orders declined 0.8% after a 0.6% increase in June as demand for transport equipment fell sharply over the month.
  • In the UK, the Markit Manufacturing PMI unexpectedly fell to 52.8 in August from a downwardly revised 53.8 in July as new order growth slowed and foreign demand declined for the first time since April 2016. However, the Markit Services PMI picked up to 54.3 in August from 53.5 in July as business activity and new work rose. Job creation was strong and input cost inflation, driven by fuel prices and wage pressures, also accelerated. Finally, year on year house price growth in the three months to August, according to the Halifax House Price Index, accelerated to 3.7% from 3.3% in July though house price growth in August was just 0.1%.
  • In Europe, Euro Area retails sales fell by 0.2% in July taking year on year growth to 1.1%, though June year on year growth was revised up by 0.3% to 1.5%. German data was also weaker as industrial production fell 1.1% in July versus market expectations of a 0.2% increase. Factory orders showed a similar trend, falling 0.9% in July versus market expectations of a 1.9% increase. The decline in factory orders was largely driven by a 3.4% fall in foreign demand as domestic orders grew 2.4%. The German trade balance showed a similar trend as it fell sharply by €5.3bn in July to a €16.5bn surplus as exports fell 0.9% whilst imports grew 2.8%. In contrast to the softer data elsewhere, Euro Area producer prices continued to accelerate, rising 4.0% in the year to July.
  • The Japanese economy grew at an annualised rate of 3.0% in Q2 2018, beating the initial estimate of 1.9% and forecasted growth of 2.6%. Japan’s current account surplus widened to ¥2,009.7bn in the year to July, above forecasts of ¥1,893.2bn. Labour markets slowed as labour cash earnings slowed to 1.5% in the year to July, down from the 3.6% increase in the previous month and below a forecasted increase of 2.4%. Real wages rose for the third consecutive month as it increased by 0.4% over July but slowed from a previous 2.8% increase, and below a forecasted increase of 1.1%.
  • The Caixin Manufacturing PMI, which is more focused on private Chinese businesses, hit a 14-month low as it fell by 0.2 points to 50.6 in August due to a slower pace of increase in new orders. Growth in the services sector also disappointed with the services PMI falling to 51.5 from 52.8; below expectations of 52.6. The consumer price index increased by 2.3% over the year to August; this inflation rate was 0.2% higher than the previous month and the consensus estimates. Exports and imports growth slowed to 9.8% and 20.0% respectively over the year to August. Imports growth beat consensus estimates of 17.7% while exports growth was marginally below forecast. This led to a narrowing of China's trade surplus to US$27.9bn, well below analyst forecasts of US$31.0bn. However, China’s trade surplus with the US rose to a record high in August at US$31.1 bn.

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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