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Weekly Update - 01 October 2018


U.S. Corporate Pension Liability Hedging Views. This update from the U.S. practice provides corporate pension liability hedging views as of August 31, 2018.

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MARKET MOVES - Week Ending September 30, 2018
  • Global equity markets ended lower over the week with noticeable differences in regional equity market returns. The diplomatic relationship between the US and China was further strained as Trump accused China of meddling in the upcoming US mid-term elections against a backdrop of escalating trade tensions as 10% tariffs on US$200bn of Chinese imports came into effect. In more positive trade news, Canada agreed to join a US deal with Mexico to revamp Nafta under a new name, the United States-Mexico-Canada Agreement. The deal will be signed on November 30 and congress will hold a vote on the deal in 2019.The S&P 500 fell by 0.5% outperforming the MSCI World Index, which fell by 0.6%. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (10.6% vs. 5.9%).
  • US Small Cap stocks underperformed Large Cap stocks over the week as the Russell 2000 Index fell by 0.9% whilst the S&P 500 Index fell by 0.5%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (11.5% vs. 10.6%). Growth stocks outperformed Value stocks over the week as Growth stocks rose by 0.8% whilst Value stocks fell by 1.8%, as measured by MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (17.4% vs. 3.8%).
  • The 10-year US treasury yield fell by 1bp to 3.05% and the 30-year US treasury yield remained unchanged at 3.20%, in a week which saw the US Federal Reserve (Fed) raising its federal funds rate to a range of 2.00-2.25%. The Fed signaled for a more gradual rate hike path than investors had expected given recent upbeat economic data. The 20-year TIPS yield fell by 1bp to 0.97% and the 20-year breakeven remained at 2.16%.
  • The spread on the Bloomberg Barclays Capital Long Credit Index fell by 1bp to153bps while the yield of the Bank of America Merrill Lynch US Corporate Index above US treasuries fell by 2bps to 111bps. The US high yield bond spread over US treasury yields fell by 1bp to 324bps and the spread of USD denominated EM debt over US treasury yields narrowed by 8bps to 335bps over the week.
  • The S&P GSCI rose by 2.7% in USD terms over the week. The energy sector rose by 4.4% as the price of WTI crude oil rose by 3.5% to US$73/BBL. Crude oil prices touched the highest level since November 2014 after OPEC declined to increase production amid reducing supply due to the ongoing Iranian sanctions. Industrial metals fell by 0.9% as copper prices fell by 0.4% to US$6,180/MT. Agricultural prices fell by 1.5% and gold prices fell by 1.0% to US$1,187/Ounce.
  •  The US dollar appreciated against all major currencies over the week. The US dollar appreciated by 0.4% against sterling, ending the week at $1.30/£. The US dollar appreciated by 1.2% against the euro, finishing the week at $1.16/€. The US dollar appreciated by 0.9% against the Japanese yen, ending the week at ¥113.59/$. The US dollar appreciated by 0.1% against the Canadian dollar, ending the week at C$1.29/$. 
Economic Releases 
  • The US Federal Reserve further tightened monetary policy with the federal funds rate target increasing to 2.00%-2.25%. This move marks the first time in over a decade where the federal funds rate will be above the Fed's preferred measure of inflation, the core Personal Consumption Expenditure price index, which remained as expected at 2.0% for August. Upbeat labor market outlooks helped consumer confidence in the US rise to its highest levels in over eighteen years. The Conference Board's Consumer Confidence index increased to 138.4; defying expectations of a slight weakening in the reading to 132.1 from 134.7. Whilst durable goods orders surged by 4.5% over August, orders for US capital non-defense goods excluding aircraft (a proxy for business spending) unexpectedly dipped by 0.5% following four consecutive month of strong gains. Analysts expected a 0.4% increase.
  • In Europe, year-on-year M3 money supply growth slowed to 3.5% in August versus market expectations of 3.9% and 4.0% in July. September inflation data was mixed with headline consumer price inflation increasing slightly to 2.1% but core CPI falling back to 0.9%, below expectations of a 0.1% increase to 1.1%. This accompanied a pickup in German harmonized consumer price inflation which increased to 2.2% in September from 1.9% in August. The German IFO business climate index fell 0.2 points to 103.7 in September as a drop in manufacturing sentiment outweighed gains across services, retailers and construction. In more positive news, German unemployment fell 23k in September, better than market expectations of a 9k fall. This took the unemployment claims rate to 5.1%, its lowest level since German reunification in 1990.
  • In Japan, the jobless rate for August stood at 2.4%, slightly lower than the market expectation of it remaining unchanged at 2.5%. The job-to-applicant ratio remained unchanged at 1.63, its highest level since 1974. Retail sales rose by 2.7% over the year to August, ahead of the forecasted 2.0% increase and 1.5% reading for July. Japanese industrial production rebounded by 0.7% in August based on preliminary data. Although the reading showed a pickup from the 0.1% decline in July, August's reading remained short of the 1.4% forecasted increase.
  • Chinese economic data was generally disappointing as escalating US-China trade tensions continue to impact the world’s second largest economy. Industrial profit growth slowed for a fourth consecutive month to 9.2% over the year to August, sharply down from the previous reading of 16.2%. The official Chinese manufacturing PMI for September fell by 0.5 points to 50.8 – below expectations of 51.2. The gauge for new export orders contracted for the fourth consecutive month by falling to 48, the lowest reading since 2016. However, the non-manufacturing PMI rose to 54.9 from 54.2, against the estimated fall to 54. The Caixin Manufacturing PMI, which is more focused on private Chinese businesses, fell by 0.6 points to 50.0, the lowest level for 15 months. 
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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