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Aon Retirement and Investment Blog

Weekly Update - 17 September 2018 (UK/Europe)

MARKET MOVES

  • The MSCI AC World Index rose 1.2% in local currency terms and 0.3% in sterling terms. US and China agreed to resume trade talks before the US imposes $200bn tariffs on Chinese imports. Japan was the best performing market in local currency terms at 2.8% as weakness in yen boosted the performance of exporters. However, developed Europe ex UK was the best performing region in sterling terms at 1.0%. Emerging Markets were the worst performing region both in local currency as well as sterling terms at 0.4% and -0.4% respectively. Emerging market equities continued to underperform in a week where the Central Bank of Turkey raised rates to 24% in an attempt arrest the fall in the Lira. As widely expected, both the Bank of England and the European Central Bank kept their interest rates unchanged.
  • UK gilt yields rose across maturities over the week following strong UK wage growth data and more positive comments from the Bank of England and more positive Brexit developments. The 10-year UK gilt yield rose by 7bps to 1.53% and the 20-year UK gilt yield rose by 6bps to 1.84%. The 10-year US treasury yield rose by 5bps to 2.99% despite the US posting softer inflation data. In Europe, German bund yields rose by 6bps to 0.44% and French government bond yields rose by 4bps to 0.76%. Italian government bond yields fell by 7bps to 2.97%. Greek government bond yields fell by 18bps to 4.09%.
  • The 20-year real yield in the UK rose by 3bps to -1.53% and the Over 5-year real yield rose by 1bp to -1.49%. 20-year breakeven inflation rose by 3bps to 3.32%.
  • Credit spreads narrowed over the week. The US high yield bond spread over US treasury yields fell by 19bps to 329bps and the spread of USD denominated EM debt over US treasury yields fell by 12bps to 355bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) fell by 1bp to 119bps.
  • The S&P GSCI rose by 0.8% in USD terms over the week. The energy sector rose by 1.3% as the price of Brent Crude oil rose by 1.6% to US$78/BBL. Industrial metals fell by 0.6% despite copper prices rising by 1.1% to US$5,947/MT. Agricultural prices fell by 1.4% and gold prices rose by 0.3% to US$1,202/ounce.
  • Sterling weakened against major currencies over the week. The US dollar appreciated by 0.9% against sterling, ending the week at $1.31/£. The euro appreciated by 0.2% against sterling, finishing the week at €1.12/£. The Japanese yen depreciated by 0.9% against the US dollar, ending the week at ¥112.10/$.

ECONOMIC RELEASES

  • Inflationary pressures in the US looked to have eased slightly over August as consumer price inflation slowed on a year-on-year basis to 2.7%, below expectations of 2.8% and from last month's reading of 2.9%. Moreover, core inflation unexpectedly fell back from a decade-high of 2.4% to 2.2%. Slowing inflation appears to have benefited US consumers with real wage growth, as measured by real average hourly earnings, rebounding by 0.2% following last month's revised 0.1% decline. A favourable outlook for the labour market and wages supported an increase in the University of Michigan's Consumer Sentiment index to a six-month high of 100.8 from 96.2. Analysts had expected a modest increase to 96.6. However, the positive consumer sentiment release followed disappointing retail sales growth figures which inched up just 0.1% over August compared to expectations of 0.4% and July's upwardly revised reading of 0.7%.
  • The Bank of England Monetary Policy Committee unanimously agreed to keep the bank rate unchanged at 0.75% at its September meeting and hinted at further interest rate rises if a favorable deal with the EU is reached. The rates decision came despite continued positive labour market data as the unemployment rate stayed at 4.0% and average weekly earnings increased by 0.2% to 2.6% in July. However, industrial production data came in below expectations as industrial production grew by just 0.1% in July, below expectations of 0.2% and June's 0.4% growth. Finally, the trade deficit unexpectedly shrunk to the lowest level since April 2011 at just £0.11 billion in July, well below market expectations of a £2.1 billion deficit, as the surge in exports (+2.0%) offset slightly higher import growth (+0.4%).
  • The European Central Bank also left its main rates unchanged at their September meeting but reconfirmed the reduction in their bond purchases from €30bn to €15bn in October and for the programme to stop altogether in December. Eurozone industrial production fell 0.8% in July, below market expectations of a 0.5% fall, and slipped 0.1% lower on a year-on-year basis. This was the first year-on-year decline since January 2017 and well below market expectations of a 1.0% increase. The September ZEW economic sentiment indicator rose 3.9 points to -7.2 as more analysts continue to expect economic activity to get worse than better. Elsewhere, the German indicator rose 3.1 points to -10.6.
  • In Japan, core machine orders recovered after June's disappointing 8.8% decline, growing by 11.0% in July. Over the year to August, the producer price index increased by 3.0%, in line with July's revised reading but below the forecasted increase of 3.1%. The Tertiary Industry index rebounded in July as it matched estimates and rose by 0.1%. However, the previous month's reading was revised slightly lower to -0.6%.
  • In China, industrial production for the year to August increased as expected by 6.1%, above the 6.0% increase previously recorded. Retail sales growth outperformed forecasts of an 8.8% increase and accelerated by 9.0% over the year to August. Analysts had expected no change in sales growth. The positive releases were, however, offset by disappointing growth in fixed asset investment, which slowed over the first eight months to a historic low of 5.3%. This was not only below the 5.5% increase that was previously recorded but fell short of an expected acceleration to 5.6%.

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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