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Weekly Update - 04 July 2016 (UK/Europe)



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MARKET MOVES (week ending 1 July 2016)

  • Global equities rebounded sharply over the week, as Brexit concerns pushed back central bank interest rate expectations around the world. The MSCI AC World Index rose 3.5% in local currency terms. Sterling continued to weaken, pushing up the returns to 6.2% for sterling investors. The UK was the best performing region in local currency terms (7.2%), as comments from Bank of England (BOE) Governor Mark Carney indicated the possibility of further monetary easing. All regions recorded positive returns in both local currency and sterling terms with the emerging markets returning the least in local currency terms (3.1%) and Developed Asia Pacific ex Japan returning the least in sterling terms (5.9%). However, Emerging markets were the best performing region in sterling terms (7.3%).
  • Government bond yields of developed markets trended lower over the week fuelled by the prospect of interest rates remaining lower for a longer period. Despite major credit rating agencies lowering the UK’s credit rating, gilt yields fell across all maturities driven by the new easing bias of the BoE. The 10 year UK gilt yield fell by 24bps to a record low of 0.99% while the 20 year UK gilt yield fell by 29bps to 1.54%. The 10 year US treasury yield fell by 12bps to 1.46%. European government bond yields fell across all regions. German bund yields fell by 7bps to -0.13% and French government bond yields fell by 21bps to 0.17%.
  • UK real yields fell over the week. The 20 year real yield fell by 23bps to finish the week at -1.40% and the Over 5 year real yield fell by 17bps to -1.39%. 20 year breakeven inflation fell by 3bps to 2.88%.
  • Credit spreads fell over the week. The US high yield bond spread over US treasury yields fell by 21bps to 612bps and the spread of USD denominated EM debt over US treasury yields finished the week 17bps lower at 383bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 4bps, ending the week at 152bps.
  • The S&P GSCI rose by 2.0% in USD terms over the week. The energy sector rose by 2.7% as the price of Brent crude oil rose by 2.3% ending the week at USD 50/BBL. Industrial metals rose by 4.9% as copper prices rose by 4.5% to $4,900/MT. Agricultural prices fell by 1.1% while the gold price rose 1.7%, finishing the week at $1,336/ounce.
  • Sterling continued to weaken against major currencies over the week. The US dollar appreciated by 2.7% against sterling, ending the week at $1.33/£. The euro sharply appreciated by 2.9% against sterling, finishing the week at €1.19/£. The Japanese yen fell marginally by 0.5% against the US dollar, ending the week at ¥102.67/$.


  • US economic data showed modest improvement last week. First quarter annualised quarter-on-quarter GDP growth was revised up to 1.1% from 0.8%, ahead of expectations. Furthermore, the manufacturing ISM for June strongly beat expectations, rising to 53.2 when analysts had penciled in no change from 51.3. Personal spending rose by 0.4% over May (versus 1.1% in April) and personal income growth suffered a similar slowdown (0.2% versus 0.5%). Meanwhile, the services Purchasing Managers’ Index (PMI) remained at 51.3 in June, while the composite index rose marginally to 51.2. However, we will need to wait for the more closely watched service sector ISM report to get a better steer on activity. House price growth remained fairly steady in April, with prices rising by 5.44% over the twelve months to April, roughly in line with expectations.
  • In the UK, the latest forward looking consumer index by GfK was better than expected but still negative at -1 as consumer confidence dropped following Britain's vote to leave the EU. The M4 broad money supply rose by a monthly 1.2% in May versus -0.1% in the previous month. Similarly, the yearly rate rose to 1.8% from 1.1%. The current account balance for Q1 2016 was worse than expected at -£32.6bn compared to expectations of around -£28.0bn. The economy grew 0.4% in Q1 and was 2.0% larger than a year earlier (in GDP terms).
  • In the Eurozone, consumer price inflation was 0.1%, ahead of expectations of zero inflation. Meanwhile, the core measure, which strips out volatile food and energy prices, was 0.9%, up from expectations in May of 0.8%. Provisional German inflation was 0.3% in May. Raising inflation away from negative territory continues to be a battle for the European Central Bank who is hoping that the most recent round of easing measures (taken in March) will help to provide a boost to inflation and the economy. Unemployment in the Eurozone was in line with expectations at 10.1%. Interestingly, the German GfK consumer confidence Index beat expectations by 0.3 and was 10.1 as consumers do not yet appear to be affected by discussions around the potential exit of Britain from the EU.
  • Japanese economic data had a mixed tone over the week. Consumer prices continued to fall as consumer price inflation was -0.4% over the year to May, adding more pressure on the Bank of Japan for further monetary easing. The core measure rose by 0.6% over the same period, in line with expectations but slower than the 0.7% rise recorded in April. The unemployment rate remained unchanged in May at 3.2%, but the Job-to-Applicant ratio rose to 1.36, the highest level since October 1991. Consumption data was weak, with retail sales contracting for the third consecutive month, by falling 1.9% year on year in May against the 1.6% fall pencilled in by analysts. Meanwhile, the widely watched Tankan survey for the second quarter provided some relief, with both current conditions and outlook components for large manufacturers exceeding analyst expectations while large non-manufacturer indices met expectations. Large businesses remain more optimistic than small businesses.
  • China’s Caixin PMI came in below consensus, falling to 48.6 in June from 49.2, but the official manufacturing PMI fell marginally to the neutral 50.0 level as expected. Meanwhile, the official non-manufacturing PMI rose to 53.7. Lastly, industrial profits rose by 3.7% over the year to May, which was disappointing when compared with growth over the twelve months to April of 4.2%.
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