Week Ending 29th November 2015
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 3 United Kingdom United States Eurozone Australia & New Zealand Canada Japan
Emerging Markets 10 India China Africa Russia and Eastern Europe Latin America South East Asia Middle East
Equities 17 Financials Oil & Gas Retail Technology Pharmaceuticals Industrials & Basic Materials
Commodities 23 Energy Precious Metals Agriculturals
Currencies 26 EUR, USD, GBP AUD, JPY & Other Asian
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Week Ending 29th November 2015
THE WEEK IN BRIEF
Unemployment falls in Japan
Autumn Statement spells out new cuts
Unemployment, now at 3.1%, hit a twenty year low this week low in October, coming in considerably better than forecasts. Meanwhile inflation, excluding oil costs, showed a 1.2% annual increase. The news comes as a confidence boost for Prime Minister Abe’s government, and makes the potential for quantitative easing much less likely than it appeared last week.
This week George Osborne announced a number of changes to government spending, with major cuts to the budgets for Transport, Business, Environment, Energy, and Culture and Media, while spending on the NHS, Education, International Aid and policing have been maintained. The cuts come as the chancellor hopes to cut the deficit, which has repeatedly missed targets set by the conservative government. However, following the severe pressure on Osborne over his planned tax credit cuts, in this week’s statement the chancellor decided to scrap the proposed changes completely. This means that the government will almost certainly miss its target for the level of welfare spending, for this, and most likely for the next, fiscal year. With the UK economy continuing to take time to recover, it seems fair to expect the government to continue to miss targets for the coming years, heaping yet more pressure on Osborne to make further cuts. It is clear that the government will have to substantially increase tax revenue or reduce government spending, or both, if it wants to achieve a £10 billion budget surplus, as targeted by the chancellor.
Thanksgiving and Black Friday Thanksgiving was celebrated in the US on Thursday, and with consumers flocking to the shops over the four-day celebration, retail sales are expected to receive a boost. The holiday has had an impact on energy prices, with increased demand for gasoline and natural gas causing what most expect to be a short term recovery in prices. Meanwhile, Black Friday has also helped retail sales, with many benefiting from bargains both in store an online: Amazon has reported record one-day sales in the UK, while popular card game, Cards Against Humanity, having great success in selling absolutely nothing for $5, making $71,000!
Jack Millar
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NEFS Market Wrap-Up
MACRO REVIEW United Kingdom This week’s headline regards the release of the Autumn Statement and Spending Review by the Chancellor. The Autumn Statement is an annual update on the government’s plan on spending and taxation based on the economic projections provided by the Office for Budget Responsibility (OBR). The spending review sets out the government’s spending plan for the rest of this parliament, including spending on infrastructure and governmental departments. The key point is how the planned £20 billion of cuts are distributed across government departments. These cuts are necessary in order to achieve the Chancellor’s promise of eliminating the public sector deficit by 2020, however the NHS, education and international aid are protected from cuts. Also, due to security concerns following the Paris attacks, the police budget will not be reduced. The summary of the main spending cuts include Transport (-37%), Business (-17%), Environment (-15%), Energy (-22%) Culture and Media (-22%). Importantly the Chancellor has scrapped his planned reduction in tax credits following its defeat in the House of Lords and the backlash from the public. The cuts follow this government’s ongoing favour of
austerity to balance the books. All in all these cuts are aimed to improve public finances and achieve the Chancellor’s target of a budget surplus of £10 billion by 2020. However, the chart below illustrates that the Chancellor is relying more on increasing tax receipts and welfare cuts than cuts in public spending. In other news, revisions by the Office of National Statistics show that a widening trade gap has had a record negative effect on third quarter growth. While growth remained unchanged at 0.5%, net trade knocked 1.5% of main growth rate, with a 0.9% increase in exports overshadowed by a 5.5% decrease in imports, the most since records began in 1997. This further highlights the imbalance in the economy, and the UK’s reliance on domestic consumption. Fortunately domestic spending is experiencing robust growth due to zero inflation and rising real wages. While this provides a positive short term outlook it does highlight inherent weaknesses in the UK economy and competitiveness abroad. Matteo Graziosi
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Week Ending 29th November 2015
United States It’s the annual Thanksgiving holiday this weekend in the US. About 138.5 million Americans will throng to the shops over the four-day weekend (including online shoppers) to take advantage of heavily discounted consumer goods. Robust growth in the US economy, especially on the consumer side, should be reflected in sales figures. The preliminary release of the real GDP growth rate from the Bureau of Economic Analysis beat forecasts of 2.0% to reach an annualised rate of 2.1% for the third quarter. This was higher than the initial estimated growth of 1.5% made in the previous month. This GDP figure is the second of three for the quarter, with the final release in December when more information can be incorporated. It is worth noting that it is the first release, advance GDP growth data, which has the biggest impact. Revisions for third-quarter GDP resulted from the smaller than previously estimated decrease in private inventory investment. Continuing on from strong macroeconomic data, the US Census Bureau released data showing durable goods orders rose by 3.0% month-on-month, almost double forecasts of 1.6%. This is significantly higher than last month’s decline of 0.8%. Durable goods orders
represent the total value of new purchase orders placed with manufacturers for durable goods (hard goods that have a life expectancy of more than three years). It is a leading indicator of production as rising purchase orders signal that manufacturers will increase activity as they work to fill the orders. Core durable goods orders rose in line with forecasts by 0.5% month-on-month. This is higher than last month’s decline of 0.1%, shown in the graph below. Orders for aircraft are volatile and can severely distort the underlying trend and as such are removed for core data. The core data is therefore thought to be a better gauge of purchase order trends. The aforementioned strength in the US economy may be driving companies to invest more in new equipment following years of underinvestment due to economic uncertainty. Encouraging economic signs point towards an interest rate rise in December to avoid potential above-target inflation problems. Positive results from next week’s data releases on the unemployment rate, average hourly earnings and non-farm payrolls should all but confirm the imminent rate hike in December that the markets have been predicting. Sai Ming Liew
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NEFS Market Wrap-Up
Eurozone Consumer confidence in the EU has increased from the revised figure of -7.5 last month to -5.9 for November, which measures the amount of optimism consumers have about the economy. This is shown on the graph of EU consumer confidence below. Conversely, this increase in consumer confidence in the Euro Area was offset by a decline in EU business confidence. The European commission announced this week that the Business Climate Indicator, which measures the level of confidence of the businesses located in the Eurozone, fell from 0.44 in October to 0.36 in November 2015. While it was expected that business confidence would rise in November to 0.45, this was not the case. The European commission advised that these figures were collected prior to the Paris attacks this month - it is expected that the attacks will greatly reduce consumer and business confidence within France and the Euro area as a whole. The largest increases in economic sentiment about businesses were in services, which rose from 12.3 in October to 12.8 in November, and the construction sector, which increased from 20.7 to -17.8 this month. German consumer confidence declined for the sixth month in a row from 9.4 to 9.3, which is the lowest figure recorded since February 2015, but it still
managed to stay above the expectations of the market. The cause for this fall in German consumer confidence is mainly due to worries about the German unemployment figures due to be released, which are predicted to rise. In other news, the European Commission this week has advised the Eurozone, particularly Germany and the Netherlands, to invest more money in order to help increase the GDP growth and the inflation rate in the Eurozone. Both indicators have been disappointing over the last few months, with negative inflation being present alongside low GDP growth figures. These two countries were singled out due to the large current account surpluses they possess: it is believed that, because they both have a surpluses, they have the finance to invest more. For example, in 2014 Germany had a current account surplus as a percentage of GDP of 7.8% - the commission rates a surplus larger than 7% as excessive. The European Commission stated that economies such as Germany and the Netherlands need to rebalance their economies away from their reliance on exports. They believe that they should invest more and encourage consumer spending. Kelly Wiles
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Week Ending 29th November 2015
Australia & New Zealand This week we learned that Australia’s Private Capital Expenditure depreciated significantly to -9.2%, down from -4.0% in the previous quarter. This came as a shock for forecasters who predicted a -2.3% change. The Australian Bureau of Statistics announced that total new private capital expenditure had fallen to AUD 31.4 billion. The data pointed out that investment in buildings and structures fell by 9.8% (at AUD 19.8 billion), while spending on equipment, plant and machinery was down by 8.2% (at AUD 11.5 billion).
The Capex indicator is particularly useful as it is helping to show how well the Australian economy is transitioning from a mining to nonmining economy.
Capex (the money invested by a company to upgrade or purchase physical, non-consumable assets such as properties) is expected to be 21% lower in 2015-16 than it was in 2014-15. Senior economist at RBC capital markets SuLin Ong pointed out there’s “weakness across the board, in services and capex”, as spending on production plants haven’t changed a great deal. As a result, such depreciations in spending on key equipment may cause downward expectations on growth figures, as less capital expenditure may inhibit growth.
A decline in imports by 2.2% was led by reductions in petrol, avgas (aviation gasoline), and capital goods. There were fewer large plane imports during October, a potential contributor to the decline. However, exports also fell by 4.5%, owing to reductions in dairy imports such as milk powder, butter and cheese. Despite the reduction in the deficit for the October months, compared to last year, the deficit had widened slightly, up from -892 million.
However, the downward pressure on Capex is also believed to have been contributed to by the sharp reductions in mining investment, as many projects are reaching completion and therefore recent investment has been low in the industry.
Meanwhile, New Zealand’s trade balance came in with promising prospects. Improving from the NZD 1140 million deficit in September, the trade balance came in at NZD -963 million in October, as shown in the graph below. The trade balance during this period tends to be its lowest around this time of year.
China has been a key player in this. China’s demand for dairy products spurred the changed in dairy exports. The amount of milk powder exported to China fell by 65%, but still remains the most-exported commodity. Meera Jadeja
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NEFS Market Wrap-Up
Canada “Going forward, the risks to the Canadian outlook remain tilted to the downside” according to Bill Morneau, Canada’s new Finance Minister, who spoke at a press conference, also noting that other G-20 countries face similar conditions. According to the Bank of Canada (BoC), real GDP is expected to grow by 2% in 2016, and 2.5% in 2017. The central bank’s view is that slow growth in Canada is due to weaknesses in the global economy. Reiterating this in a presentation this week, Lynn Patterson, the BoC’s Deputy Governor, stated that the forecast increase in growth is likely to be due to increases in non-energy exports and investment. The chart below shows the forecasted takeover of energy exports by nonenergy and non-commodity exports. Weakness in the global economy is particularly significant for Canada, as Canada is reliant on trade in two senses: firstly, commodity exports, of which prices are largely driven by growth in China, and secondly, exports to the US. The recovery of oil prices is expected to be slow, with forecasts estimating that it is unlikely that prices will reach USD 60 per barrel even by 2018. Last week, the Canadian Dollar fell below USD 0.75 on the same day that the price of crude oil dropped below USD 40 per barrel.
A report by CIBC World Markets has highlighted that in order to stimulate growth over the next decade, Canada will need to produce high-value products and improve skills, thereby diversifying its economy. Improving skills is particularly important, as highlighted in a report by Capital Economics that the number of high-paying jobs in Canada has been declining for the first time since the 2008 financial crisis. Unemployment has been high in energy-reliant provinces such as Alberta and recent employment creation has mostly been in temporary or part-time work. There may be some good news however. Increasing speculation that the US Federal Reserve will raise interest rates soon is a sign of an improving US economy, and as Canada’s biggest trading partner, US growth should help Canadian exports. Next week the Bank of Canada’s Governing Council will meet to decide whether to change the current interest rate of 0.5%. Low interest rates alongside a weak Canadian dollar are helping to keep growth going at the moment, however this is yet to spur the much-needed surge in private investment. Shamima Manzoor
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Week Ending 29th November 2015
Japan The latest unemployment rate for October, released on Thursday, indicates that the labour market remains tighter than ever, at 3.1%. Below the 3.4% previously forecast, this is the lowest jobless rate Japan has seen since July of 1995, as shown on the graph below. The strength of Japanese manufacturing has been at the forefront of this. The preliminary Purchasing Managers’ Index (PMI) reading of 52.8 indicates an expansion of the sector at its fastest pace in over 18 months, boosting employment. In theory, a buoyant labour market would lead firms to increase wages for workers but Japanese firms remain cautious in the midst of the slowing emerging markets and weak export growth. Japan’s lacklustre wage growth has become very visible in the latest household spending figures. Falling by 2.4% compared to last year, weak household expenditure in an economy with 1.24 applicants for every job, is a clear sign that it is domestic consumption is a significant drag for growth and the reflation of the economy. On Wednesday Prime Minister Shinzo Abe called for a 3% increase to the minimum wage, which he hopes will increase wage growth, stimulate consumer spending and create inflation.
price level annually. However, an alternative indicator of inflation released by the Bank of Japan, which strips out the effect of lower oil costs, shows a 1.2% increase in the price level. In addition to the optimism expressed by the Bank in recent months, this gives further indication that the BoJ is unlikely to change their monetary policy in the short-term, as their measure supports an improving underlying inflation trend since 2013. A recent poll by Reuters shows that economists are split on whether more quantitative easing will follow at the start of next year. On Friday PM Abe called on his Cabinet to compile a budget for additional fiscal spending. The extra budget for April 2016 will aim to tackle the effects of both the declining population and the impact of trade diversion on sectors affected by the Trans-Pacific Partnership free trade agreement. No longer considering deflation as a top priority, the Japanese government seems be focused on the wider revitalisation of the economy. Given the diminishing returns of QE this could mean a permanent shift toward fiscal policy and structural reforms. Loy Chen
Inflation data released this week, as measured by the core CPI, shows a 0.1% reduction of the
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NEFS Market Wrap-Up
EMERGING MARKETS China China’s slowing economic performance is becoming more and more of a problem for the world economy. At the end of the week, the stock index in Shanghai dropped by 5.5%, as shown by the graph below, while the index in Hong Kong dropped by 1.6%. This downturn is the result of several factors. The difficulties of the industrial sector in October, published earlier this month, increased the concerns about the situation of China’s economy. Hence, higher costs and especially the rough-andready performance of the Oil, Steel, Coal and Mining sectors are the main reason for the stagnation. However, the far more important cause of the retracement of China’s stock indices are investigations against the brokerage houses Citic Securities and its smaller rival Guosen. The stock prices of both of them dropped by 10%, which is the daily limit. This is a first. Recently, China’s government has been investigating individual managers, but now, the state is turning against whole companies. Furthermore, it became public that China’s stock exchange regulator CSRC supposedly forced brokerage houses not to sell specific products anymore.
Monday’s” stock market crash in August this year. After officials said that this was due to “foreign forces intentionally [unsettling] the market”, they now focus on domestic players. However, the true reasons for the stock market crash in China lies in the combination of a weakening outlook for Chinese growth and a slip in the Yuan’s value, which was initialised by the PBoC itself. So, China’s government seems to be blaming everybody but itself. Nonetheless, a key question to ask is whether the 8.5% downturn of Chinese Equities really that worrying. Perhaps the 8.5% fall does not seem hugely more unusual than the 4.61% downturn of the Nikkei, the 4.67% decrease of the FTSE or the 3.95% downturn of the S&P 500. Normally, I would say that, as China’s financial markets show a steady progress, the volatility of China’s stock markets will become less extensive. However, the investigations against brokerage houses and individual managers is a huge step back in China’s financial development and comes as proof that China’s capital markets are not “free”, and are instead driven by the political will of the Communist Party. Perhaps this should be a reason for the IMF to rethink their decision to include the RMB into the basket for the SDR.
This is a desperate try by the Chinese government to find a culprit for “Black
Alexander Baxmann
Figure 1 - Shanghai Stock Exchange November
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Week Ending 29th November 2015
India Prime Minister Modi was once again on his travels this week, gracing Singapore with his presence in light of fifty years of relations between the two countries. During his visit Modi stressed the importance of making improvements to India’s business environment for foreign investors via a number of different reforms. However, a report released this week by Moody’s, a global ratings agency, encouraged the government to push more aggressively for domestic economic reforms, warning that a loss of momentum as a result of delays could hamper investment amid weak global growth. Since Modi took office 18 months ago, he has been on a mission to improve the country’s economy, as well as create a business friendly economic climate. It would be unfair to say that he has not succeeded in doing so, relaxing foreign direct investment (FDI) norms in 15 sectors and seeing a 40% increase in FDI since he was elected. However, attention must now shift to domestic reform, which has been a cause for frustration for the government all year. The report released by Moody’s said “The Modi administration so far this year has been unable to enact legislation on key reforms, including a unified goods and services tax (GST) and the Land Acquisition Bill.”
Implementing GST is crucial for India, not just to garner higher taxes, but also to restore its brand amid losing investor sentiment owing to slacking reforms. By triggering higher consumption through a unified tax system, India will also see industrial investments rise in order to meet demand. Some economists estimate that the combination of these two components could promote a 1.5 to 2% increase in GDP growth, but only timely implementation of the bill will allow it to become a reality. The loss of momentum as a result of delays referred to by Moody’s can in part be seen in the results of a recent survey of 400 businesses taken by the MNI Indicators Business Sentiment index. Not even Diwali could boost business sentiment, as it dropped from 62.3% to 60.9% in October. This is about 12% down from a year earlier, as the graph shows, and is at the lowest level since February 2014. Talking about reforms has proven effective to a certain extent, but now is the time to implement them on a vast scale. Whilst Modi has no issue selling reforms to the rest of the world, persuading Parliament to adopt them is something he is yet to master. Homairah Ginwalla
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NEFS Market Wrap-Up
Africa In a controversial turn of events, South Africa has decided to lift its 2009 domestic rhino horn trade ban. Many South African rhino breeders argue that, since the ban, costs to protect herds from poachers have increased massively, hence destroying all profits and leading many to sell their rhinos at huge costs. Those in favour of lifting the ban argue that local rhino businesses and their workers will be protected, thus helping the economy. Moreover there is evidence to suggest that the recent surge is rhino poaching is directly related to the ban, with the ban having created an underground market with augmented prices and therefore increased poacher incentives. From 2005 to 2009, 36 rhinos were killed on average per year, whereas in 2014 alone, 1,215 rhinos were killed. It is hoped that, by removing the ban, prices will fall and poaching will decrease. This will also be achieved through selling the vast government stockpile of obtained rhino horns. Finally, if the trade is legalised, the authorities will be able to monitor poaching and ensure it is carried out to legal standards. As a result, it is hoped that legalisation will instead act to protect rhino numbers.
consequently deeming it Africa’s fastest solarpower project. It is clear evidence of Rwanda’s successful economic growth, in being able to quickly raise funds for projects. The $23.7m solar field is 20% more efficient than normal, by using computers that allow the panels to follow the sun’s path. The construction of the plant provided 350 local jobs and currently powers over 15,000 homes in a 9km radius, increasing Rwanda’s generating capacity by 6%. In Rwanda’s rapidly expanding economy, as shown in the graph below, increasing civilian access to power and investment in infrastructure is considered crucial for further expansion. Politicians hope that by storing the energy and selling it to other countries, as seen already with Oslo, it will further boost the economy and kick-start the creation of other solar-power plants, to meet global consumption. This will utilise a valuable African asset - solar-power. However, critics argue that the energy will eventually end up going only to rich Western economies, and not to African civilians. Furthermore, if more solar-power plants are created, this will take up valuable land needed to grow crops.
In Rwanda, an 8.5 megawatt solar-power plant has been completed in under a year,
Charlotte Alder
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Week Ending 29th November 2015
Russia and Eastern Europe Less of a focus on Russia this week and more on Eastern Europe as a whole, after the controversy surrounding the Turkish downing of a Russian jet. The Russian reaction to the downing of a military jet allegedly over Turkish airspace has dominated news this week, highlighting the current worldwide political tension permeating our households. Unsurprisingly, this event is likely to carry with it substantial economic effects. The Russian Prime Minister, Medvedev, announced that Russia would be imposing sanctions aimed at thwarting Turkey’s economy. Supported by Putin, the sanctions will target trade, tourism and joint investment projects between the two countries in response to what Russia is calling, “an act of aggression”. The announced plans include bans on Turkish business in Russia, a halt on the construction of a sub-Black Sea natural gas pipeline and the removal of Russian funds in the building of a nuclear power station in Turkey. These seem harsh and one might expect the Turkish to respond apologetically, however the retort has been one of defiance, with Mr Erdogan, President of Turkey, claiming that Turkey can find help elsewhere. Russia and Turkey have engaged in $28 billion worth of trade with each other from January to September of this year. Consequently, the
economic ailments that these sanctions will carry are bound to have an effect on the Turkish economy. Erdogan had planned to triple trade volumes to $100 billion by 2020 – an unlikely reality, it would now seem. In addition, Russia had been instrumental to Turkey’s economic growth in her provision of numerous investment opportunities, all of which were burgeoning, and now at risk. It is estimated that Turkey could lose $12 billion from the sanctions. To underline the severity of this loss, we must realise that it would amount to 2.6% of annual GDP. Putin has advised Russians in Turkey to leave, and for those planning a trip to change their schedules. For those who do not take heed of his warnings, he has tightened control on the Russia-Turkey border, making it extremely difficult for exchange of persons across. This is of great significance when we consider that Russians account for one tenth of tourism in Turkey (worth $2.7 billion). Tourism revenues (shown in the graph below) are likely to substantially decrease. The measures seem harsh but defiant, and Turkey’s resilience is inspiring. One might note, however, that the current economic climate cannot afford to have two major economies going head to head. Tom Dooner
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NEFS Market Wrap-Up
Latin America Luis Diaz, head of the Democratic Action party in the town of Altagracia de Orituco in central Venezuela, was shot while he was meeting with locals on Wednesday. Opposition leaders blamed militias supporting the governing United Socialist Party of Venezuela (PSUV). Yet the current President Nicolas Maduro has so far made no public comment. Democratic Action is part of the opposition Democratic Unity coalition about to contest a December 6 election for a new National Assembly in Venezuela. So this controversy comes at a time when tensions are running high - polls show the coalition has a good chance of wresting the legislature from the ruling socialists for the first time in 16 years.
economic reforms instead of turning to others for an excuse. Furthermore, with an annual GDP growth rate of -4% and the last recorded inflationary figure at 68.5%, whichever party wins the election has major economic and crime issues to solve. This also comes at a time when in his first press conference as Argentinean President last Monday, the centre-right Mr Macri said that he would seek Venezuela’s suspension from regional Mercosur trade bloc over rights abuses committed by President Maduro’s administration. Max Brewer
Support for the Socialist Party is dwindling, as poor economic policy and increasing homicide rates (see graph featured at bottom of page) have led to increased poverty and public unrest. At first Maduro used the country’s vast oil funds to provide public services and subsidised fuel, which helped him to gain the public’s support. However, economic mishandling has made society poorer, widening the gap between the rich and the poor, causing many to be driven towards crime. At the institutional level, the police force is underfunded and suffers from high levels of corruption. Furthermore the judicial system is poor and again shrouded in corruption, there aren’t as many courts and judges as there should be and the correct decisions are not being made. As a result, violent crime reigns. For example, look at Caracas, the capital of Venezuela - it has a homicide rate of 82 per 100,000, more than ten times the global average. Venezuela continually tries to shift blame to neighbouring Colombia - one can only assume that the reason behind Maduro’s activity is to boost patriotic sentiment in order to increase confidence in his party. However, for the emerging economy to truly prosper, it must address its current issues at the core through
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South East Asia Amando Tetangco, the current governor of the Philippine Central Bank for the past 11 years, has been criticised for his inattention to detail and devotion to a particular hobby - video games. However, whether down to a combination of skilful economic analysis and common sense, or just luck, Tetangco continues to take a prudent approach which has led to the emergence of Philippines as South East Asia’s fifth largest economy. Tetango has recently announced that the macroeconomic policies and structural reforms in the Philippines are carefully considered and approached cautiously. Perhaps Tetango’s greatest achievement is his implementation of sensible policies with huge long-term benefits, whilst working with two governments over the past 11 years. He states that this approach will not change even when there will be a change in government next year. In the past 5 years, Aquino’s reign has seen spending on education and infrastructure double, whilst healthcare tripled, surpassing competing Asian countries such as Singapore and Malaysia. This highlights the Philippines’ commitment to its young population, with the expected population to reach 140 million in the next thirty years which shows that country has the potential for its services sector to expand massively. Additionally, the construction sector
has also picked up, due increases in government spending on infrastructure - more jobs will lead to further rises in consumer spending. However, it seems that the Philippines still has a long way to go, as it has been revealed that the poor infrastructure cost to the economy is $60 million a day, which will certainly deter multinational companies from outsourcing to the Philippines: poor roads and airport developments will lead to high costs, impacting on profits. Moreover, an average journey on the road takes around 45 minutes due to the heavy congestion which creates further problems, particularly if the Philippines want to compete with the world’s fastest growing foreign direct investment location, Vietnam. Overall, the real question is whether the Philippines can continue to take this long-term approach, which has seen annual GDP exceed China’s in recent cases, or whether the next year’s new government will make radical changes (that Tetangco will certainly not be content with). Whatever happens, it is clear the Philippines do not want to return back to the dark days when it was branded ‘the sick man of Asia’ by many economists, riddled with corruption and bureaucracy. Alex Lam
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Middle East A week after the prediction of an 8% growth rate by the Iranian Central Bank governor in 5 years’ time, many claim the view to be unrealistic, given the 2% current annual GDP growth in Iran. Growth is expected to stall again, thanks to low oil prices and rising unemployment. The unemployment rate is moving in the wrong direction, rising to 10.9% in the last quarter, and is expected to maintain the upward trend in 2016. Iran's Statistics Centre has announced the inflation rate in Iran's urban areas for this month to be 13.1%, 0.2% less than the preceding month. The centre said that the consumer price index (CPI) in Iran's urban areas is 0.7% more than in the previous month. Scrutinising the different sectors, the index for foods, drinks and tobacco products has shown an increase of 0.3% compared to the month before, and a growth of 7.9% when compared to the same time last year - the index for services and nonedible goods hit 209.7. According to the revised estimates of Trading Economics, the inflation rate in Iran is forecasted to be near 14% in the last quarter of 2015 before it falls, and then fluctuates between 9% and 10% in 2016.
Meanwhile, this week Dubai was confirmed to host the world expo 2020, thus entering the phase of increased activity. There has been an upward revision of the growth forecasts of the country: GDP Growth Rate in the UAE is expected to be 3.88% by the end of this quarter, while by 2020, the UAE GDP Growth Rate is projected to trend around 4.94%. This growth is expected to come along with an improvement in infrastructure and a fall in the unemployment rates. In the next few years, 275,000 jobs are estimated to be created in and around the region to service the Expo, across sectors. Overall the positive halo effect of the Expo 2020 Dubai will leave behind a strong transformative social and economic legacy across the region. However, there is a growing fear of the debt led growth of the economy whose reduced prices of Oil and diesel are now taking a huge toll on government revenues. The Country has witnessed a 2% increase in the Debt to GDP ratio in the last quarter of 2015. This trend could hamper the long run growth prospects of the economy. Sreya Ram
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EQUITIES Financials This week in the financial industry saw four senior partners of KMPG arrested in their Belfast office after allegedly evading tax. This was a blow for the company’s reputation in Northern Ireland after they supposedly moved from Dublin so the staff could “better perform day-to-day tasks”. Elsewhere, Spanish BBVA has bought a 30% stake in the British challenger bank, Atom. BBVA believe there is a gap in the market for a bank with few legacy cost structures or systems to grow. The market reacted well to the news with BBVA’s share price increasing 3.2% this week. Brazil’s biggest investment bank, BTG Pactual, showed this week how an unpredictable shock can cause a large shift in the market. The bank’s chief executive and multibillionaire, André Esteves was arrested in connection with a corruption scandal involving Brazilian oil firm, Petrobras. There were large negative reactions as Mr Esteves has been the mastermind behind the success of the bank and has a 20% share in the business, thus there is mass uncertainty surrounding the future of the bank. Rating agencies, Fitch and Moody’s have suggested
they may have to downgrade the credit rating of the bank, even in light of the interim CEO announcing the bank will be increasing liquidity in order to reduce the risk. The markets have reacted badly, with the share price falling 40% on Wednesday, as shown by the graph below. German insurance giant and asset manager, Allianz, has announced it will be launching a joint venture with the Chinese search engine group, Baidu, and investment group, Hillhouse Capital. This is the company’s attempt to expand in the Chinese market, as demand for insurance in China continues to grow at a considerable rate. The move is also intended to help Allianz achieve their target of 13% return on equity by 2018 whilst boosting revenues to €6.5bn. In my opinion, this is a logical idea as it will enable Allinaz to grab a share of the Chinese market, however, whilst the Chinese economy is still unstable following the stock market crash this summer, the move could prove costly. Sam Ewing
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NEFS Market Wrap-Up
Oil and Gas This week, oil futures (CLF6: NYMEX) further dropped 2.7% to $41.89 pressured by a strong dollar and concerns over excessive global supply. This triggered a selloff in energy US stocks on Friday’s short session: Southern Energy Company (SWN: NYSE) fell by 7.22%, making it the biggest decliner among the S&P 500 stocks, while Consol Energy Inc. (CNX: NYSE) followed closely with a decline of 6.5%. On Wednesday, billionaire financier Andrè Esteves was arrested under a new set of investigation into a vast bribes-for contracts scheme at Petrobras (PETR4: SAO). The allegations are that former executives conspired with construction bosses, black market money dealers and politicians to extract an estimated R$6bn through fraudulent contracts. Petroleo Brasileiro SA Petrobras is Brazil’s state-run oil giant, and with its discovery of giant offshore oil reserves in 2007, has transformed into one of the world’s most promising oil companies and a symbol of a resurgent Brazil, raising $70bn in its share sales in 2010, one of the biggest in history. Overall, the negative implications for the financial sector of any association with the
Petrobras scandal were immediate, moving Brazil’s economy on its track to one of its worst recession since the Great Depression. The graph below showcases the plummeting of Petrobras’ share price since Wednesday, from $5.58 to $4.94, an 11.5% decrease so far. Meanwhile, the two former heads of BP and Royal Dutch Shell, Europe’s two largest oil companies, have argued that the two groups failed to act fast enough to respond to the implications of climate change for their businesses. Their professed concern is not matching the sweeping actions needed to address the problem, and the consequences of it are likely to be reflected in the stock market in future weeks. Due to the ongoing investigations, Petrobras was obliged to announce that it would have to delay the publication of its third quarter results, which will likely have an enormous impact on the value of the company. Morgan Stanley, for instance, estimates the company’s assets to be slashed by $8.1bn, while UBS put the damage estimate to something between $10bn and $15bn. Andrea Di Francia
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Week Ending 29th November 2015
Retail Analysts’ forecasts pertaining to retail equities were this week dominated by “Black Friday”, the ubiquitous lowering of prices for retail goods to consumers, now commonplace for large retail chains. Black Friday, when viewed simply as a day of increased retail spending from consumers, will ultimately have a tangible, albeit small, impact on the year results of retailers. However, Black Friday results could potentially be viewed as an indication of holiday season performance for retailers, and thus could potentially have a significant impact on retailers and their behaviour. As such, strong sales could improve a retailer’s share price, and weak sales could have an adverse impact.
holiday period as retailers compete on price, Black Friday will have a small impact on a retailer’s profitability throughout the year. Furthermore, given the arguably fickle nature of retail sales, with intangible and unpredictable variables such as weather affecting whether or not consumers will travel out to stores, Black Friday is not, by any means, indicative of the overall strength of a retailer’s business, especially given the changing nature of retail, with approximately 15% year on year sales growth online, exacerbating the impact of “Cyber Monday “, and, by extension, lowering the impact of black Friday. Jack Blake
This theory, however, disregards the plethora of convoluted metrics which impact a retailer’s share price and overall performance, and overestimates the importance of Black Friday when viewed from a stock or sector analyst’s perspective. Whilst black Friday can, on occasion, have a significant impact on the stock market, with the DJIA showing a 300 point increase in 2011 after stronger than expected Black Friday consumer spending, analysis indicates a very disparate depiction of black Friday’s significance. Despite consumer spending comprising around 60% of GDP in the UK, financial analyst Mark Hulbert states that Black Friday performance, when viewed in a long term historical perspective, has absolutely no correlation to a retailer’s performance across the year, whether that performance be profitability, turnover, or share price. There are an abundance of reasons that Black Friday is not a good indicator of overall retail sector performance. For example, given the prevalence of discounting throughout the
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NEFS Market Wrap-Up
Technology Reviewing the Technology industry this week, we see some variation in performance levels, with Intel Corporation perceiving a rise in share prices by 4.1% to $34.56, whilst HewlettPackard experienced a fall from $14.28 to $12.56. This 12% drop, combined with what has been a poor annual performance, with a sharp yearly decline of 26.01% in share prices, could prove disastrous for the American-based Information Technology Company and the confidence of its shareholders. After reporting on the huge boost in share prices last week, a further increase has been spectated by Infineon Technology over this week. The German semiconductor company announced its recent expected fourth-quarter income figures, with a net value predicted at €322 million – an 80% rise on last year’s value. Such excellent news saw Infineon’s share price soar 15% higher on the Thursday. This success comes down to numerous factors, with one being the €131 million tax fillip, and another being its €3 billion acquisition of International Rectifier last year. This California-based corporation operated at a greater margin than Infineon itself, boosting the overall group’s margin and performance. Infineon has maintained this success throughout the year, with share prices being up 16.9% to €13.48 from €11.20, demonstrated by the graph below – excellent news for shareholders, with huge prospects for further successful investments.
Reflecting upon last week’s news regarding Google Plus, the huge tech-firm is now revealing its plans to instigate app streaming into its devices. Google plans to remove barriers surrounding apps, allowing for a more integrated service between its apps and the World Wide Web, which in turn allows for easier access to information from all devices. Google went ahead with an app-streaming experiment recently, testing the outcome of such a change, and it was proven that such a movement would indeed open up the possibilities of Google’s search business, enhancing the digital world. But this service comes at the cost of shifting how Google’s services interact with information, and the technological changes required may result in the loss of consumer-valuable features. Despite this ambitious announcement, share prices fell from a weekly high of $782.90 to $770 - though only a minor drop. These two firms continually progress their respective equities, whilst consistently boosting their own market capitalisation, resulting in quality satisfaction from their shareholders with future expectations at the highest; making these shares definitely worth an investment. Daniel Land
Infineon’s share prices this week
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Week Ending 29th November 2015
Pharmaceuticals Pharmaceuticals have remained relatively stable this week amidst the announcement of a historically large acquisition taking place within the sector. The NASDAQ Biotechnology Index rose by 1.92% and the FTSE 350 Pharmaceuticals & Biotechnology Index rose a mere 0.13% over the course of the week.
activity, which has been replicated across other Big Pharma, confirms the importance of clever accounting over research triumphs, as Pfizer's clever accountant-turned-CEO Ian Read, who strongly pushes for shareholder value, has increased Pfizer 's share price by almost double since his appointment.
Marking the biggest healthcare deal in history, among an active year of mergers and acquisitions, Pfizer announced a $160bn takeover of Dublin-based Allergan last Monday which (if finalised) will create the world's largest pharmaceuticals group. Despite paying a premium for the stock, which had a market capitalisation of only $123bn ahead of the deal confirmation, Pfizer's share had risen 1.1% over the course of the week as hopeful analysts such as Cowen & company and SunTrust upgraded the stock due to the deal making strategic sense. Although analysts fear that Pfizer has undervalued its synergy cost budget (estimated to cost $2bn) since it is likely to face significant difficulties, they cite the increase in US to ExUS sales mix, from 44:56 percent to 61:39 percent as an optimistic re-enforcement that the new firm will have considerable pricing power. Yet, the deal is still to be completed. It is now seeking approval from Washington - political power plays will be an important factor. This deal finally enables Pfizer to move its domicile to a lower tax jurisdiction in Ireland which is expected to cut its tax rate by roughly 7%. This
In other news, Turing Pharmaceuticals, one of the main reported companies accused of drug price hikes (Daraprim increased by 5,455%), has abandoned its price cut promise. Despite not being a publicly traded company, this highlights the industry’s reliance on high prices. Yet, its competitor, Imprimis Pharmaceuticals, which responded by offering alternative compounded substitutes, has reported strong earnings growth by undercutting price hikes. Rating increases have helped its share price to rocket by 28% in the past week as seen below. Along with the fact that the promise of resulting R&D growth from mergers rarely materialises, continual market density and thus competition shrinkage due to recent M&A is likely to disadvantage patients in the long run. Perhaps Pharmaceutical companies will soon feel a wrath from the market for morphing into marketing rather than research enterprises in the long run, or maybe this is just becoming an inevitable trend. Sam Hillman
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NEFS Market Wrap-Up
Industrials & Basic Materials China, the fastest growing economy in the last decade, has seen its industrial production grow 5.6% year-on-year. This is the slowest pace since April 2015, as a result of lower capacity utilization in the industrial sector with weak demand from local and foreign consumers. The slowdown in the Chinese Industrials and Manufacturing sector is prevalent where China has repeatedly lowered its growth forecast over the years. China metal producers are finally feeling the heat where they have requested for the Chinese authorities to purchase surplus metal reserves to ease pressure in the market. The state-controlled metals industry body, China Nonferrous Metals Industry Association, proposed on Monday that the government scoop up aluminium, nickel and minor metals including cobalt and indium. The Association had suggested that state buys 900,000 tonnes of aluminium, 30,000 tonnes of refined nickel, 40 tonnes of indium, and 400,000 tonnes of zinc. While it is unclear if the authorities will agree to the proposal, the approach underlines the extent to which smelters in the world’s top producer and consumer are suffering from prices at or near multi-year lows. This also
wouldn’t be the first time something like this has taken place - back in 2009, the authorities purchased up to 700,000 tonnes of copper to arrest sliding copper prices. At that time, copper was trading at USD3000/tonne and with the State Reserve Bureau’s help, copper prices stabilised, and many believe that this was the key factor in helping push prices up to USD10000/tonne by 2011. The direction of the State Reserve Bureau is still unclear, as China has not been able to consume as much metals as they produce amidst the slowing economic growth in the country. Metal prices are arguably in worse shape today than in 2009. Aluminium is down by almost 30% the past year. Nickel is at 12year lows, falling to USD8145/tonne this week. The last time it dropped below this level was in 2003. Hence, it would be a large bill to foot should the SRB step in to stabilise the market. The share price of Aluminium Corp. of China Limited has declined by 27.05% since March 2015 and has also underperformed the S&P500 by a whopping 27.28%. The negative earnings of the company alongside the oversupply in the industry will prove to be challenging times ahead for the company. Erwin Low
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Week Ending 29th November 2015
COMMODITIES Precious Metals This week we have seen the precious metals sector prices continue to waiver around historically low levels. Gold prices dropped by 13USD to 1072USD/oz., flirting with its lowest level since February 2010 on the strength of the US Dollar. The other metals prices have also remained low over the week. Prices are stuck in their worse rout since July as the Federal Reserve officials continue to raise the expectations of an interest rate hike in December. The Gold prices this week have been pushed down further from 1085.67.24 USD/oz. to 1072.10 USD/oz, as shown on the chart below. This came after the dollar index, which measures the currency against a basket of its peers, was up 0.2% to 99.79%, leaving it less than 1% below the 12-year high touched in March. The prospects of a stronger dollar and a deepened expectation of an interest rate increase have sent investors fleeing from Gold as prices of Gold continue to tumble. As I mentioned last week, the higher the interest rate, the lower the appeal for Gold as they lose out to competitive assets that pay interest or dividends such as bonds. Silver has also continued to stay low, hovering just above the 14USD/oz. mark, almost reaching its lowest levels since 2009. Silver is still considered as one of the most volatile
metals and its fluctuations tend to be large, and follow similar trends as Gold. The strengthening of the dollar has remained a negative on precious metals prices as both industrial and investor demand remain poor. Platinum on the other hand, has a positive outlook as analysts view it as an oversold metal. As the prices of Platinum have hovered around the 845USD to 850USD mark and because of the Volkswagen scandal, prices of Platinum have become very attractive. There would be a substitution effect as Platinum would see demand rise for industrial uses such as the gasoline car market. In other news, Palladium prices have continued to linger around the 545USD to 550USD mark this week as the overall outlook for Palladium looks grim. Palladium is widely used in production of catalytic converters for gasoline engines. With the strong US economic outlook, it must be imminent that the Fed will eventually raise the interest rates. Higher rates would mean an increased probability of a slower growth and a stronger US dollar coupled with a weak global economy would be a negative for the overall Precious Metals prices. Samuel Tan
Gold Price Trend
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NEFS Market Wrap-Up
Energy It’s been an eventful week in the energy market, as many commodities make a strong resurgence. Labelled as a market reaction to the shooting down of a Russian jet by Turkish forces, WTI and Brent Crude Oil have risen 4.0% and 1.6% respectively, while the biggest mover came in the form of Gasoline which rose dramatically climbing 8.5% for the week. Oil prices climbed from Tuesday as fears of a supply disruption after the Turkish military shot down a Russian jet fighter along the Syrian border. Many are therefore worried that supply coming from Russia and the Middle East into Europe will be halted as tensions rise between the two nations. Although there appears to be no clear signal of intent for war by either side, President Putin has called the incident “a stab in the back”. While this had a hand in the surge in Gasoline prices, the main reason for the increase in prices seems to stem from limited supplies in North-eastern America ahead of Thanksgiving, which took place on Thursday, one of the biggest holidays of the year in the US. In other energy news, Natural Gas made a surprising recovery after its heavy losses in the previous week. Despite the US Energy Information Administration (EIA) reporting that
US natural gas stocks increased by 9 billion cubic feet for the week ending November 20, prices rose 7.4% over the past seven days. With supply increasing, the price increase can therefore only be explained by an even greater increase in demand. Forecasts for colder temperatures over the coming days, released on Monday and Wednesday, is the reason for the demand increase according to energyadvisory firm Gelber & Associates, stating that “Domestic [US] weather models are calling for a cold front to sweep through the country in the next two days.” The graph below shows this market reaction clearly, with a large surge on Wednesday off the back of both the continuing cold in the coming days and the Thanksgiving holiday on Thursday, with many families in the US traditionally eating (and thus heating) their homes. For the future, one would imagine gas prices to fall once all the Thanksgiving festivities end. In regards to the Oil price, the jury is still out; what takes place between Russia and Turkey over the coming weeks will play a role in the direction of prices. Harry Butterworth
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Week Ending 29th November 2015
Agriculturals Monday signified a turning point in the price of cotton. While the production of cotton has declined appreciably over the last year due to decreased demand, the main driving force in shifting prices back upwards is the decline in high-quality supply. During the period from 20th October to 20th November, the price fell from 64.25 USD/lb to 60.05 USD/lb (a fall of 6.54%). The graph below shows the price of cotton hitting a low point at the end of last week, before rising 3.21% by Wednesday, 25th November. Pakistan, the 4th largest cotton supplier in the world, concluded that these changes were a consequence of heavy flooding and the consequent harm caused by pests. The projected amount of cotton to be produced in 2015/2016 cycle was 2325 million kilograms. However at the moment, due to very late sowing, the expected estimated output might be as low as 1705 million kilograms, equivalent to a 26.7% decline. The US Department of Agriculture seems to be more optimistic, forecasting a smaller drop in production – by 17%. Furthermore, the weather and pests contributed to drastically lowered quality of the cotton produced. It is believed that only around 40% will be of quality considered as high. Up until mid-November, demand remained low as the traders expected a higher supply. As this
prediction was not the case, traders rushed to obtain more good-quality cotton.. The government of Zimbabwe has already decided to introduce support to farmers and initiatives for greater production. The government is planning to spend $26 million on distribution of necessities (such as seeds and fertilisers) to farmers. AGRITEX, the national agricultural extension service, is responsible for the identification of affected farmers and ensuring the support packages are distributed. With regard to other commodities, soybean prices began to pick up since 13th November and rose from 855.25 USD/bu to 876.75 USD/bu by 27th November. Analysts concluded that this outcome might have been influenced by the Thanksgiving celebrations; traders assumingly were more willing to complete purchases beforehand. The sudden increase in price might be well overestimated and shortly return to the previous trend next week. Similar comments were attributed to increased cotton demand. According to Jordan Lea, co-owner of Eastern Trading Company, closing a position and having a 4-day weekend could have been an additional short-term factor in price fluctuations. Goda Paulauskaite
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NEFS Market Wrap-Up
CURRENCIES
Major Currencies The euro remained near seven month lows against the dollar after closing under 1.07 for the sixth straight session. The dollar ended the week with a three day winning streak against the euro, having closed higher in five of the last six trading sessions. The pair wavered between 1.0596 and 1.0683 before settling 1.0596, down 0.15% on Friday’s session. EUR/USD gained support at 1.0591, the low from November 23rd and was met with resistance at 1.1096, the low from October 28th. The euro could fall even further later next week if the ECB's Governing Council institutes further easing measures to stimulate the economy and bolster inflation at its meeting in Frankfurt. Over the last few weeks, ECB president Mario Draghi has sent strong indications that the central bank could increase the scope of its comprehensive EUR 60 billion a month quantitative easing program at the meeting. On Wednesday, Reuters reported that the ECB could also impose a two-tiered penalty next week for banks that leave deposits at its facility. The ECB's benchmark refinancing rate is at a record low of 0.05%, while rates at the deposit facility are already in negative territory at -0.20%.
Less than two weeks later, the Federal Open Market Committee is expected to raise its benchmark Federal Funds Rate for the first time in more than nine years. The rate, which banks charge on interbank overnight loans at the Fed, has remained at a near-zero level since December, 2008. The potential for sharp divergence between monetary policies in the US and the Eurozone has sent the dollar soaring, as foreign investors look to pile into the greenback in order to capitalise on higher yields.
With volatility on the rise and many key events ahead, the market is about to start, what could be a historic December. After six months of closing between 1.09 and 1.12, the pair broke decisively to the downside and is about to post the lowest monthly close since 2002. A combination of more easing by the ECB and a strong US jobs report could send EUR/USD below 2015 lows located at 1.0460 and would open the doors for a decline toward parity. The pressure on EUR/USD could continue until after the Fed’s decision when the pair could start to stabilise. Adam Nelson
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Week Ending 29th November 2015
Minor Currencies The Swiss Franc has been weakening long term; the trend began in mid-October when Mario Draghi committed the ECB to considering further QE at their next monetary policy meeting in December. This does not explicitly affect the Franc, but because the EU is Switzerland’s largest trading partner, the Swiss National bank will need to take action to weaken their currency to keep their exports competitive. This caused the USD/CHF to rise significantly in midOctober and break through the 0.980 resistance level, which had previously been proven strong when the pair bounced off the price multiple times in August and September. Once the price was broken, a trend began (highlighted in the graph below) averaging an increase of 13 pips per day. This uptrend made surprisingly swift work of the 1.000 price, which one would have thought would have produced substantial psychological resistance. Prices for this pair haven’t reached this range in over 5 years, and so there is some uncertainty among currency traders as what positions they should be taking or where the significant price levels will be. However, given the imminent rate hike from the Fed, and with the Swiss National Bank
giving further considerations to actions they can take to weaken the Franc, we can expect the trend in USD/CHF to continue into the foreseeable future. The Australian dollar had an up and down week against its US counterpart. The currency briefly broke its October high but unfortunately for the Aussie the gains were lost later on, ending the week roughly even. However, against the Euro and Pound Sterling the Aussie pushed forward. General feeling around the Reserve Bank of Australia has been negative in recent weeks, but better than expected unemployment data has meant odds of further RBA rates cuts have lengthened. The ECB’s and the BoE’s recent dovish behaviour has made speculators prefer Aussie dollar in trading, gaining 0.5% against GBP and 0.4% against EUR this week. The coming week could bring some change in sentiment around the Aussie dollar, if figures for trade balance and quarterly growth are different to forecasts. Will Norcliffe-Brown
USD/CHF 1 day candlestick (Source: OANDA)
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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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