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Weekly Update - 15 February 2016 (UK/Europe)

  • US Retirement Legal Consulting & Compliance Quarterly Update. The US practice is pleased to present its quarterly update of recent legal developments and consulting opportunities for the first quarter of 2016.
  • Discount Rate Update.  Average discount rates fell during January as equity markets fell around the globe and investors sought out safety assets. The average plan sponsor’s discount rate decreased 4 basis points in January, to 4.52%. Even more notable was the steepening of the yield curve which led to a wide distribution of discount rate movements depending on the duration of the plan. In early February, rates have decreased by 13 basis points through Tuesday February 9, 2016.
  • Radar. Provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health. 
  • Global equities fell sharply over a week during which most Asian markets were closed due to the Lunar New year holiday period. The broad stock market sell-off was prompted by falling banking stocks, which suffered as investors worried about the impact on their profitability of negative interest rates, but falling crude oil prices also contributed. The MSCI AC World Index fell 2.9% in local currency terms and 2.3% in sterling terms. The US was the best performing market both in local currency terms and sterling terms, falling by -0.8% and -0.6% respectively. On the other end of the return spectrum, Japan was the worst performing market both in local currency terms and sterling terms falling 12.7% and 9.2% respectively as the stronger yen hurt exporters.
  • UK nominal gilt yields fell across all maturities except at the very short end of the yield curve. The 10 year UK gilt yield was 15bps lower at 1.42% and the 20 year UK gilt yield was 12bps lower at 2.11%. The 10 year US treasury yield fell by 10bps, finishing the week at 1.75% after Federal Reserve Chair Janet Yellen’s Congressional testimony signaled that global financial market turmoil poses a threat to the US economy. European government bond yields were mixed over the week. German bund yields fell by 4bps to finish the week at 0.26% and French government bond yields were unchanged at 0.64%. Peripheral government bond yields rose, with notable upward momentum in Greek and Portuguese debt, whose 10 year yields rose by 157bps and 61bps respectively.
  • UK real yields fell over the week. The 20 year real yield fell by 1bp to -0.87% and the Over 5 year real yield fell by 2bps to -0.94%. 20 year breakeven inflation fell by 10bps to 2.91%.
  • Credit spreads rose over the week due to investors’ risk aversion. The US high yield bond spread over US treasury yields was 54bps higher at 864bps and the spread of USD denominated EM debt over US treasury yields finished the week 20bps higher at 493bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was higher by 13bps at 177bps.
  • The S&P GSCI Index fell by 1.3% in USD terms over the week. The energy sector fell by 2.1% as the price of Brent crude oil fell by 4.8% to $33/BBL and WTI crude oil fell by 5% to finish the week at $29/BBL. Industrial metals prices fell by 0.9% over the week as copper prices decreased by 2.7% to $4,507/MT. Agricultural prices were 1.4% lower while gold prices rose by 6.9% to $1,234/ounce after reaching a 12-month high in the middle of the week.
  • Sterling depreciated against major currencies over the week. The US dollar appreciated by 0.2% against sterling, finishing the week at $1.45/£. The euro rose by 1.1% against sterling, finishing the week at €1.29/£. The Japanese yen strengthened against the US dollar by 3.8%, touching its highest level since November 2014 and ending the week at ¥112.75/$.
  • In a relatively light week for US economic data, retail sales growth was slow, at 0.2% over January, but it marginally beat expectations and the previous month was also revised upwards. The growth rate excluding auto and gas was better, at 0.4% over the month. The University of Michigan Consumer Sentiment fell in February for the second month in a row, to 90.7 when analysts had hoped for a small rise to 92.3. The NFIB small business optimism index also fell - to 93.9 from 95.2 in January, its lowest level since early 2014. Finally, import prices fell by 6.2% over the twelve months to January as the strong US dollar continued to make an impact.
  • UK industrial production fell by 1.1% in December after also contracting in the first three quarters of 2015. Manufacturing output also fell in December by 0.2% but was flat over Q4. These figures were worse than expected and result in a 0.4% decline in industrial production and a 1.7% decline in manufacturing over 2015. This weak industrial picture fed through into slower growth in the three months to January (0.4%), compared to Q4, according to the National Institute of Economic and Social Research. The overall trade deficit narrowed from £4.0bn in November to £2.7bn in December as imports fell more than exports.  
  • Eurozone GDP rose by 0.3% in Q4 on a seasonally adjusted basis, the same pace as in Q3, resulting in a year-on-year growth of 1.5%, which was expected. German GDP rose by 1.3% year-on-year in Q4. Industrial production was weak, falling by 1% in December and 1.3% over the last year, largely due to disappointing German output, falling by 1.2% over December. Eurozone investor confidence slid from 9.6 to 6.  Lower confidence is to be expected given increased concerns over the global economy and this year’s equity market turmoil.
  • Japanese economic data was again mixed. Labour cash earnings rose by only 0.1% over 2015, which was disappointing given the consensus estimate of 0.7%. This led to real earnings growth of -0.1% over the same period. The January economy watchers survey revealed a less pessimistic outlook, with the outlook component rising to 49.5 from 48.2 and ahead of consensus. However, the current conditions component fell to 46.6 from 48.7 when only a small fall had been expected. The adjusted current account surplus for December rose to ¥1,635bn, ahead of consensus, as the trade deficit returned to surplus. Producer price inflation remained negative, at 3.1% over the twelve months to January, a sharper contraction than expected, but more moderate than 2015’s contraction.
  • There were no noteworthy Chinese economic data releases last week.

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, nor should it be treated as investment advice. Use of, or reliance upon any information in this post is at your sole discretion. It should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.