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Weekly Update - 05 November 2018

  • Pathways. In this edition of Aon Hewitt Investment Consulting’s newsletter for retirement plan sponsors, we discuss effective decision-making, DC recordkeeper evaluation, an investment strategy called “bank capital relief,” how public pension obligations affect credit ratings, and retirement readiness.
  • Aon’s Quarterly Investment Outlook Aon’s Global Asset Allocation team shares our views on recent market experience and outlook for the future.
  • Register for our webinar: “Get Ready Now for Your Next DOL or IRS Retirement Plan Audit.”  This webinar will discuss the U.S. Department of Labor’s recently launched initiative for auditing qualified retirement plans.  This event will discuss likely areas of focus and mitigating the risks from IRS or DOL audits.  It will be on Tuesday, November 13, 2018 at 1:00-2:00pm Eastern Time. 
MARKET MOVES (Week ending November 5, 2018)
  • Global equity markets rebounded over the week with all regions posting positive returns. The S&P 500 index rose by 2.4%, underperforming the MSCI World index which rose by 2.8%. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (3.4% vs. -1.1%). Reports of constructive trade discussions between US president Donald Trump and Chinese president Xi Jinping ahead of the G20 summit in Argentina later this month improved market sentiments. In Europe, German Chancellor Angela Merkel announced that she will be resigning as head of the ruling Christian Democratic Union (CDU), following poor performances of the party in a series of recent regional elections. Elsewhere, Brazilian stocks rose following the election of market-favourite Jair Bolsonaro in the country's presidential election. MSCI Brazil is now up 17.4% in local currency terms 
  • US Large Cap stocks underperformed Small Cap stocks over the week as the S&P 500 index rose by 2.4% and the Russell 2000 index went up by 4.3%. However, on a year-to-date basis, the S&P 500 Index has outperformed Russell 2000 Index (3.4% vs.1.8%). Growth stocks rose by 2.3% and Value stocks rose by 2.7% over the week as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (7.0% vs. -0.3%).
  • The 10-year and 30-year US treasury yields both rose by 14bps to 3.21% and 3.46% respectively over the week. The 20-year TIPS yield rose by 13bps to 1.27% and the 20-year breakeven rose by 1bp to 2.10%.  
  • The spreads on the Bloomberg Barclays Capital Long Credit Index fell by 1bp to 164bps and whilst the Bank of America Merrill Lynch US Corporate Index rose by 1bp to 124bps. The US high yield bond spread over US treasury yields fell by 13bps to 372bps and the spread of USD denominated EM debt over US treasury yields fell by 10bps to 355bps over the week.
  • The S&P GSCI fell by 3.7% in USD terms over the week. The energy sector fell by 5.8% as the price of WTI Crude oil fell by 6.6% to US$63/BBL in a week in which US crude oil inventories again increased. Industrial metals remained unchanged, whilst copper prices gained 1.6% to US$6,255/MT. Agricultural prices rose by 0.9% whilst gold prices fell by 0.1% to US$1,232/Oz.  
  • The US dollar depreciated against major currencies (except for the yen) over the week. The US dollar depreciated by 1.1% against sterling, ending the week at $1.30/£. The US dollar depreciated by 0.1% against the euro, finishing the week at $1.14/€. The US dollar appreciated by 1.5% against the Japanese yen, ending the week at ¥113.11/$. The US dollar depreciated by 0.1% against the Canadian dollar, ending the week at C$1.31/$.  
Economic Releases
  • While the headline unemployment rate stood steady at 3.7%, the US economy added a further 250k jobs in October; exceeding estimates of 200k and well above September's downwardly revised reading of 118k. Tightness in labour markets appears to have fed through to wages with annual wage growth accelerating to 3.1% - the fastest pace of wage gains since 2009. The robust labour market (even prior to the positive non-farm and wage growth releases) continues to be supportive for the US consumer, as the Conference Board's Consumer Confidence index rose to an eighteen year high of 137.9 from a revised 135.3 reading. There was less stellar news for other areas of the US economy as the Institute of Supply Management's (ISM) manufacturing index fell by 2.2 points to 57.7 against analyst estimates of a more modest 0.8 point fall. 
  • Euro Area GDP expanded by just 0.2% in Q3 2018, the weakest rate since Q2 2014 and below market expectations of 0.4%, as Italy's economy stalled for the first time in four years. This took year-on-year GDP growth to 1.7% from 2.2% seen in the previous quarter. Despite weaker growth, inflation continued to rise with headline consumer price inflation accelerating by 0.1% to 2.2%, the highest rate since December 2012, and core inflation increasing by 0.2% to 1.1%. German inflation also continued to increase with the EU-harmonized Consumer Price Index increasing by 2.4% year-on-year. Elsewhere, German retail sales fell 2.6% in the year to September 2018, the biggest fall since May 2014, as sales grew just 0.1% in September while August's reading was revised lower by 0.2% to -0.3%.
  • Based on preliminary data, Japanese industrial production contracted by 1.1% in September, disrupted in part by a series of typhoons and earthquakes. It was worse than the forecasted 0.3% decline and August's 0.2% increase. As expected, retail sales dropped by 0.2% over September from the 0.9% growth recorded in August. Japan’s labour market continued to tighten as the jobless rate for September fell to 2.3%, against expectation of it remaining at 2.4% and the job-to-applicant ratio inched higher to 1.64 from 1.63. The consumer confidence index in October fell marginally to 43.0 from 43.4. 
  • In China, the official Chinese manufacturing PMI for October fell to 50.2 from 50.8, the weakest level since July 2016 and marginally above the level which reflects expansionary activity in the sector. This reading was much weaker than the forecasted 0.2 point decline. Sentiment within the service sector also deteriorated with the non-manufacturing index falling to 53.9 from 54.9 over the month. The Caixin manufacturing PMI, which focuses more on small and mid-sized Chinese businesses, edged up to 50.1 in October against expectations of it remaining at 50.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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