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Market Snapshot: Summary important announcements Economics Watch: Contents: Week Beginning 18 th January: Last week Economics Watch 3 Monday: - Tuesday: UK CPI (Dec) Equities 4 US TIC Data (Nov) Credit 5 Wednesday: UK MPC Minutes Nominal Yields 6 UK Labour Report Inflation 7 US Housing Starts (Dec) US PPI (Dec) Real Yields 8 Appendix 9 Thursday: UK CBI Quarterly Industrial Trends Survey US Jobless claims Philly Fed (Jan) China Q4 GDP Friday: Eurozone Flash PMIs (Jan) UK Retail Sales (Dec) In 2009, Redington was ranked globally first for ALM/LDI Advice ; second in the category of Manager Selection and third for Strategic Advice by Life & Pensions Magazine against a peer group of global firms (including Watson Wyatt, Hewitt and Mercers) Redington: #1 in ALM/LDI; #2 in Investment Consulting; #3 in Strategic Advice; #3 Overall Consultant 2
Key data released last week Last week Economics Watch Date Economic Data Consensus Actual Figure Previous Figure Tuesday, 12 th January UK RICS Housing Market Survey (Dec) 37% 30% 35% UK Trade Balance (Nov) / GBP -7bn -6.754bn -7.108bn -32.9bn US Trade Balance (Nov) / USD -34.6bn -36.4bn Wednesday, 13 h January Germany GDP (2009) -4.8% -5.0% 1.3% UK Industrial Production YoY (Nov) -6.1% -6.0% -8.4% Thursday, 14 th January ECB Rate Announcement 1.0% 1.0% 1.0% Eurozone Industrial Production MoM 0.5% 1.0% -0.6% US Initial Jobless Claims 437k 444k 434k Friday, 15 th January EuroStat ‘Core’ Inflation YoY (Dec) 1.0% 1.1% 1.0% ECB ‘Core’ Inflation YoY (Dec) 0.9% 0.9% 0.5% US CPI YoY 2.8% 2.7% 1.8% US Industrial Production (Dec) 0.6% 0.6% 0.8% 3
Equities : “A jittery week for equities...” Figure 1: Relative Weekly World Equity Performance Markets traded with a rather jittery tone over the week with concerns over sovereign defaults continuing, especially in relation to Greece’s fiscal challenges. Disappointing US retail sales also added to nervousness. Equities were down with the exception of Japan, with fixed income rallying and the dollar broadly stronger. Equity markets in the UK ended the week lower with the FTSE 100 down 78 points (-1.43%) at 5,455. The S&P 500 finished the week down 0.78% at 1,136 (the worst drop in 4 weeks), and the EuroStoxx 50 finished the week below 3000 again, down 2.6% at 2940. Figure 1 shows the relative weekly performance of major world equity indices rebased at 100 at the start of the week. Prices used are closing prices. Figure 2: S&P 500 & FTSE 100 Total Return - Sept 08 to Present The VIX Index, a measure of equity market volatility ended the week slightly lower by 0.22 at 17.91; the lowest value since mid 2008. 4
Credit: “Credit continues its rally...” Figure 3: Corporate Spreads by Rating Over the last week, corporate spreads in aggregate tightened across the board. The Barclays’ Sterling Non-Gilt Corporate Index traded 10 bps tighter at 140.8. Spreads on the AAA index tighten by 1.1bps to 28.4 while those on AA, A and BBB tightened by 7.5bps to 132 , 17.3bps to 193 and 15.3bps to 256 respectively. On a sector basis, spreads tightened in all sectors. Sub financials traded at 333 (-29bps), senior financials at 166 (-8bps), cyclicals at 144 (-11bps) and non- cyclicals at 110 (-6 bps). Sovereign CDS risk was still on the agenda; with Iceland deciding to hold a referendum on whether to pay back € 3.9bn ( € 12,000 per taxpayer) to the UK Source: Barclays Capital, Redington and the Netherlands. This referendum will be held in late February or early March. Greece’s fiscal position was also challenged in the press. Figure 4: Barclays Sterling Non-Gilt (Investment Grade) by Sector 5 Source: Barclays Capital, Redington
Nominal Yields: “Gilt yields & swap rates fall across the curve...” Figure 5: Nominal Term Structure of Gilts vs. Swaps Nominal swap rates remain above gilts at all maturities up to 10 years, after which the relationship inverts and the swap curve ranges between 20-25bps above the gilt curve between 30Y – 50Y tenors. Over the last week, gilt yields decreased across the curve by about 9-12 bps, with the largest move in 10Y yields falling 12bps to 3.935%. Swap rates also decreased by 5-12 bps with the main move in the 5Y tenor. Z-spreads decreased by around 2-4 bps across the curve as gilt yields and swap rates fell. Figure 6: Nominal Swap Spreads (Z-spreads 1 ) on Selected Gilts 6 1 Z-Spreads are the weighted average constant spread added to the swap zero curve to get the market price of the gilt. They are used as a relative value measure between cash and the swap market.
Inflation: “Breakeven inflation falls...” Figure 7: Gilt Breakeven Inflation Term Structure vs Swaps Gilt breakeven inflation decreased across all tenor points by about 5-8 bps . 30 year Gilt breakeven inflation is currently at 3.82, this is 50bps higher that its level at the beginning of 2009 (i.e. 1 year ago). Swap inflation moved by less than Gilt breakeven, falling by about 3-5 bps across the curve. The swap inflation curve is relatively smooth and upward sloping the Gilt breakeven curve remains “humped” around the 15Y tenor. The DMO clarified the announcement that the “ 30 year area” linker syndication will occur the week of 25 th January. It is expected to be a new 2040 issue of circa £7bn. The DMO also published minutes of their 11 th January meeting: In summary there will be more index linked issuance, more syndications, more long dated Figure 8: Swap Inflation - Gilt Breakeven Inflation conventional and more 2Y bonds. This would come at the expense of medium term issuance. Source: Barclays Capital, Redington 7 1 Source: Bank of England website
Real Yields: “Real yields continue to fall...” Figure 9: Real Gilt Yield Term Structure vs Swaps Real yields remained negative out to between the 5Y and 10Y tenors, with Gilt real yields below swap real yields in this part of the curve. From the 15Y tenor onwards the curves inverts and the Gilt real yield curve is significantly (up to 50bps) higher than the swap real yield curve. 30Y swap real yield trades at 32bps, while 30Y Gilt real yield trades at 81bps. Figure 10 shows a time series of 30Y nominal interest rate swaps and 30Y inflation swaps from Jan 2009 to present. Figure 10: Daily 30Y Nominal and Inflation Swap Levels 8
Appendix: Summary Tables Figure 12: Traditional Liability Matching Assets: Figure 11: Growth Assets 9
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