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Aon Retirement and Investment Blog

Weekly Update - 24 September 2018 (UK/Europe)

MARKET MOVES

  • Global equity markets rose over the week. Economic data was stronger overall, and retaliation by China on US tariffs less than feared. The US imposed 10% tariffs on US$200bn of Chinese imports effective from 24 September, with a threat to increase to 25% in 2019. However, China's response including reassurance from Premier Li Keqiang not to devalue the Renminbi appeared to sooth markets. Despite the trade tensions, the S&P 500 and Dow Jones Industrial Average index both touched their record highs during the week. The MSCI AC World Index rose 1.4% in local currency terms and 1.5% in sterling terms. Japan was the best performing major market in local currency as well as sterling terms at 4.2% and 3.7% respectively as the Japanese Premier, Shinzo Abe, got re-elected as the leader of the ruling Liberal Democratic Party. The US was the weakest in both local currency and sterling terms returning 0.8% and 0.6% respectively.
  • UK gilt yields rose over the week (except at the short end of the curve). Initially, yields rose on the back of strong inflation and retail sales data. However, yields retreated later after the UK Prime Minister Theresa May’s Chequers Brexit plan was rejected by the EU. Both the 10-year and the 20-year UK gilt yield rose by 2bps each to1.55% and 1.86% respectively.
  • The 10-year US treasury yield rose by 8bps to 3.07%. The spread between the US 10-year treasury yield and German bund increased to 2.61%. In Europe, German bund yields rose by 1bp to 0.46% and the French government bond yields rose by 2bps to 0.78%. Italian government bond yields fell by 12bps to 2.85%. Greek government bond yields fell by 4bps to 4.05%.
  • The 20-year real yield in the UK fell by 3bps to -1.56% and the Over 5-year real yield rose by 2bps to -1.47%. 20-year breakeven inflation rose by 5bps to 3.37%.
  • The US high yield bond spread over US treasury yields fell by 4bps to 325bps and the spread of USD denominated EM debt over US treasury yields fell by 12bps to 343bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) remained unchanged.
  • The S&P GSCI rose by 2.1% in USD terms over the week. The energy sector rose by 2.2% as the price of Brent Crude oil rose by 0.9% to US$79/BBL. Industrial metals rose 4.8% as copper prices rose by 4.3% to US$6,203/MT. Agricultural prices rose by 0.7% and gold prices fell by 0.3% to US$1,199/Oz
  • Sterling weakened against major currencies (except for the euro) over the week despite strengthening earlier in the week following the stronger than expected inflation release. The US dollar appreciated by 0.2% against sterling, ending the week at $1.31/£. The euro depreciated by 0.6% against sterling, finishing the week at €1.11/£. The Japanese yen depreciated by 0.4% against the US dollar, ending the week at ¥112.54/$.
ECONOMIC RELEASES
  • Provisional US Purchasing Managers' Index (PMI) data reflected contrasting fortunes for the manufacturing and services sectors. Business conditions in the former improved over September with the headline manufacturing PMI rebounding from 54.7 to 55.6, surpassing expectations of a more modest increase to 55.0. Conversely, the Services PMI fell to its lowest level in eighteen months with index unexpectedly dropping to 52.9 from 54.8. Over the second quarter of 2018, the US current account deficit narrowed from $124.7bn to $101.5bn; lower than the estimated $103.4bn. In the same Commerce Department's report, it was revealed that a total of $169bn of dividends was paid by US firms from repatriated earnings. In the upcoming week, the US Federal Reserve is widely anticipated to hike the federal funds rate by a further 25bps.
  • In the UK, headline Consumer Price Index (CPI) inflation increased to 2.7% in August from 2.5% in July and above market expectations of 2.4% whilst core inflation rose back above the BoE's target coming in at 2.1%. Inflation was boosted to its highest level since February by rising prices of transport, recreation & culture and food & non-alcoholic beverages. CPIH, the ONS’s preferred measure of inflation which includes housing costs, came in at 2.4% and RPI 3.5%. Retail sales growth also positively surprised, increasing by 0.3% in August versus market expectations of a 0.2% fall, driven by increases in non-food (+2.8%) and household goods stores (+4.5%). July's figure was also revised up by 0.2% to 0.9%. The Rightmove House Price index continued to show a steady pace of house price growth at 1.2% in the year to September; a slight uptick from the previous reading of 1.1%.
  • In Europe, Euro Area retail sales fell 0.2% in July after increasing 0.3% in June, as sales of food, drink and tobacco (-0.6%) and automotive fuel (-0.7%) fell but non-food products rebounded (+0.4%). German industrial production also disappointed as it fell 1.1% in July versus an upwardly revised 0.7% fall in June and market expectations of a 0.2% increase. Factory sales showed a similar trend, falling 0.9% in July against market expectations of a 1.8% increase. Elsewhere, the German trade surplus declined to €16.5bn in July, its lowest level since January 2017, as exports fell 0.9% but imports rose 2.8%. However, the cumulative surplus over the last 12 months is still X (Y% of GDP). Year-on-year GDP growth for the Euro Area was revised down slightly to 2.1%
  • In Japan, headline consumer price inflation rose at the fastest pace in six months at 1.3% for the year to August, ahead of consensus estimates of 1.1%. Core CPI, which excludes more volatile food but not energy prices, rose by 0.9% matching consensus estimates. Growth in the manufacturing sector accelerated in September with the preliminary Nikkei PMI manufacturing index rising to 52.9 from August’s reading of 52.5. Japan posted a trade deficit for the second consecutive month despite a boost in exports. Export growth rose to 6.6%for the year to August, more than the 3.9% growth in the previous month and ahead of expectations of 5.2%. However, this was more than offset by the sharp increase in imports which rose by 15.4% over the same period, up from 14.6% in July and ahead of the estimated 14.5% increase. As a result, the trade deficit widened to ¥444.6bn.
  • While there was no major economic data points released in China last week, the People's Bank of China (PBoC) injected a further $29bn of loans through its open market operations, the most in two months.
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