NEFS Weekly Market Wrap-Up Presented by the NEFS Research Division
18.02.19
MACRO REVIEW
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United Kingdom The US and Canada Europe Japan & South Korea Australia & New Zealand
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EMERGING MARKETS
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Africa China Latin America Russia & Eastern Europe South Asia
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EQUITIES, COMMODITIES & DEALS
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Financials Energy, Oil & Gas Tech & FinTech Pharmaceuticals Mergers & Acquisitions
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CURRENCIES
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Major Currencies Minor Currencies Cryptocurrencies
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NEFS MARKET WRAP-UP
.MACRO REVIEW United Kingdom Despite the UK economy enduring another week of unprecedented Brexit chaos and announcements of poor economic data, the benchmark FTSE 100 index managed to pull-off another impressive week (see chart below). The index finished the week at 7,236.68, up 2.34% from the opening on Monday. It was a similar story with regards to the mid-cap FTSE 250 index, finishing the week at 18,987.23, up 1.85%.
As wages are rising at 3.3%, Tej Parikh, senior economist at the Institute of Directors, said the lower inflation was a "boon" for the economy as it attempts to weather the effects of uncertainty. "This easing in the cost of living should provide some uplift for the High Street just as consumer confidence appears to be waning," Mr Parikh said.
On Friday, the ONS released some positive economic data, announcing retail sales for January rose sharply by 1% on the previous month after falling 0.7% in December. This was the biggest These gains are despite the Office for National annual rise since December 2016 with discount Statistics (ONS) announcing poor UK GDP data for sales in clothing being the driver behind the lift. Q4 2018 on Monday morning. The UK economy However, the gains are minor compared with last expanded 1.3% year-on-year in the fourth quarter of year’s data where retail sales were up an 2018, down from a revised 1.6 % in the previous impressive 4.2% in January. period and below market expectations of 1.4%. It In Westminster, the House of Commons voted on has not been weaker since the second quarter of Thursday by 303 to 258 against a symbolic motion 2012 and continues its relatively subdued endorsing the Prime Minister’s approach to performance over the last year. resolving the Brexit deadlock. Despite the deadline fast approaching, very little progress is On Tuesday, the Bank of England released inflation being made on both sides in Brussels. data for January 2019 with the CPI falling to 1.8%. It is the lowest inflation rate since January 2017, However, the U.K. reached an agreement with mostly due to a slowdown in cost of electricity, gas Switzerland this week that will allow it to continue trade without any additional tariffs after it leaves and other fuels. the EU. It’s an important step, but the U.K. still has a long list of countries it needs to do the same with before Brexit day. Sean O’Hagan
18.02.19
MACRO REVIEW
The US and Canada This week has seen Google plan to invest more than $13billion this year. The company plans to build data centres and offices across the US with the hope that the investment will spur the creation of more than 10,000 construction jobs, adding tens of thousands to its workforce and help to rapidly increase Google’s United States footprint.
In Canada this week, Goldy Hyder, the CEO of Business council of Canada, sent a letter to Finance Minister Bill Moreau this week, saying that "Canada's business leaders are concerned about Canada's economic future”. The letter also outlined the business councils concerns about skills training, regulation, the energy sector, trade and Canada's fiscal sustainability.
The emphasis on investing in the US comes amid global concerns about the slowing business investment, therefore commitment to investment has won the firm praise. The graph below shows the fall in the United states business inventories, falling to -0.1 in November 2018. The investment will boost the US overall business investment and hopefully business confidence for investors but also should boost the US GDP and aid some growth within the US.
The Business Council of Canada is urging the federal Finance Minister to include measures in the upcoming budget to make Canada more competitive and brace the country for the next economic downturn. If Canada can improve its competitiveness, this will help to boost GDP, meaning consequences of a global economic downturn that many are fearing may be less harsh.
Furthermore, this week has seen the United States’ federal debt rise past $22 trillion - a record high despite the continued economic growth which was hoped to reduce the debt/GDP ratio. During the first two years of the Trump administration, the debt increased by more than $2 trillion, in part because of the $1.5 trillion tax cut and large spending increases the president has signed into law. If the debt continues to increase at this rate it may cause concerns of whether it is sustainable for the US economy.
While the council have been pleased with the previous tax measures in last fall’s fiscal update, they argue that the upcoming federal budget needs to offer a long-term commitment to competitiveness. Therefore, the budget needs to focus on skills and training to help improve structural issues within Canada’s businesses. Abigail Davis
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NEFS MARKET WRAP-UP
Europe This week, figures divulged that industrial growth across the Eurozone is falling at the fastest pace since 2009, with a 0.9% decrease from quarter 3 to quarter 4 in 2018, and predictions of a similar trend during the first quarter of this year. Growth in China is slowing down, leading to less demand for cars, one of Germany’s largest exports, and this is leading the Eurozone to achieve lower than forecasted growth (see graph for actual and trend growth). France, another major Eurozone player, is seeing a slump in one of its lifeblood industries – tourism. Due to political tensions and demonstrations, monuments such as the Eiffel Tower and the National Library of France remain open only for limited time periods, constraining revenue earned from the spending and sightseeing from tourists. Moreover, Italian bond yields are beginning to slowly rise again. This means that the price of bonds is decreasing, indicating is lower confidence in the near future of the economy – which is currently in recession - because there is lower demand for bonds and/or higher supply of them. Higher bond yields increase the repayments on the loans, compounding the government’s debt and potentially increasing their debt to GDP ratio past the already concerning level of 132%.
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Some analysts are not too panicked about the future. China is anticipated to implement some type of stimulus, whether fiscal or monetary, in order to recover its growth rate, which may stimulate demand for European exports once again. Even if Germany does not recover as well as expected, the ‘spill-over’ effects on the rest of the Eurozone should be containable. This is because of differences in the structure of the German economy compared to other states – it has a much higher budget surplus, meaning that there is money which can be used as a stimulus for growth, without problems such as elevated debt. France’s economic problems on the other hand will require political action. However if these expectations turn out to be too optimistic, there are few other resorts for Europe. Interest rates are already ultra-low and quantitative easing (which ended earlier this year) has already exhausted trillions of euros of the European Central Bank, making it unfeasible to resume. Megan Jackson
18.02.19
MACRO REVIEW
Japan & South Korea Both positive and negative economic data were released this week in Japan and South Korea respectively. Japan returned to growth in the fourth quarter of 2018, after idiosyncratic shocks such as natural disasters causing a contraction in the third quarter. For example, GDP expanded 1.4%, contrasting the revised 2.6% decline registered in Q3, due in part to the support of higher domestic consumption expenditures of around 2.4%. Likewise, final sales of domestic product, a measure of underlying demand in Japan, rose at an annualized pace of 2.1%, trending above its long run growth potential. This is despite rising pressure on exports ignited by the knock-on effects of a slowdown of the Chinese economy and the USChina trade war, highlighting Japan’s ability to shake of external pressures. Analysts at Nomura reinforce this positive rhetoric, commenting on the resilience of domestic demand and “favourable income climate for households” as “hiring and employment are on an upward trajectory”, due partly to structural labour shortages. Similarly, Tetsufumi Yamakawa, an analyst at Barclays, highlighted that current economic expansion could depend on the country’s ability to transition smoothly into “domesticdemand led growth”. Consequently, the increased domestic investment and consumer confidence in Japan can be seen as an indicator of higher economic growth in the future.
However, economic activity was flat when compared to the same quarter of the previous year and economic growth for the full year in 2018 was at 0.7%, a decline from 1.9% the year prior. Nonetheless, nominal GDP climbed to a record $4.9 trillion whilst a deal between the US and China could help release a lot of held-back investment. Elsewhere, South Korea’s unemployment rate rose to a 9-year high in the wake of tough corporate restructuring and increases in the minimum wage, weakening the country’s ability to revive a slowing economy. The following graph shows that the seasonally-adjusted unemployment rate jumped to 4.4% in January, the highest since it increased to 4.7% in 2010.
The main job losses came from manufacturing and construction sectors. Alex Holmes at Capital Economics stressed the drag on growth is due to the ‘poor health of the labour market’. This indicates the increase of the minimum wage by 11% at the start of January this year weighed on hiring decisions, which as translated into the lowest growth rates for six years in January. George Kennedy
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NEFS MARKET WRAP-UP
Australia & New Zealand This week, the Reserve Bank of New Zealand kept its interest rate at 1.75%, the same record low it has maintained for over two years (see graph below), in line with expectations. Policymakers believe maintaining lower interest rates help boost domestic economic growth and keep inflation stable, through supporting household spending and business investment. This is particularly relevant as a presently slowing global economy with falling commodity prices could hamper demand for New Zealand's exports. In a statement by the Central Bank of New Zealand, it was expressed that the official cash rate is expected to stay unchanged from its current expansionary level through this year and next year. This utilisation of monetary policy is deemed necessary as (mainly because of petrol costs) core consumer price inflation is approaching, but still below, the Bank's 2% target. The low interest rate and increasing employment in the economy is predicted to build capacity pressures that will cause consumer price inflation to rise to the target. As employment reaches its maximum sustainable level, the Central Bank acknowledged that following 2020, the interest rate could move in either direction. In Australia, the National Australia Bank's business confidence index was revealed to have grown to 3.6 points in January.
This comes after the index was at an almost three year low of 2.7 points in December. This is still below its long-run average but is indicative of the general optimism of Australian businesses towards current economic conditions, thought to be improved due to better trading conditions, profitability and employment expectations. Breaking this down into sectors, business confidence stayed strongest in transport, utilities and construction, whilst it was lowest in personal services, as well as finance, business and property services. Also, this week, the Westpac-Melbourne Institute's consumer sentiment index increased from 99.6 in January to 103.8 in February. This signifies a rebound in consumer confidence, as the value has shifted above 100 points (which separates optimism from pessimism). This month's value is due to changes in the subcomponents of the index, fuelled by easing monetary policy from the Reserve Bank and strong labour market conditions with increasing employment. Consumers' expectations of their personal finances are likely affected by tax cuts planned for July; expectations of economic conditions over the next twelve months and five years have too risen, each further from their longer run averages, seeming to underlie rising consumer confidence.
Amy Chai
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18.02.19
. EMERGING MARKETS Africa On Friday, Somalia welcomed the African Union's (AU) decision to support the country's debt cancellation. Since the collapse of the central government in 1991, Somalia has been fraught with violence, corruption, political instability and economic underdevelopment. Somalia is also not the only African country facing debt problems. Approximately 40% of SubSaharan Africa is currently at high risk of debt distress. The debt problems stem from the US financial crisis in 2008 and continue to plague much of the continent. On Tuesday, Ahmed Isse Awad, the Minister for Foreign Affairs and International Cooperation in Somalia, released a statement that say “the African Union's decision mirrors the fundamental spirit of cooperation and support that exists within the AU fraternity� as well as outlining how the country's leaders are attempting to undertake fiscal and economic reforms in an attempt to achieve debt relief and attain better economic development. According to the IMF, Somalia's external debt has reached approximately $5bn. Another country with worrying debt problems is South Africa. The country's debt-to-GDP ratio has gone up in recent years and it is thought that the ratio will peak in the next few years at 60%. The country is currently paying R180bn over the course of last year and this year on debt repayments (the health budget for South Africa Is R205bn). If this trend continues, the country could see itself sinking into a debt trap.
Other African countries that are particularly in trouble when it comes to debt are Chad, South Sudan, the Republic of Congo and Mozambique, all of which have been moved into 'debt distress' in recent years. Many experts worry that these countries could fall into a debt trap only 13 years on from the Multilateral Debt Relief Initiative that cancelled much of the African Debt.
The problems that are causing these debt issues include overreliance on commodity exports in countries such as Nigeria and Zambia, borrowing in foreign currencies and the substantial corruption that is rife in countries such as Mozambique and Angola. The IMF has projected that the public debt burden in African, low-income countries has increased by 13% of GDP in the past 5 years. Abigail Grierson
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NEFS MARKET WRAP-UP
China Sentiment for the Chinese economy started positively but waned as the week went on, with USChina trade talks continuing to dominate market behaviours. Robert Lighthizer, the US trade representative and Steven Mnuchin, US Treasury secretary, have spent the week in Beijing for the latest round of talks to resolve trade and tariff differences between the two economic powerhouses. Donald Trump on Wednesday said that the talks progressed “very well” and that China had displayed “tremendous respect” for their American counterparts. The US president also hinted at a willingness to extend a March 1 deadline that could see tariffs on $200bn of Chinese imports increase from 10 to 25 per cent. He did, however, rule out any meeting with Chinese president Xi Jinping before that deadline. In response to these developments, the CSI 300, China’s main stock index of firms listed in Shanghai and Shenzen, continued its bullish trend of 2019 (see graph). The index remains the world’s best performer this year, increasing 12.5 per cent year-todate. Wobbles on Friday ate into this week’s gains as no concrete signs of progress emerged from the talks; however, the index’s value has increased 3 per cent since Monday.
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Looking beyond trade relations, the Chinese government is investigating corporate bond issuers’ ability to repay maturing debt. This follows a series of high-profile defaults in recent weeks that have rocked market confidence. For example, China Minsheng Investment Group, a private equity firm backed by many of China’s largest private companies, failed to repay principal on a $442m (Rmb3bn) private placement bond late last month. The investigation represents concern about the financial risks of a slowing economy and tight liquidity that has hindered the refinancing ability for many borrowers. Finally, the People’s Bank of China continues to add to its gold reserves this month, most likely in response to the aforementioned geopolitical tensions with the US. Gold stockpiles reached 59.94m ounces by the turn of February, an increase of 0.38m ounces from a month earlier. The central bank’s strategy mirrors that of both Turkey and Russia, who also increased gold purchases in the face of political tensions with the US. Ben Shepley
18.02.19
EMERGING MARKETS
Latin America This week, we focus on Brazil’s social security reforms alongside tax cuts for Mexico’s biggest company, Pemex, and updates on Venezuela’s state oil company PDVSA. Brazil’s economy minister, Paulo Guedes, has vowed to end years of failed state interventions as Latin America’s largest economy embarks on sweeping free-market reforms under President Bolsonaro. Currently, the country is approving a pension overhaul in an attempt to save R$1tn ($350bn) over 10 years with the hope of moving towards a “market-driven economy”. The proposed social security reform will introduce individual contributions into private funds to ensure the pensions of future generations and help boost growth, replacing the current public system based on a guaranteed package of retirement benefits. This will be followed swiftly by tax reform and a radical privatisation programme. Guedes has repeatedly stressed that his top priority was fiscal consolidation, given how government revenue had collapsed from 36% in 2010 to 29% in 2018, while spending soared to 39% of GDP. As a result, the fiscal deficit has ballooned and gross public debt is forecast to hit 90% of GDP this year, shown by the graph below, according to the IMF.
But these are not the only challenges facing Guedes which also include near record unemployment, that has left about 12m people without work, low productivity and an anaemic economic recovery. Mexico will increase the already announced tax cuts for Pemex, the state oil company, as part of long-awaited bailout as it struggles with production in freefall and is riddled with $104bn of debt. Instead of 11bn pesos in tax relief this year, the increase in deductions is now expected to save 15bn pesos, rising to 30bn pesos in future years, Pemex’s finance director said. The tax measures, which were increased slightly since they were first announced last month, come on top of a string of other measures that the company expects will provide it with an additional $5.2bn. Finally, Venezuela’s opposition government has sought to take control of the country’s oil revenues from the regime of Nicolás Maduro by naming an interim board of directors for PDVSA and the USbased refiner Citgo. Venezuela’s energy industry is the lifeblood of its economy and, valued by PDVSA at $9bn, Citgo has been a major source of dollar revenue for Venezuela. Control of these industries is vital to any rebuilding effort if Guaidó’s attempts to oust Maduro succeeds. Kaythi Aung
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NEFS MARKET WRAP-UP
Russia & Eastern Europe After Russia’s credit rating was upgraded from junk status by Moody’s this week, Russian sovereign bonds are now rated investment grade by all three major rating agencies. Moody’s raised Russia’s credit rating upwards by one grade from Baa3 to Ba1 on the basis that policies imposed in recent years aimed at strengthening the country’s public finances have reduced Russia’s vulnerability to exogenous shocks. Whilst Moody’s still forecasts that the US will apply further sanctions, it believes that since 2015 when it cut Russia’s rating to junk status, the government’s ability to withstand such external shocks has greatly improved. With its population projected to fall 15% by 2050, Hungary’s nationalist prime minister, Viktor Orban, announced on Sunday that Hungarian women who have 4 or more children will be exempt from income tax forever. Claiming that ‘migration for us is surrender’, Orban aims to tackle one of the lowest fertility rates in the world as well as harsh labour shortages in an approach very different from that adopted by many Western European countries in which inwards migration is encouraged. In fact, Orban has declared the main focus of his current term in office to be anti-migration demographic control after Hungary, and many of its neighbours, have started to see the negative
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impact that outward migration flows have had following the accession to the EU when natives attracted by higher wages moved West. Similar incentives have also been introduced by other Eastern European governments to raise the birth rate. In an initiative that costs more than 1% of its GDP, Poland pledges 500 zlotys (£100) per month for every family’s second and subsequent child, whilst Serbia provides 12,000 dinar (£90) for families with 3 children and 18,000 dinar (£134) for those with 4 children. Data released Thursday revising Eastern European 4th quarter growth in 2018 shows that declining export demand from the Eurozone led to a braking of regional growth rates, with slowdowns in Romania and Slovakia exceeding economists’ estimates. However, Poland’s expansion decelerated at a rate less than anticipated and Bulgarian growth remained unchanged. Bucking the trend of an Eastern European stagnation or slowdown, Czech GDP expanded 2.9% from a year earlier, beating expectations and posting the highest annual expansion rate in 3 quarters, with a key driver being domestic spending on investment goods. See the chart below for more. Matthew Copeland
18.02.19
EMERGING MARKETS
South Asia This week in South Asia there have been strong developments in the Malaysian and Philippine economies were growth and confidence have increased. HSBC also released a report into how the economies of the ASEAN region will drive growth across the coming year and the potential challenges they could face. In Malaysia, GDP growth figures of 4.7% for Q4 of 2018 (as seen in the graph below) indicate increased performance in the economy after a slowdown at the beginning of 2018. The strong growth figures came off the back of a rebound in exports which had previously been performing poorly. Bank Islam Malaysia chief economist, Mohd Afzanizam, said that economic growth was also driven by increased consumer spending, which had been above the trend level over the last year. There is also optimism for 2019 with 5% growth predicted on the back of continued strong FDI inflows, which increased 1.3% in Q4 2018. New data on foreign portfolio investments (FPI) in the Philippines this week showed increasingly positive sentiment towards the economy from outside investors. In January net inflows equalled $762.8 million, a 370.4% rise on January 2018 and 174.4% than December 2018.
These inflows point towards strong expectations from abroad on short term economic performance such as yields. Factors driving this positive sentiment included the reducing trade tension between the USA and China as well as decreased inflation in the domestic economy. According to HSBC economists, a difficult year could be in store for ASEAN (association of Southeast Asian Nations) economies. Many of these economies have been adversely affected by spillovers from the USA-China trade war in recent times but economists are now predicting that ASEAN export growth will decline irrespectively of developments between USA and China. It was also predicted that fixed investments were likely to decline due to higher interest rates and tighter domestic liquidity, along with political concerns. As a result of all these external pressures, HSBC state that private consumption will be key in helping to drive economic growth over the coming year; expectations for domestic demand vary across countries. For example, economists predict Indonesia will experience the necessary consumption gains to support growth, but this is not the case in other nations who could experience economic downturns. Ashley Brumfield
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. EQUITIES, COMMODITIES & DEALS Financials This week saw healthy performances from both the FTSE 100 (UKX) and the Dow Jones Industrial Average (DJI). The former rose from 7,103 points to 7,236, with the latter climbing from 25,176 points to about 25,785 by week’s end (see chart). Credit Suisse announced on Thursday that 2018’s earnings report saw the major Swiss bank turn a yearly profit after a three-year streak of lossmaking. They reported a pre-tax income of CHF 3.4 billion, which is up a staggering 90% against 2017’s pre-tax income of CHF 1.8 billion. 2018’s fourth quarter in particular, saw the lowest quarterly operating expenses in the last five years, at CHF 3.9 billion, which helped play a noteworthy part in the bank’s success. Whilst the report is exceedingly positive when taken at the group level, it did highlight the poor performance of its Asian fixed-income sales and trading revenues, which fell 91%. This does, however, mirror the performance of other major European banks’ year in Asian markets, which can be explained away in some capacity with reference to the US-China trade war, which has taken a hit on client activity within the area. Santander, Spain’s largest lender, decided against the early repayment of a €1.5bn capital bond,
which some analysts are describing as a “big statement” that has stunned the European debt market. The bond type in question, an AT1 bond which houses banks’ riskiest debts, has perpetual maturity and so it never necessarily has to be repaid. In response to this technicality it has become custom that a gentleman’s agreement exists to repay such bonds at the first opportunity after 5 years of its issuance. Santander’s decision is the first case that this gentleman’s agreement has been repudiated and thus is likely to have knock on effects to investors’ willingness to buy bonds of this type in the future. Allianz, Germany’s largest insurance company, reported an operating profit of €11.5bn in 2018, marking a 3.7% increase from 2017 and the highest operating profit in its 129-year history. Accordingly, Allianz has upped its dividend from €8 to €9 and has announced a new €1.5bn share buyback programme. Commerzbank, the Frankfurt based lender, has abandoned its medium-term targets, admitting that reaching revenues of €9.8bn to €10.3bn by 2020 is out of reach. It has instead opted for a target of €9.2bn by 2020 which would require revenue growth of 3%.
Sebastian Hodge
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18.02.19
EQUITIES, COMMODITIES & DEALS
Energy, Oil & Gas This week, Saudi Arabia’s announcement of deeper production cuts helped crude oil prices regain their 2019 momentum with both crude benchmarks nearing 3-month highs. Brent crude rocketed 6.2% to $65.92 per barrel (see graph) and WTI crude shot up 6.4% to $55.79 per barrel by Friday evening. Despite the overall weekly price hike, markets were initially lacklustre. On Monday, last week’s rise in US oil rigs, global growth concerns and the strengthening US dollar continued to subdue investors and this led to a 1% fall in Brent and 0.6% drop in WTI crude-oil futures. Nevertheless Brent and WTI prices then jumped 1.9% and 1.5% respectively on Wednesday after Saudi Arabia, the world’s largest oil exporter, pledged to bolster oil prices by slashing production by an additional 500,000 barrels per day (bpd) in March. Prices were also buoyed by the partial maintenance closure of Saudi Arabia’s largest offshore oil field which has a capacity of more than 1 million bpd.
What’s more, the International Energy Agency warned that turmoil in Venezuela could disrupt global flows of heavy-crude. Unlike Brent crude which comes from the European North Sea and unlike the US mainland’s WTI crude, Venezuela and OPEC members produce a heavier, higher-sulfur crude oil which many refiners are configured to process such as those along the US Gulf Coast. Therefore, OPEC’s drastic output cuts and Venezuela’s political crisis including US-imposed sanctions have significantly dwindled global heavycrude oil supplies. However, gains were capped on Wednesday evening after a 1.2% decline in U.S. retail spending, the steepest since 2009, heightened investor fears of a global economic slowdown. These fears were further backed up by OPEC’s monthly report, released on Tuesday, which blamed slowing global economies for the cartel’s cut to its 2019 world oil demand forecast. The OPEC report also blamed expectations of faster supply growth from rivals with the Energy Information Administration (EIA) announcing on Tuesday that last week’s US crude oil inventories climbed to their highest levels since November 2017. Compared with analysts’ expectations of an increase of 2.7million barrels, inventories rose by 3.6million as refiners drastically cut runs. However, the EIA also reported that total US crude imports, curbed by Saudi Arabia’s output cuts and US sanctions against Venezuela, hit their lowest levels in over twenty years. This gave hope that the US would burn off some of their inventory excess and helped strengthen the market rally into Friday. Hannah Cousins
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NEFS MARKET WRAP-UP
Tech and FinTech Facebook’s Cambridge Analytica scandal continues to place a burden on the company following the data breach of 87 million users last year, with US regulators looking to fine the tech giant accordingly.
Graphics chip producer Nvidia released its fourth quarter forecasts, driving its share price upward by 1.1% as investors had an overly pessimistic view on the company’s performance.
Talks of a multibillion dollar fine by the Federal Trade Commission (FTC) have emerged following an investigation into the privacy practices, however both sides are yet to agree on the exact amount. The magnitude of this fine shall be priced into Facebook’s value, currently at $163.61 a share.
Analysts have been expecting a fall in sales by 4% to a total of $2.25 billion, however Nvidia forecasted that revenues for the full year will be “flat to down slightly”. This fuelled a rapid upswing in the share price as investors had been expecting much weaker performance for the chip maker. Chief Executive Jensen Huang added that “Nividia’s fundamental position and the markets we serve are strong”, providing a reassuring sentiment for investors.
Meanwhile, Amazon announced this Thursday that it has cancelled its planned secondary headquarters in New York City, due to the opposition it has been facing from “state and local elected officials” said in a written statement. Critics warned that the new headquarters would lead to rent hikes in the Queens borough of New York City, potentially leading to displacement of local residents due to an influx of high paid tech sector workers. This backtrack has been met with a fall in the stock price of 1.1% to $1622.65, see graph below. At present, Amazon has not reopened its search for a new location however shall proceed to make Northern Virginia an alternative headquarter location.
One of Europe’s largest banks, Societe Generale, has chosen HPS to improve its payment processing for ten of its African subsidiaries. With 4.1 million customers in Africa, the PowerCARD software provided by HPS shall help support the banks activities in Africa as HPS has experience with implementing many African payment platforms. The project will focus on the migration of the banks existing electronic payment operations to HPS’s platform, helping Societe Generale’s “innovation and growth dynamics in Africa” according to head of payment solutions Nicolas Revol. Amar Toor
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18.02.19
EQUITIES, COMMODITIES & DEALS
Pharmaceuticals The Trump Administration in the United States has made it clear; the era of continued drug price rises is coming to an end. It seems to be a central tenet to the President’s current economic strategy to attack ‘big pharma’, but in a way that may be beneficial to the market in the long-term. Credit Suisse stated that in 2017, drug price increases by pharmaceutical firms accounted for 80% of their earnings growth. The graph below demonstrates this significant increase in prescription prices over past decades. However, it is important to note that there are justified reasons for these price increases; inflation and the increasing price of drug research, particularly in areas such as antibiotics, mean that it is important for companies to raise prices to cover costs and deliver high quality products. On the surface, the implications for pharmaceuticals stocks may seem bleak. For such a major source of earnings growth to come under regulatory scrutiny may threaten the future revenue generating abilities of many large firms. However, some of the proposals may actually be beneficial to firms. In the US, within the drug distribution process companies pay significant amounts to third party ‘pharmacy-benefit managers’ (PMBs) to administrate commercial health plans.
Draft legislation has been suggested that would outlaw the large annual rebates that pharmaceutical firms pay to PMBs, which has been welcomed by some key industry leaders, including Vas Narasimhan, Novartis AG CEO. With regard to stock performance, it seems unlikely that this is guaranteed to have a major market impact until the reality of legislation becomes clearer. Major Pharmaceutical ETFs, including iShares U.S. Pharmaceuticals (IHE) and SDPR S&P Pharmaceuticals (XPH) have in general followed wider market trends – with relatively low Betas (3Y Monthly) of 0.95 and 1.25 respectively, the most probable outlook would be that for now, the impact of these potential reforms will be minimal. However, taking a longer-term perspective, pricing legislation will be one of the dominant forces in the market for 2019 and ultimately will likely change the revenue structure for many companies across the sector. James Counsell
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NEFS MARKET WRAP-UP
Mergers & Acquisitions Malaysia’s largest wireless carrier, Axiata Group have sold a 28.7% share in M1 Limited, a Singapore listed telecoms company. The stake was sold to Keppel Corp Ltd and Singapore Press Holdings at the offer price of approximately $1.52 billion US, with Axiata receiving $30.98m US from the divestment.
Italy’s state lender CDP (Cassa Depositi e Prestiti) have said they will increase their stake in Italian telecommunications Provider, Telecom Italia. As a result of the statement, shares in Telecoms Italia rose on Friday, rising from 0.48 EUR per share to 0.52 EUR, increasing 6.40% (see graph). Shares in the telecoms company are also up 4.9% on year.
The offer price illustrated a premium of roughly 26% of M1s recent traded share price which was $1.20 US per share on September 21st, 2018, but only a 0.98% premium on its latest closing price of $1.50 US on Friday.
The CDP already holds a 5% stake in the firm, and Italian newspapers have reported that they plan to double their stake to 10% over the next 12 months. The decision is in line with the CDP’s dedication to supporting Italian businesses, and they are openly commitment to creating value in the telecommunications market.
Axiata have stated their long-term ambition to become a ‘next generation digital champion’, with the sale marking the beginning of their capital reallocation. Axiata have stated they are keen to modernise their IT network and infrastructure, as well as increase investment in Malaysia, which continues to be a strong emerging market. Axiata Group have also stated they do not want to be a minority investor in a potentially privatised company which would make their investment illiquid. The Malaysian Index, FTSE Bursa Malaysia moved in a positive direction this week in line with news of the sale, moving from 1,688.700 on Monday morning to 1,682.620 on Friday morning. Axiata has a 3.79% weighting in the index.
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The move comes after a turbulent year for Telecom Italia, which has been caught up in a tug of war between shareholders over how to revive the company which has been hampered with debt of around $28.7 billion. Activist fund Elliot Management Corporation which owns a 10% stake has been at conflict with French media company, Vivendi over operational issues, and analysts believe this is the reason why Telecom Italia shares have lost 30% since the start of 2018. Oscar Miller
18.02.19
.CURRENCIES Major Currencies Edmund Shing, Global Head of Equity and Derivative Strategy at BNP Paribas stated, "We are pretty bearish the Dollar will decline because we think eventually the debt mountain comes to bear," demonstrating that the Dollar has troubles ahead including mounting debt as well as Donald Trump's emergency shutdown and protectionist The growth of the Dollar this week was notably more policies. modest than other weeks though, primarily because of several disappointing data reports released this Furthermore, the Pound lost more ground against the Euro this week dipping below the key week. threshold of 1.14 again falling to 1.1335 after the The US Labour Department announced on Friday vote. Uncertainty has once again begun to that import prices had dropped 0.5%, largely down surround the UK's exit from the EU following yet to lower oil prices, and the strength of the dollar another defeat for Theresa May in parliament on curbing the cost of imported consumer goods like Thursday. cars, with the fall representing the largest decrease in almost two and a half years. Additionally, reports Members of the European Research Group, who emerged showing poor retail performance during want a no-deal Brexit, abstained from voting the back end of 2018, leading to a significant again, leaving the possibility of the UK exiting on slowdown of the US economy, but the Dollar March 29 without a deal, which would be disastrous for the Pound, especially in the short continues to grow. run. Whilst this may force the PM to compromise further, on the other hand the EU may be forced However, not all are convinced that the Dollar's good performance at the start of 2019 will continue to make further concessions to avoid their nightmare scenario, a no deal Brexit. in the long run. Edmund Shing, Global Head of Equity and Derivative Strategy at BNP Paribas stated, "We are pretty bearish the Dollar will Joseph Houghton decline because we think eventually the debt mountain comes to bear," demonstrating that the Dollar has troubles ahead including mounting debt as well as Donald Trump's emergency shutdown and protectionist policies. The US dollar continued its recent rise this week, with the Dollar Index finishing the week 0.12% higher. The Dollar made further gains against the Euro moving from 0.8829 to 0.8872 whilst rising from 0.7729 to 0.7778 against Pound Sterling by the end of weekly trading.
However, not all are convinced that the Dollar's good performance at the start of 2019 will continue in the long run.
18
NEFS MARKET WRAP-UP
Minor Currencies Last week, improving global sentiment on Brexit and the US-China trade war have bolstered various currencies, including the Canadian Dollar; this improving sentiment comes as the British government reassures speculators that a no deal Brexit is unlikely The Swiss Franc (CHF), commonly seen as a safe haven currency, has seen its value slightly drop recently as global uncertainty subsides. Domestic news has shown signs of improvement last week, as production price data has been reported positive, along with one of the country’s largest banks, Credit Suisse, reporting profit for the first time since 2014. Despite this good domestic news, overall the GBP has gained 3.3% against the CHF in the last month continuing the CHF’s bearish momentum. Moving forward however, this pairing is most sensitive to any significant movements in the US-China trade war talks. However, since it is unlikely for a significant development to take place before the 1st of March, any rate changes in the next 7 days will likely be due to domestic influences.
Meanwhile, the CAD has overall strengthened over the last week (see graph), bolstered by rising oil prices and improving US-China trade war sentiment. The expectation of an extension to the 90-day pause of the trade war lifted the value of the CAD, as the trade war escalation after the current 1st of March deadline would weigh down heavily on global growth. This would be disastrous for the Canadian economy, which is a large exporter of crude oil. Again, the future direction for the Canadian Dollar depends on the progression of US-China talks, with the CAD becoming a lot cheaper if Trump’s tariff escalation comes through. There are no top tier economic data releases scheduled for the next week, so expectations are centred around US-China movements, and for now markets seem to be bullish. The New Zealand Dollar (NZD) has been weaker lately as fears of a slowing global economy rise. The currency is seen as a barometer of global trade in the currency market, rising and falling on changing attitudes to risk sentiments. GBP/NZD levels are now below 1.90, due to the major risks posed by the Chinese economic slowdown and the trade war.
Rudai Wang
19
18.02.19
Currencies
Cryptocurrencies JP Morgan have announced they are going to start trials with a cryptocurrency named JPM Coin. Although it has been called a cryptocurrency, it actually has little to do with the crypto market. With around $6tn of daily transfers, they are simply upgrading to a private distributed ledger system to streamline things for them and their clients. This news didn’t cause any visible changes to crypto prices. Bitcoin (BTC) continued to find support around $3600 this week, trading at $3612 on Friday according to CoinMarketCap. Average 30-day volatility, which has been declining since midDecember, has fallen to its lowest level in 3 months. Trade volumes have also declined this week, dropping below $6bn on Friday. Bitcoin’s average block size has drastically increased this month, peaking at 1.305mb on 11th February. This is up from 0.899mb the week before. The average block size is currently 1.08mb, which still exceeds the previous limit of 1mb established by the Bitcoin network. Binance Coin (BNB) continues to outperform the bearish crypto winter. Since the week commencing 3rd December, the coin increased by 115%- peaking around 0.0027 BTC. These are the highest levels seen since June 2018. On Friday, it is trading at 0.00253126 BTC, a 6.32% increase in 24 hours.
Ethereum is currently trading at around $124, resulting from a bad year for the cryptocurrency. Ethereum (ETH) reached lows of $83 in early December, falling from $1,424 in January 2018. This is a fall of over 94% in under a year. However, it doesn’t look likely to hit any new lows anytime soon because of the significant volume upticks between November and December. Ethereum replaced Ripple in the market capitalisation ranking this week, claiming the 2nd place spot. Ripple (XRP) is now ranked at 3rd, with the price down from $0.315 last Friday. It is currently trading at $0.300314. Stellar (XLM) received an increase in bullish momentum, shown by an increase of 4% on Friday. Ranked at 9th for highest market capitalisation, XLM reached a yearly low of $0.07318 in early February, following the downward trend from early December. Stellar is trading at $0.077874 on Friday. Following a mix of weekly gains and losses in the top 20 cryptocurrencies, the crypto market capitalisation displayed a steady pattern this week (see graph). On Friday afternoon, the crypto market capitalisation was at $120.4bn, down slightly from $122.2bn the same time
Rhys Dil
20
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