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Weekly Update - 08 February 2016 (UK/Europe)

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  • Global equities fell over the week after having picked up a little in the last part of January, driven by a move down in oil prices and concern over global growth. The MSCI AC World Index fell 3.1% in local currency terms and 4.2% in sterling terms. All regions recorded negative returns with Emerging Markets falling the least in both local currency (-0.5%) and sterling terms (-2.4%). Developed Europe ex-UK continued to be the worst performing region in local currency terms (-4.7%), as a downgrade to economic growth forecasts weighed on equities in the region. The US was the worst performing equity market in sterling terms (-5.1%), as the US dollar weakened against sterling, continuing the last couple of week's correction of the weak sterling trend.
  • UK nominal gilt yields rose at the very shortest and longer maturities, but fell slightly at short to medium maturities. The 10 year UK gilt yield was unchanged at 1.57%, while the 20 year UK gilt yield marginally rose by 1bp to 2.23% over the week. The 10 year US treasury yield fell 8 bps to 1.85%.  The majority of European government bond yields rose, with more notable upward momentum observed in peripheral government bond yields. German bund yields rose 3bps to 0.30%, while French government bond yields fell 2bps to 0.64%.
  • UK real yields fell marginally over the week. The 20 year real yield and the Over 5 year real yield both fell by 1bp and ended the week at -0.86% and -0.92% respectively. 20 year breakeven inflation rose by 1bp to 3.01%.
  • Credit spreads rose over the week. The US high yield bond spread over US treasury yields was 36bps higher at 810bps and is now 115bps higher than at the start of the year. The spread of USD denominated EM debt over US treasury yields finished the week 10bps higher at 473bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was higher by 6bps at 164bps.
  • The S&P GSCI fell by 3.5% in US dollar terms over the week. The energy sector fell by 6.5% as Brent Crude oil rose by 0.8% to US$ 35/BBL but WTI Crude oil fell by 8.3% to US$ 31/BBL over the week as inventory data from the American Petroleum Institute showed a large inventory build-up. Industrial metals prices marginally rose by 0.3% over the week as copper prices increased by 1.4% to $4,633/MT. Agricultural prices were 1.4% lower, while gold prices rose by 3.3%, finishing the week at $1,155/ounce.
  • Sterling weakened against the yen and the euro, but strengthened against the US dollar. The US dollar depreciated by 2.1% against sterling, finishing the week at $1.45/£. The euro rose by 0.9% against sterling, finishing the week at €1.30/£. The Japanese yen strengthened against the US dollar by 3.5%, ending the week at ¥117.02/$, despite the loosening of monetary policy by the Bank of Japan (BoJ) in January.
  • US labour market data remained broadly encouraging. While nonfarm payrolls only rose by 151,000 over January, less than expected and just over half the previous month’s gain, the unemployment rate finally broke through 5%, falling to 4.9% for the first time since early 2008. This was accompanied by still steady wage growth, with average hourly earnings rising by 2.5% over the year to January, ahead of the 2.2% growth expected. However, overall personal income rose by only 0.3% over 2015, and personal spending was flat over the same period. The PCE core inflation measure, the Federal Reserve’s favoured metric of underlying inflationary pressures in the economy remained at 1.4% as expected in December. January’s manufacturing and services purchasing managers’ indices (PMI) were revised down, resulting in the composite index dropping to 53.2, a level last reached in 2013. Lastly, preliminary estimates suggest that labour productivity fell by 3% over Q4 of last year.
  • In the UK, economic releases were also decent.  January’s Markit/CIPS manufacturing PMI surprised on the upside, rising to 52.9 from 52.1, when it was expected to fall to 51.6. There was also positive news from the services PMI, which rose 0.1 to 55.6 when it was expected to fall marginally. The UK service sector has now been expanding for over 3 years. The construction PMI fell from 57.8 to 55.0, but this was not enough to prevent the composite PMI from outperforming expectations, rising to 56.1 from 55.3 when a fall of 0.3 was anticipated. Mortgage approvals remained steady at 71k in December.
  • The Eurozone composite PMI was upgraded marginally from 53.5 to 53.6. Annual retail sales to December grew 1.4%, marginally behind expectations of 1.5% but November sales were revised up. Finally, unemployment figures were released, with the rate falling 0.1% to 10.4%, a situation mirrored in Germany where the rate fell from 6.3% to 6.2%.  Regional unemployment has been slowly falling since 2013, after rising due to the Global Financial and Eurozone crisis.
  • In a light week for Japanese economic data, January’s manufacturing PMI was revised down marginally to 52.3, but the services figure rose to 52.4, causing the composite PMI to increase to 52.6 from its previous reading of 52.2. The consumer confidence index fell to 42.5 from 42.7, meeting consensus expectations.
  • Chinese economic data picked up slightly. The Caixin manufacturing PMI rose slightly to 48.4 in January from 48.2 in December, ahead of consensus expectations, but the services PMI rose considerably to 52.4 in January from 50.2. This move brought the composite PMI above the neutral 50 mark to 50.1 from 49.4.

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