Week Ending 6th March 2016
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 2 United Kingdom United States Eurozone Japan Australia & New Zealand Canada
Emerging Markets 8 China India Russia and Eastern Europe Latin America Africa Middle East
Equities 14 Financials Pharmaceuticals Retail
Commodities 17 Energy Agriculturals Precious Metals
Currencies 20
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MACRO REVIEW United Kingdom Markit’s Purchasing Manager’s Index (PMI) tracks business conditions in various sectors of the economy, with a reading above 50 indicating expansion, and a reading below 50 indicating contraction. The index for the UK’s services sector fell to 52.7 in February, down from 55.6 in January. As shown on the graph below, this is the worst reading since March 2013. The slowdown in services is attributable to falls in the volume of new business. The increased risk of Brexit, alongside financial market volatility and weak domestic and global growth, mean clients are delaying placing new orders. The construction and manufacturing PMI results are also at their lowest levels in over a year, at 50.8 and 54.2 respectively. These two sectors account for 16% of the UK economy – but the services sector accounts for over 75%. Therefore this data has raised fears that GDP growth could fall to 0.3% or less in the first quarter of 2016. It also makes it more unlikely that the Bank of England will raise interest rates soon. Alan Clarke, head of European fixed income strategy at Scotiabank, has said this could even lead the Bank of England to consider a cut in interest rates.
The weak PMI data serves as a signal that the prospect of Britain leaving the EU is damaging the economy. A referendum is due to be held on 23rd June. None of the foreign exchange strategists who participated in a poll by Reuters this week thought that a Brexit would benefit the UK, with over half forecasting that it would lead to a sterling crisis. Recently, the pound fell to a seven year low, due to expectations that sterling will fall even lower if a Brexit occurs. The world’s largest asset manager, Blackrock, has said that Brexit would: damage the UK economy, particularly the financial, fashion and property markets; trigger lower growth and investment; lead to higher unemployment and inflation; and pose risks to sterling and UK equities. Blackrock have also stated that the UK’s £18.5bn surplus in financial, insurance and pension services was likely to contract - if 10% of workers became redundant following a Brexit, the government could lose up to £3bn in annual employment taxes. Shamima Manzoor
Markit Services Sector PMI
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NEFS Market Wrap-Up
United States The US economy is set to “power ahead” and push inflation back to target despite hazards overseas, John Williams, the president of the Federal Reserve Bank of San Francisco said in an assessment of the current US economic climate. Despite the recent winds of gloomy warnings, Mr Williams talked down the recession fears and flagged up risks associated with leaving interest rates too low for too long. To some extent, this bullish assessment of the economy is not completely implausible. The resilience that the US economy has shown in the face of developments such as the 20% surge in dollar is quite remarkable and one that is projected to divide the Fed’s policymakers at the Central Bank’s meeting, planned in late March. In other news, US construction spending surged in the first quarter of 2016 to the highest level since 2007 when it bottomed at $0.78 trillion, as shown on the graph below. Construction spending increased 1.5% to $1.14 trillion, as both private and public outlays rose, the Commerce Department said on Tuesday. First-quarter gross domestic product growth
estimates are currently as high as a 2.7%, but the strong construction spending report could prompt economists to raise their forecasts. The year 2016 seems to be an optimistic one not only for US businesses but also the young graduates seeking professional jobs, thanks to an aging US workforce and low unemployment. Amidst all the political conjecture, you do not have to dig far below the surface of recent jobs reports to discover why billionaire Donald Trump this week solidified his place as the Republican frontrunner. Mr. Trump secured “Super Tuesday” victories in a wide variety of states from north-eastern and wealthy Massachusetts to southern and poorer Alabama. Mr Trump’s economic policy hangs largely on cutting taxes and protectionist promises to raise tariffs on China and Mexico to bring offshore jobs back to the US. Such economic anger has been a big theme in this election campaign so far and one that Donald Trump seems to successfully capitalising on. Vimanyu Sachdeva
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Eurozone Eurozone lenders and the International Monetary Fund (IMF) disagree over how much more Greece needs to do to reform its economy, a dispute that may delay new payouts and the start of debt relief talks, officials said this week. Greece has been kept afloat since 2010 by IMF and Eurozone bailouts. The lenders have disagreed in the past, but they have managed to resolve their issues before they received much publicity. But after Athens had to ask for a third bailout last year, some in the IMF wanted to stay out of yet another programme unless they were sure it would get Greece back on its feet. "The main problem now is disagreement between the institutions, because that will harm the credibility of any solution," one senior official said. "They must get their act together and agree on a scenario and on policy measures." IMF and Eurozone officials hope to reach a compromise on Greece in talks this week, before a meeting of Eurozone finance ministers on Monday. Until the Eurozone and the IMF agrees, they cannot decide if Greece has met the first requirements for the pay-out of new loans. Nor
can the Eurozone start discussions with Athens on debt relief that would help make Greece's huge debt sustainable. Greece has no major debt redemptions due until July, giving the lenders and Athens time to find a compromise. But the drawn-out talks undermine investor confidence. The dispute focuses on what Greece has to do to reach a 3.5% primary surplus in 2018 and keep it there so that it no longer has to borrow from the Eurozone to remain solvent. The IMF believes Greece's primary surplus in 2018 will be around 2% with the current reforms. Growth will be about a percentage point lower than forecast by the Eurozone. Greece should therefore be more ambitious with reforms, especially with the most politically difficult, pension reform. The pension reform could be less ambitious and the 2018 primary surplus lower if the Eurozone offered Greece greater debt relief. That would irk some in the Eurozone who have to maintain similar surpluses to keep debt sustainable or who, like the Baltics or Slovakia, find it difficult to justify Greeks getting bigger pensions than their own citizens. Erwin Low
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NEFS Market Wrap-Up
Japan This week, yields on Japanese government bonds turned negative for the first time, meaning that people are now paying the Japanese government for the privilege of lending them money. This is symbolic more than anything, as yields have been rapidly approaching zero over the past few weeks (see graph below), however, this emphasizes the extent to which borrowing costs in Japan, and around the world, have dropped, highlighting the failure of recent unconventional policy measures implemented by the BoJ, who hoped that by cutting interest rates into negative territory they would be able to stimulate investors into putting their money into riskier assets. Nowhere is the problem faced by authorities in Japan more noticeable than in the case of the Japan Post Bank, which was privatised by the Japanese government six months ago in the hope that ordinary investors – the so-called Mrs Wantanabes of Japan – would be tempted into investing in equities. Falling yields on Japanese government bonds have squeezed the profits of the Japan Post Bank and its share price is now 20% below the IPO level. This will have hurt the confidence of many ordinary investors in Japan and this, therefore, demonstrates the policy
contradictions which are present in Japan at the moment. In other news, figures for capital spending and retail sales were released this week. It was reported that capital spending for japan in the final quarter of 2015 grew by 8.5% from a year earlier, which is lower than the forecasted 8.8% gain and down from an 11.2% gain in the September quarter. This fall may have been caused by decreasing business confidence, which itself is attributable to a contracting economy, volatility in financial markets and gains in the yen, which have eroded the competitiveness of Japanese goods overseas. With retail sales, at -0.1%, also lower than their forecasted value, which was 0.2%, many economists think that GDP growth may be revised, from an initial projection of a 1.4% drop, to a contraction of 1.5% when updated figures for GDP are released next week. As has been the case for many years, figures for unemployment remained low this week and actually fell to 3.2% from 3.3% in January. This, however, becomes less impressive when you realise that average cash earnings increased by a measly 0.4% last month. Daniel Nash
Greece has been kept afloat since 2010 by IMF and Eurozone bailouts. The
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Australia & New Zealand Economists expected the end of the mining boom to bring turmoil to Australia’s economy for months to come, however the latest figures on Australia’s growth show otherwise. As shown by the graph below, Australia enjoyed 3% growth in 2015 as output rose by 0.6% in the December quarter. ABS said that “the major contribution to economic growth” came from household final consumption expenditure, with 0.4 percentage points to GDP growth, and public gross fixed capital formation with 0.2 percentage points. This was caused by lower petrol prices, rising house prices and falling saving rates, which encouraged consumer spending. This offset a slump in private business investment (-3.3%), driven by a fall in new engineering construction (-12.3%). Craig James, CommSec economist, stated that Australia is now one of the fastest growing economies in the developed world. After the collapse of the mining industry caused devastation throughout the economy, this news boosted consumer and business confidence, aiding growth. The news helped prop up the Australian dollar to US72.29c. Elsewhere, New Zealand’s terms of trade declined in the fourth quarter due to weaker meat and dairy prices. Import volumes rose 0.7% and the value fell by 1.9%. Export prices
fell more than import prices, as seasonally adjusted export volumes and values fell by 2.4% and 6.1% respectively. The decline was led by milk powder and butter. A weaker dairy market hit KiwiRail and Port of Tauranga who suffered from the drop in export volumes. Meat values fell by 2.4%, led by a 6.6% drop in beef, despite a 16% surge three months earlier. However, Christina Leung, NZIER senior economist, implied that although prices for dairy exports have sunk, strong population growth, construction and tourists are helping to offset such downturns. She stated that they will be the “key driving forces behind solid growth for the next few years” and expects annual GDP growth to recover to around 3% over 2016. But Leung did warn that “tough international conditions” could make this trifecta effect less strong. She mentioned that current volatility in the global financial markets indicates how quickly things can change and that the US Federal Reserve’s interest rate plans are still being digested throughout the global economy. New Zealand’s Reserve Bank is said to be becoming “increasingly mindful” of their loose monetary policy on asset prices and financial stability. Meera Jadeja
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NEFS Market Wrap-Up
Canada It was revealed this week that the Canadian economy in the fourth quarter of 2015 grew by 0.2% as we can see on the graph below. The growth rate decreased from 0.6% in the previous quarter. The Canadian GDP growth rate for the whole of 2015 was revised to 1.2%. This was despite the fact that Canada was in a technical recession for the first half of 2015, after recording two consecutive quarters of negative growth. The decline in the Canadian GDP growth rate is partly due to Canada exporting less, in 2015 it exported a value of $408.7 billion (US dollars) of goods. This figure is down by 13.7% from 2014. This could be partly due to the big decreases in the price of oil in the previous year. Oil accounted for 19% of Canadian exports in 2015. In 2015, of the top ten importers of Canadian goods, all ten imported high quantities of oil from Canada. The US, Canada’s biggest export recipient (76.8% of Canadian exports go to the US) imported $74 billion of oil in 2015 alone. Canadian exports decreased by 0.6% in the fourth quarter of 2015. Consequently, a decrease in global oil
prices have greatly impacted upon revenues of the Canadian government.
the
Moreover, another cause in the decrease in GDP growth in 2015 compared to 2014 was a decline in investment in Canada. This can be shown by the decrease in business gross fixed capital formation, which measures net investment into the Canadian economy. As investment is a component of output a decline in the level of investment decreased GDP growth. In other news it was announced that the Canadian merchandise trade deficit rose in the first month of 2016 from $0.63 billion to $0.66 billion. The increase in the value of the deficit can be accounted for by an increase in exports of 1.0% and a corresponding increase in imports of 1.1%. The main reason for the increase in exports was a rise in consumer good exports of 13.7%. If we compare this to January 2015, exports have grown by 7.3% and imports have increased by 4.4%. Kelly Wiles
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EMERGING MARKETS China Rather surprisingly, China started off this week by cutting its reserve requirement ratio, which stipulates how much cash banks must keep in reserve. The half a percentage point cut to 17% for large commercial lenders was the first of the year, freeing up CNY685 billion in funds. The People’s Bank of China stated that the cut is designed to “ensure adequate liquidity, and to ensure a steady expansion of credit, in order to provide a suitable financial environment for supply-side structural reforms”. The shock is significant given the huge amount of liquidity that has been pumped into the system recently. While this may boost the economy in the short term, the view on Chinese policymakers’ confidence in the economy is concerning. The policy move exacerbates downward pressure on the Yuan, which is likely to be absorbed by further declines in Chinese foreign exchange reserves. However, further capital outflows could nullify this new monetary stimulus. Moody’s cut its outlook on the Chinese economy to negative from stable amid growing uncertainty and diminishing government power. The credit rating agency left its long-term credit rating at Aa3, the fourth-highest investment grade.
This week on the economic calendar, official and Caixin purchasing managers’ indices (PMI) for manufacturing and non-manufacturing sectors have been released. China’s official factory gauge declined for a record seventh straight month to a figure of 49.0, missing estimates of 49.4, as shown in the graph below. Official non-manufacturing PMI came in at 52.7, also lower than the previous month’s figure of 53.5, bringing it to its weakest level in seven years. Measures of new orders, selling prices, employment, backlogs and inventories presented a figure below the 50-point mark, suggesting a weakening economy. The Caixin PMIs for both the manufacturing and nonmanufacturing sectors came in lower than forecasted and lower than last month’s figures. Premier Li Keqiang is expected to reveal a growth target of between 6.5% and 7% at the upcoming National People’s Congress, slightly lower compared to last year’s target of around 7%. With debt levels at an unprecedented 247% of gross domestic product and current rapid capital outflows, how the Chinese government plans on achieving such a goal will be of significance to the global economy. Sai Ming Liew
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NEFS Market Wrap-Up
India With one eye on upcoming elections, the government this week announced a politically smart, $288mn budget aimed primarily at India’s farmers, who make up the majority of the country’s 1.2bn people. Finance Minister Arun Jaitley outlined the government's "transformative agenda" for the economy and whilst investors seeking liberal economic reforms were left disappointed, India’s rural economy was promised $13 billion of development. The ‘pro-poor’ budget ambitiously aims to double farmers’ incomes within the next five years and includes a pledge to set up 89 new projects for irrigation whilst also pushing for the completion of old ones. This follows two consecutive years of drought which has left the farming sector, and the two fifths of Indian families who rely on it, reeling. The government will also raise spending on a rural employment scheme, a crop insurance programme and focus on increasing rural access to the internet. Investment in agriculture is urgently needed since India’s farmers are still massively monsoon-dependent and it seems that the poorest in society are yet to benefit from India’s rapid economic expansion. The budget also offered relief for small tax payers as the ceiling of tax rebate for people earning an income of up
to Rs 5 Lakhs per year was raised to Rs 5000 from the current Rs 2000. Over a million tax payers are expected to benefit from this measure. Elsewhere, $32bn is to be allocated for infrastructure development in 2016-17, an increase of 22.5% from last year, building 10,000km of national highways and upgrading another 50,000km. Despite these spending pledges, India will stick to its fiscal deficit target of 3.5% for the coming year after achieving 3.9% in the current year. There was much speculation surrounding this decision and many would have liked to see Jaitley stretch the deficit target in order to recapitalise public sector banks, which will receive a capital injection of just $3.6bn. This is a small fraction of the $26bn that a state banking sector weighed down with bad loans is estimated to need in order to stabilise it. The absence of bold economic reforms left investors and analysts dissatisfied, with the stock market closing 0.7% down on the day of the announcement. The GST Bill was mentioned only in passing and the lack of private investment is still an issue which needs to be addressed. Homairah Ginwalla
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Russia and Eastern Europe Tensions throughout Europe have taken a turn for the worse this week, with Eastern Europe being on the receiving end of high amounts of criticism from Brussels. Merkel has denounced Eastern Europe for its poor approach to aiding the Migrant Crisis that is currently plaguing the southern European states of Greece and Italy, as well as Hungary. Some of the Western-most countries of Eastern Europe, such as Croatia, Serbia and Slovenia, have adopted a very independent approach to the crisis, which has included introducing tighter entry conditions, closed borders, and a possible cap on asylum applications. This has angered politicians in Brussels, stating that this uncooperative response to the crisis is merely prolonging the economic detriment ailing the Greek and Italian economies, which are still recovering after the 2008 Economic Crisis. Additionally, the response is placing greater pressure on Germany and other nations to open their borders. Solving the Migrant crisis currently afflicting the political, social and economic scenes of Europe is undoubtedly of the highest importance, and yet a solution can only be found by ensuing a collaborative, swift and tolerant response from a united Europe. Eastern Europe has also been condemned by British politicians in its response to the possible 2016 ‘Brexit’. Following discussions between
Brussels and the UK, numerous Eastern European states, namely Poland, Romania and Bulgaria, have spoken out about the numerous negative consequences a UK exit will have on their economies. Britain is the fourth highest contributor to the EU, and, through the robust nature of its economy, has fuelled the economic growth of new EU members with investment and trade. British politicians have judged that this self-interested response from many economically successful Eastern European countries is only focused on the future prospects of their economies. Yet with investment figures released for the fourth quarter of 2015, Eastern Europe fortunately continues to see very strong investment levels. Hungary fared the sturdiest, having imposed record low interest rates of 1.35% in July 2015 (see graph below). Overall investments increased by 7%, with investment performance seeing a 0.7% rise. Most substantially, public investment rose by 70%, and health and social work investment increased by 110%. With very strong levels of investment, it can be anticipated that the first quarter of 2016 has also proved industrious for Eastern Europe. Charlotte Alder
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NEFS Market Wrap-Up
Middle East The UAE’s non-oil private sector showed a rebound in growth last month, with output rising at a marginally faster rate, according to the Emirates NBD UAE Purchasing Managers’ Index (PMI) released this Wednesday. In the United Arab Emirates, the Emirates NBD UAE Purchasing Managers’ Index measures the performance of companies in non-oil private sector and is derived from a survey of 400 companies, including manufacturing, services, construction and retail. As shown in the graph below, the February index rose to 53 from a 52.7 in January, signalling growth in the non-oil private sector compared to persistent slowdown in four of the previous five months. The overall improvement in business conditions was helped by expansions in output, new orders and employment. All three variables rose slightly faster than in January, but the respective indices remained below long-run trends. Analysts have attributed faster jobs growth to increased workloads and new project start-ups. The increase in new work was also sufficient to lead to further growth of business, while the report stated that staff costs were relatively contained. Overall input costs increased at a
slightly faster rate in February, but price pressures remain modest as US dollar strength and low commodity prices helped in keeping producer inflation contained. Moreover, the report showed that purchasing activity and inventories rose at a similar pace to January, but the rate of increase in both remained relatively modest at 53.6 and 52.3 respectively. Backlogs of work also increased only slightly last month and remain low by historical standards, suggesting there is spare capacity in the UAE economy. Because of this spare capacity, analysts hope that in the coming months the PMI can again reach the levels hit in the middle of last year. “The improvement in the Emirates NBD UAE PMI last month is encouraging, particularly against a backdrop of low oil prices, global growth concerns and a strong dollar. However, the rate of growth in the non-oil private sector remains much weaker than a year ago, when the headline PMI registered 57.1. We expect the environment over the coming weeks to remain challenging, with several global factors weighing on sentiment and activity,” said Khatija Haque, Head of Mena Research at Emirates NBD. Harry Butterworth
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EQUITIES Financials As a result of the impending disappointment of the financial markets, it comes as no surprise with the announcement of further capital requirements for the world’s largest banks. On Friday, the Basel Committee on Banking Supervision officially banned banks from initialising their own assessments of risk. Global regulators restricted these banks on using their own models for calculating operational risk which accounts for up to 28% of the total risk to some banks - stating that they are now required to hold a larger quantity of capital in order to counter the minimal risk illusion that banks try to portray. Greater transparency will hopefully see improved equities as a result. Whilst some banks are having this capital crisis as a result of poor financial performance, we see that some who are trying to list their company shares on the equity markets face even greater problems. London in particular has dominated the European market for Initial Public Offerings (IPO’s) so far this year, with the UK accounting for a massive 72% of the total raised through entry into the equity markets. The early months are usually slower due to companies awaiting previous year’s financial results, with only one US company listing their shares on the market in January.
This huge rush for listing UK shares on the stock markets comes as the EU referendum and its attached uncertainty looms ever closer. As a result a massive $1.8 billion has been raised so far this year by ten IPO’s on the London Exchange – a 17% rise from last year. The concern within the UK is proven through comparison to European IPOs (excluding London), where only $700 million has been raised – a huge drop of 90%. Clearly the uncertainty surrounding financial markets is continuing to take its toll and with the UK’s stance in the financial world being under persistent questioning, the financial markets are only going to face struggles from here on, with investor confidence being a huge determinant. But, with so many factors weighing down the markets, it’s a relief for investors to see that the Dow Jones US Financials Index is up 4% over the past week, whilst the FTSE 100 Index – which is primarily composed of financial companies – is up almost 2% in the past week, as shown by the figure below. So with greater restrictions seeing more transparency we see growing performance in the financial industry. Daniel Land
Dow Jones US Financials Index vs FTSE 100 Index
Dow Jones
FTSE 100
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NEFS Market Wrap-Up
Pharmaceuticals This week we have seen the FTSE 350 Index Pharmaceutical & Biotechnology rally by 3.42% and the NASDAQ Biotechnology Index rally by 4.36%. This week has been positive for the Pharmaceutical sector as the two indices have increased by 3% to 4%.
came under fire last year for its drug pricing strategy, as well as for accounting issues and its relationship with the specialty pharma network Philidor. Shares of Valeant are down 59% in the last year, while the S&P has been down 7% from a year ago.
AstraZeneca has struck a $500m deal to sell the marketing rights for two heart drugs in the latest example of the UK pharmaceuticals group using licensing agreements to boost revenues. China Medical System Holdings will pay AstraZeneca $310m for the rights to sell its Plendil blood pressure medicine in China and $190m for its Imdur angina treatment in all regions except the US. The deal to market Plendil in China highlights growing collaboration between western and local manufacturers in the world’s second-largest pharma market. These agreements can help multinational groups widen their reach in China while giving local companies access to strong branded medicines.
In other news, Sanofi, another pharmaceutical company, is open to acquisitions in the market for rare disease treatments in a sign of confidence that the high prices commanded by orphan drugs are sustainable. David Meeker, the head of Sanofi’s Genzyme specialty care business, said rare disease assets were among the French group’s potential targets as it hunted growth. Orphan drugs command the biggest margins in the sector because of the small number of patients from which manufacturers can make returns on investments.
Valeant shares slump 6% after company reschedules its earnings release. The company made the announcements as its chief executive Michael Pearson returned from medical leave and the Canadian drug maker moved to split its chief executive and chairman roles. Valeant
It was a good week for the Pharmaceutical sector as the overall sentiment for the Pharmaceutical sector has been positive and there has also been huge progress in the fields of cancer research. All in all, this year would be a transformational year where there would potentially be many breakthroughs in the field of medicine and biotechnology. Samuel Tan
NASDAQ Biotechnology Index (NBI)
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Retail This week consumer groups overtook the financial sector as the largest component of the FTSE 100 as many of these companies have become a haven for investors who have recently been looking for companies with relatively safe balance sheets and strong earnings. Consumer goods rose consistently this week with the FTSE Consumer Goods Index up 7.33% and general Retailers have also risen. The FTSE 350 retail index finished up by 2.5% from the start of the week to midday on Friday. Companies such as Unilever, Diageo and Burberry have risen to become dominant members of the FTSE 100 as investors shy away from banks in a world where interest rates are so low. The five banks in the index have fallen in value by ÂŁ37.8bn since the start of the year to the end of February. Aberdeen Asset Management was also recently demoted to the FTSE 250 and Sports Direct, the sportswear retailer which has experienced problems similar to that of Poundland (explained below) was also dropped from the group. A decade ago consumer goods groups made up only 9.3% of the index but now they take up 20.85%. In the same vein as previous weeks, investor sentiments over the prospects of high street retailers can be illustrated from major reductions in a number of equities over the last few months. As seen below, Poundlands
market value has halved over the last of six months, leading its chief executive, Jim McCarthy, who had been at the helm for over 10 years, to quit this week. Along with many other UK retailers, Poundland has had a tough time given that spending habits are shifting in favour of online shopping. On top of competition from other high street multi-discount rivals such as B&M, it has suffered costs from the integration of the 99p stores acquisition made last year. Furthermore, like other retailers it has been trying to adapt in order to absorb increasing labour costs. From April 1stof this year, the UK's new national living wage initiative will raise the minimum wage for over-25s to ÂŁ7.20 an hour, from ÂŁ6.70 now. Poundland has responded by switching to LED lighting in stores, cutting its electricity bill by a third and continuing expansion in foreign markets such as Spain, where it has seen relatively successful trial results. Given that the consumer goods sector has shown stable and strong performance in comparison to other sectors, notably the financial sector, stocks from this sector are likely to perform well in the near future. Traditional high street retail stocks on the other hand remain subdued and I believe this trend is unlikely to change because spending habits are fundamentally changing. Sam Hillman
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NEFS Market Wrap-Up
COMMODITIES Energy Oil prices climbed nearly 3% on Monday after the Chinese government took measures to intervene in its slowing economy. The Chinese government made the decision to cut its required reserve ratio – the amount banks must hold in cash – in a move to boost investment. This has a major impact on the oil price as China is the world’s largest importer of the commodity. In addition to this, the US and OPEC’s output fell, while Saudi Arabia vowed to help stifle the current market volatility, indicating that the market selloff might finally be nearing its end. Both WTI and Brent Crude rose further on Wednesday to their highest prices in 2 months, as the planned production cap by the world’s major oil producers began to appear credible. Venezuela’s oil minister, Eulgio del Pino, stated that more than 15 nations were prepared to attend a meeting to deliberate over a potential output freeze. Vladimir Putin also expressed his support saying ‘On the whole, an agreement was reached that we will keep oil output at January level.’ However, data was also released on Wednesday that showed US crude
oil stocks had risen by a further 10 million barrels to 495 million. This caused any overall gains to be cancelled out, leaving the price roughly where it started the day. The price of crude futures increased on Friday due to positive US jobs data, adding further to the week’s gains. Brent is likely to end the week 5% higher. Prices had been rising steadily, supported by US production cuts. But traders had been holding back to hear news of the imminent Non-Farm Payrolls Report. A net increase of 242,000 jobs was sufficient for a lot of investors to open long positions and the benchmark’s price increased markedly late on Friday. If current trends are to continue, and we have actually reached the end of the glut, then prices should be expected to rise gradually over the rest of the year as demand re-equilibrates with supply. However, this is highly dependent on a formal agreement being reached over the prospective coordinated production freeze. William Norcliffe-Brown
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Agriculturals Grain futures may be set for a revival in pricing, according to analysts at ABN Amro, who predict that prices have now ‘bottomed out’ after a four year slump. Frank Rijkers, commodities analyst at ABN, said that “the fact that prices have been moving sideways for the last few weeks would seem to indicate that prices have now bottomed out”, citing the end of three years of over production finally coming to an end, with consequential signalling to farmers to lower their production, further lowering prices. Evidence for this can be seen in the International Grain Council forecast of 1.4% lower production for 2016-17, as farmers no longer look to maximise output, given the weak incentives provided by lower prices.
example, if ABN’S forecasted rise in oil prices were to occur, demand for bioethanol, an alternative in many cases to oil, would increase, raising prices of bioethanol, which is produced largely from corn. In turn, the demand for corn would increase, and prices would increase further. It is, however, worth noting that not all investment banks and/or analysts share the same predictions regarding oil. Goldman Sachs analysts, for example, predict that oil prices will continue to fall in 2016 as a lack of storage creates motivated sellers, and OPEC supply seems set to remain high. If this is true, ABN Amro’s predictions on grain pricing may not necessarily be accurate.
The bank also noted the role of projected crop yield shortcomings in lowering prices, with inclement weather conditions in South Africa, for example, resulting in projected yields of far less than previous peaks. This will, of course, lower supply even further, and raise prices as a result.
To conclude, therefore, ABN Amro’s predictions make for interesting reading at a time when grain futures have begun to exhibit their first tentative signs of improvement in a period of years, though only time will tell if they are accurate or valid. Jack Blake
It is also interesting to note that ABN forecasts a rebound in oil prices, which, despite not being an agricultural commodity in itself, has a number of knock-on effects for a plethora of agricultural commodities, including grains. For
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NEFS Market Wrap-Up
Precious Metals The outcome of the G20 summit, which took place on 26th and 27th February reinforced the importance of stabilising China’s yuan. Although further depreciation would assist commodity exporters, the People’s Bank of China (PBOC) agreed that an improved balance is essential in order to shift towards a market oriented economy. Gold appreciation, however, may slow. Furthermore, a more stable currency would increase the exchange rate flexibility. According to Bloomberg, G20 sees no basis for a prolonged China’s currency depreciation. However, the slowing growth of the country’s economy has been forecasted previously and, according to the Central Bank, the yuan will weaken. Among other currencies, the US dollar continues to strengthen but the Japanese yen might expect relative depreciation due to negative exchange rate policy (G20). Appreciation of USD and strong equities raise concerns in the precious metals market. Differently, growing demand for physical gold as well as oil prices remaining low offset the negative impact of the currency. Overall, the metal appreciated steadily over the last week. In the period 26th February to 4th March Gold appreciated by 3.44%, shifting from 1220.40 USD/t. oz. to 1262.40 USD/t. oz. (Figure 1). In other metals market, the prices didn’t increase as steadily. Silver reached its monthly
lowest on the 26th (14.714 USD/t. oz.) and, after a slight dip on the 1st March (14.756 USD/t. oz.), the price recovered to 15.275 USD/t. oz. on the 4th (+3.81%). Similarly, with a slight downturn on 2nd, the price of Platinum increased by 3.90% from 914.25 USD/t. oz. to 949.90 USD/t. oz. On the 4th, Palladium reached its highest in the last two months, rising by 14.4% from 11th January to 4th March (Figure 2). As the demand for physical metal overcomes US dollar appreciation, most metals experienced appreciation, with Gold remaining less volatile. According to Georgette Boele, strategist at ABN Amro, it is surprising to observe Gold still appreciating because of the opposing factors in the global economy. However, whilst the price is still peaking up, investors see a potential – meaning the right time to invest. Deutsche Bank also forecasts that low interest rates and a slowing economic growth could have a positive effect on Gold value as historical evidence shows an opposing effect at times of accelerating growth (CNBC.com). For the time being, Gold experiences a positive shift in its value, directing other precious metals towards appreciation. Fed. Reserve meeting on 15-16th March should reduce uncertainty in the metals market as, after the decision, at least the interest rates will be seen stable for a longer term. Goda Paulauskaite
Figure 2 - Palladium Figure 1 - Gold
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Week Ending 6th March 2016
CURRENCIES Currencies This week we learnt that the Bloomberg Dollar Spot Index, which tracks the currency against ten major peers, dropped 1.8% in February as the global economic slowdown is expected to drag down the US. Deutsche Bank AG, however, which is the world’s second-biggest currency trader, is expecting a fast recovery of the US Dollar after February’s slump. Deutsche Bank is relying on the “Misery Index”, which measures the rate of inflation and unemployment. Hence, the unemployment rate faced an eight-year low this Friday. Alan Ruskin, who is the global co-head of foreignexchange research at Deutsche Bank, said that “the tighter the labour market is, the more likely that we’re in a cycle where the Fed is going to be supportive of the dollar”. He forecasts the greenback will strengthen to 95 cents against the Euro by the end of 2016. This Friday, the Dollar already rose 0.1% against the Euro to $1.0952 after reaching a monthly high in the beginning of the week. At the same time, the major European currencies, sterling and the Euro, are struggling. In fact, the Euro is the worstperforming major currency after the Pound after the past month as the EU faces a potential “Brexit” and other political turmoil due to the present nationalisation process, which is
already eroding the Schengen area. German Chancellor, Angela Merkel said on March 2 nd that the strength of the Euro “relies on the free movement of goods and services as well as people”. Bloomberg experts are predicting the median value of the Euro at the end of 2016 with $1.08. While the weak Euro may have positive effects on the export sector of the Eurocountries, recently published data revealed that the UK on the other hand faces economic downturn. The threat of an exit from the EU and poor economic performance has led to a downfall of the GBP, which now stands at $1.4161. Contrarily, the Canadian Dollar appreciated this week, now up to $0.7450, benefiting from better-than-expected economic performance in February. Australia’s GDP, as well, increased more than expected, leading to an appreciation of the Australian Dollar, which now stands at $0.7384, a six-month high, as can be seen in the graph below. However, Australia is not the only resource-exporting country with a gaining currency. Brazil’s Real headed to for an 8.8% surge versus the US Dollar, while South Africa was set for a 3.8% climb. Alexander Baxmann
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NEFS Market Wrap-Up
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly knowninas NFS2011 and and UNIS). consists teams of analysts closely The Research Division was formed early is aItpart of theofNottingham Economics monitoring particular markets and providing insights into their developments, digested in our and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teamsNEFS of Weekly Market Wrap-Up. analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, providing NEFS with quality them up date with The goalasofwell the as division is both themembers development of the analysis, analysts’keeping writing skills andtomarket the knowledge, most important financial news. NEFS members with quality analysis, keeping them up to as well as providing date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Jack Millar at jmillar@nefs.org.uk For any queries, please contact Josh Martin at jmartin@nefs.org.uk. Sincerely Yours, Sincerely Yours, Jack Millar, Director of the Nottingham Economics & Finance Society Research Division Josh Martin, Director of the Nottingham Economics & Finance Society Research Division
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