Week Ending 21st February 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 India China Russia and Eastern Europe Latin America Africa Middle East
Equities 14 Financials Retail Technology Pharmaceuticals Oil & Gas
Commodities 19 Energy Agriculturals Precious Metals
Currencies 22 EUR, USD, GBP
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Week Ending 21st February 2016
MACRO REVIEW United Kingdom Office for National Statistics (ONS) figures published on Wednesday showed that there has been an increase in the number of people in work to 31.42 million, which is the highest figure the UK has seen since records began in 1971. The UK currently has one of the lowest unemployment rates in the European Union at 5.1%, following only Germany and the Czech Republic. Despite this, pay growth remains subdued. Average weekly earnings in the last quarter of 2015 was just 1.9%, down from 2% in the previous quarter. A few temporary factors seem to be suppressing wage growth, such as an increase in lower paid jobs, low CPI, a decline in the average number of hours worked per week, and a higher proportion of people new in their jobs relative to the recession. However there is also a larger underlying structural factor - weak productivity. The current unemployment rate of 5.1% is close to the UK’s ‘natural rate’ of unemployment, which is the rate at which inflationary pressures should increase as employers find it more difficult to find workers, therefore wages rise. Due to low productivity however, this is not happening.
Weak wage growth also has implications for the base rate. Sam Hill, an economist at RBC Capital Markets, said that “even if average earnings growth does pick-up towards 3% this year…it seems unlikely to be enough to provoke the Bank of England to tighten policy before early 2017”. Currently, low CPI (0.3% in January) is protecting workers from the consequences of low pay. George Osborne, the Chancellor of the Exchequer, hopes that the introduction of a ‘National Living Wage’ in April will help pay and inflation to rise. The 50p increase to £7.20 per hour will be the largest annual increase in a minimum wage rate across any G7 country since 2009. The rate will then rise to over £9 per hour in 2020. However this highlights the tradeoff between pay and employment growth, as employers may look to increase productivity of existing workers rather than hire more workers. Subtle signs of this are already starting to show as the unemployment rate remained at 5.1% in December, as shown on the graph below, although economists had forecasted a fall to 5%. Shamima Manzoor
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NEFS Market Wrap-Up
United States US consumers are panicking in a mad rush to refinance their borrowings as uncertainty surrounding interest rates has amplified in recent times. In a recent report, the Mortgage Bankers Association stated that the refinance volume is now at the highest level in over a year. The total mortgage applications are 8.2% higher on a seasonally adjusted basis this week compared to the previous week. Borrowers with large loans tend to be more sensitive to a drop in interest rates given a higher potential gain from refinancing. Hence, it comes as no surprise that big banks have engaged in a bit of an arms race to secure the business of wealthy clients. In some cases, jumbo loans and an explicitly lower rate is being offered to new clients who pledge a certain amount of assets to be managed by the bank – one of the most popular avenues to get clients through the door. In other news, the economy witnessed a fall in consumer sentiment amid signs of slower economic growth and winds of turmoil from abroad. As shown on the graph below, the Index of Consumer sentiment hit 90.7 in February's preliminary reading, slumping down from 92 in January. This figure has drawn
interest especially due to the retail sales gaining momentum earlier this year, which is an indicator that usually moves parallel to consumer confidence. Despite the steady drop, consumers expect low inflation to transform meagre wage growth into real income gains. Such economic times are incredible examples to us economists of how the basis of consumer actions have evolved over the years. As the presidential race gets underway, Republican candidate, Mr. Donald Trump seems to have mastered the art of positive messaging and conveying optimism to the US voters. With the wounds of the Iowa election results still afresh, Mr. Trump reported a landslide victory in New Hampshire last week. The voters in New Hampshire delivered a resounding rebuke to the US political establishment on Tuesday, with strong wins for left-wing Democrat Mr. Bernie Sanders and the radical Republican that is Mr Donald Trump. The presidential race has taken an interesting turn with the first week of March being labelled a “decider week� as voting takes its full swing. Vimanyu Sachdeva
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Week Ending 21st February 2016
Eurozone Europe’s new banking watchdog has ordered the biggest Eurozone banks to boost their capital levels by 0.5 percentage points on average after a year-long assessment of their risks. The Single Supervisory Mechanism (SSM) that was established in late 2014 as part of Europe’s efforts to combat its debt crisis, warned in a report published on Friday that overall risks for the roughly 130 large Eurozone banks it supervises have “not decreased compared to 2014.” The report highlighted that many banks were still recovering from the 2012 financial crisis and “they continue to face risks and headwinds.” The biggest risk consists of adapting their business models to a new environment of low interest rates. It is the first time that the Eurozone’s single banking watchdog has reviewed the riskiness of the bloc’s biggest banks based on a common standard. The task previously fell to national regulators, who took different approaches to capital levels and business risks. Europe’s battered banking sector needs to have confidence driven back into it but this has also come under renewed pressure in recent weeks amid broader concerns around the health of the global economy. The MSCI
Europe Financials Index has fallen more than 15% so far this year. Core Tier One ratios are a key measure of a bank’s balance sheet strength, comparing equity capital to risky assets and the Eurozone banks need to boost their core Tier One capital ratios to 9.9% on average this year from 9.6% last year, and set aside an additional 0.2% of capital as a buffer against the risk posed by systemically-important institutions. The report shows that five banks didn’t have enough capital to meet the current requirements, including one that fell significantly short. The review provides “a holistic view of banks’ risk profiles,” and uses forward-looking elements such as stress tests, said Korbinian Ibel, Director General at the European Central Bank responsible for microprudential supervision. Mr. Ibel said that the SSM had hired more than a thousand staff since its establishment in late 2014 and was now “the biggest supervisor in the world.” The SSM is housed within the ECB in Frankfurt, and the banks it supervises account for around 85% of all Eurozone banking assets. Erwin Low
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Japan The prospects facing Japan’s economy have scarcely improved since last week’s article; just before the week began it was reported that Japan’s economy shrank at an annualised rate of 1.4% in the fourth quarter of 2015. This figure came as no surprise, released as it was after a dismal few weeks for Japan, in which stagnant wages, a strengthening yen and global market uncertainty decimated any hopes the BoJ had of achieving their inflation target of 2% in the near future. As usual, Japanese officials were quick to come to the defence of the economy, with Yoshihide Suga, Japan’s chief cabinet secretary, blaming an abnormally warm winter for weakness in consumption. He claimed that the economic fundamentals in Japan are good and said that the government was expecting a steady recovery in business conditions. On Wednesday, it was announced that Japan’s trade surplus for January was ¥119bn, the highest it has been in four years. This is somewhat good news for officials as external demand is supposed to be one of the driving forces of the Abenomics stimulus, however, the figure does not directly reflect the fact that exports, although rising by 0.6% compared to December, fell by 12.9% year-on-year. Part of the reason why there is a trade surplus despite
this is that falling oil prices have lowered the value of one of Japan’s main imports (see graph below). Going forward, this trade surplus is in danger of disappearing, as the recently strengthened yen has its effect on the competitiveness of exports and as demand from China weakens even further. We also learnt this week that machine orders in Japan, which are a popular proxy for capital spending, fell by 3.6% year-on-year in December. This, along with the fact that the index of all industries’ activity, which reflects the total value of goods and services purchased by businesses, fell by 0.9% month-on-month in January, will further cement worries that Japan is stuck in secular stagnation and raise the likelihood that officials will take action over the coming weeks. What form this action would take is not clear; it’s unlikely that the government will intervene in currency markets, as this would be politically toxic and Mr Abe has ruled out a supplementary budget. Therefore, we’re left with the possibility that the government will postpone the planned rise in consumption tax or that the BoJ will cut interest rates further into negative territory. Daniel Nash
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Week Ending 21st February 2016
Australia & New Zealand The Economic and Political Outlook 2016 report from the Committee for Economic Development of Australia (CEDA) was released this week but was not optimistic. Business confidence was predicted to be a “significant issue” despite the fact that the economy is much stronger than surveys suggest. This is partly due to the political election which can sway business sentiment. The fall in the mining industry from its 2012 boom and the worst of its effects are said to be over, as 60% of job losses have already been incurred but there are still fears of further turmoil.
Asia’s rising middle-class provides “unprecedented opportunities for Australia’s non-resource sectors”, a key opportunity that political and business leaders should focus on.
The Treasury and Reserve Bank admitted that Australia’s trend rate of growth is in fact closer to 2.75% than 3.25%, so the incomes of taxpayers and the tax base will grow slower than the economy has previously experienced.
Continuing with such plans would result in “slightly less tax revenue, slightly lower operating balances and slightly higher debt” than the Budget predicted. These forecasts would not hold the government back from continuing with their restrictive approach by having a tight hold on government spending, whilst trying to pay national debt, focusing on public services results and return excess revenue to taxpayers.
The economic chapter described that a weakness in income can spell disaster for the economy. This is because “households want to defer spending”, businesses will reduce investment and governments are experiencing growing budget deficits, implying they are inclined to use stronger contractionary fiscal policy and so the economy won’t experience high levels of growth. China’s slowdown in economic growth was also mentioned, as it means the global economy faces significant risks. But the report stated that
In other news, New Zealand’s Prime Minister, John Key, announced that the government is continuing with tax cuts, despite a slowdown in recent economic growth. It was speculated that the size of the economy is expected to be NZ$17 billion lower over five years than expected by the Budget in May 2015, partly caused by weak dairy prices.
In addition, Mr Key reassured the population that despite lower forecasts, the economy continued to expand, as the Treasury forecasted an average of 2.7% over the next five years. Figures also showed that incomes are growing faster than inflation, and growth in employment continues. Meera Jadeja
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NEFS Market Wrap-Up
Canada The Candian inflation rate has reached its highest level since November 2014. Consumer prices in Canada increased at a rate of 2.0% in January 2016. As evident from the graph of the Canadian inflation rate over the last four years, the inflation rate rose by 0.4%, from 1.6% in December 2015 to 2.0% the following month. The rise in the inflation rate was above the market expectations of 1.7% increase in consumer prices. In seven of the eight major components used for calculating the Canadian inflation rate prices increased over the one year period from January 2015 to January 2016. The largest increases was in food and transportation prices - food prices rose by 4.0% whilst transportation prices increased by 2.2%. If we look at food prices in more detail we can see that a large proportion of the increase in food prices is due to a rise in the price of fruit and vegetables. In a basket used for calculating the price of fruit and vegetable which contains peppers, cauliflower, celery and broccoli, prices rose by more than 22%. One of the factors causing the large increase in the prices of food is the weak value of the Loonie (the Canadian dollar). This generates higher food prices because a large proportion of Canadian food is imported.
Clothing and footwear prices declined by a small 0.3% over the one year period. All the provinces in Canada recorded higher inflation rates in January 2016 than in January 2015. In other news this week, it was announced that the Organisation for Economic Co-operation and Development (OECD) has cut the growth forecast for the Canadian economy in 2016 alongside the global growth forecast. The OECD have stated that their new projection for the Canadian growth rate is 1.4% (the same prediction as the Bank of Canada). This is revised down from the previous prediction of a growth rate of 2.0% in 2016. For 2017 the OECD are now predicting a growth rate of 2.2% decreased slightly from 2.3%. The OECD stated that investment and trade has been weak in the US and Canada contributing the revised figures, alongside low inflation and the large fall in the price of oil in Canada. The recent weak trade figures and the fall in the price of oil have been particularly important as the OECD described the Canadian economy of being too reliant on export commodities. The world economy grew by 5.0% in 2015, the lowest rate since 2010. Kelly Wiles
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Week Ending 21st February 2016
EMERGING MARKETS China Chinese markets re-opened this week after the week-long Lunar New Year holiday. The risks of deflation in China in 2016 were emphasised recently and this week’s consumer price index (CPI) and producer price index (PPI) data highlights this. There is also trade balance data this week which should somewhat demonstrate how well China’s accommodative policies have performed so far. Data released by the National Bureau of Statistics showed that CPI year-on-year came in at 1.8%, just missing a forecast of 1.9%. This was a notch higher than last month’s figure of 1.6%. The main driver of the gain in inflation can be attributed to food prices, rising 4.1% compared to 2.7% in the previous month. However, food prices are subject to supply shocks and seasonal blips, such as the recent Lunar New Year. PPI year-on-year came in better than expected at -5.3%, slightly higher than last month’s figure of -5.9%, as shown in the figure below. The forecast for the month of January was -5.5%. Producer prices are often regarded as a proxy for medium-term inflation and as such, can have an effect on inflation expectations. Prices of mining products declined the most by 19.8%, raw materials by 9.1% and means of production by 6.9%. Overcapacity still remains a large problem.
From an international trade perspective, the world’s biggest trading nation’s trade balance rose to CNY 406 billion from the previous month’s reading of CNY 382 billion. This month’s figure was higher than a forecasted CNY 389 billion. It was the largest trade surplus on record. Despite this seemingly positive data, the underlying figures should be examined carefully. Exports in US dollar terms from a year earlier declined by 11.2%, well below last month’s fall of 1.4% and a forecasted -1.9%. This suggests that the central bank’s efforts to boost competitiveness in the export market has not taken effect. Moreover, imports fell by 18.8% from a year earlier, representing the 15th straight month of declines. This could signal a weak domestic economy, one in which the Chinese were keen to pursue. As mentioned before, it is important not to look too much into figures around Chinese New Year due to potential distortions. Nevertheless, the Chinese economy still remains at weak levels compared to the last two decades or so. The Chinese government may want to inject fiscal stimulus as soon as possible to drive consumption and investment. Sai Ming Liew
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NEFS Market Wrap-Up
India In the past couple of weeks, I have primarily highlighted and discussed the internal and external difficulties that India faces in terms of maintaining its impressive yet somewhat questionable growth figures. Despite the fact that India must address its own macroeconomic imbalances as well as dealing with a fragile global economic situation, reports published last week by the Organization for Economic Cooperation and Development (OECD) and Moody’s, a global ratings agency, were much more optimistic, stating that India would not be negatively affected by the global slowdown as the country’s economic outlook would be determined instead by strong domestic demand. Both reports also predicted that the South Asian nation will continue to see robust growth over the next two years, with the OECD upgrading its 2016 forecast for the Indian economy to 7.4%. Moody’s prediction for the next fiscal year was even more cheerful at 7.5%, as it stated that India is less exposed to external headwinds, such as China’s slowdown and global capital flows. It also expects India to continue to gain from lower commodity prices, despite speculation that the benefits enjoyed as a result of lower prices could dry up within the next year. Amid low growth in global trade in goods, another source of resilience is provided through India’s large services export sector, with IT services accounting for around
18% of total exports. Moody’s also maintained an optimistic tone in regards to the forthcoming 24% increase to public sector salaries, which has been criticised by some who believe it will only contribute to inflation within the economy. Instead, the agency believes that the government will cut spending in other parts of the budget in order to maintain the deficit broadly in line with the 3.5% of GDP target, thereby mitigating some of the inflationary effects. The optimism shown through these reports is in direct correlation with the positive sentiment currently present within the county, after “Make In India Week”, which closed on Thursday, garnered $222bn worth of investment pledges from firms all over the world. The event was a part of the government's push to create jobs by increasing the share of manufacturing to GDP to 25% over the next decade, from the 16-17% now. Although there is still plenty of room for improvement, India must also be applauded for the continuing stability that it displays in spite of an unaccommodating global economic climate. Homairah Ginwalla
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Week Ending 21st February 2016
Russia and Eastern Europe In a UN Development Programme report published this week, it has been noted that despite Eastern Europe having made terrific advances in economic growth over the past 10 years, the size of its middle class is greatly under threat. Unfortunately, whilst many people are rising out of poverty, they are then being prevented from moving to higher income levels. As a result, wealth inequality is worsening and having a detrimental impact on potential economic growth. Several factors have been postulated as possible causes for the reduced income and employment opportunities, such as falling commodity prices, slowing economies and shrinking remittances. Whilst many hope that oil prices will eventually stop falling and consequently bring economic opportunities back to Eastern Europe, this is uncertain. Another solution would be increasing investments into training already employed workers with new skills to enable them to attain higher income jobs, as well as creating new employment prospects. However this would be extremely costly and many argue it would be wrong to invest money into helping workers achieve a higher income, when there are still issues of poverty and unemployment. More effective schemes could also be provided to aid citizens with saving money and property
ownership. Finally, global measures could be initiated to increase the amount of remittances being sent back to Eastern Europe. Subsequently, with the economies of Eastern Europe growing rapidly, it has hence become vital that the middle classes are allowed to expand accordingly and wealth inequality is kept to a minimum. With regards to falling oil prices, Russia has temporality halted the deterioration of its economy following a deal on Tuesday with various OPEC leaders, most notably Saudi Arabia. Along with Qatar and Venezuela, whose economies are also struggling with the low oil prices, the nations have agreed to freeze oil production at current levels. By holding supply constant, it is hoped that increasing global demand will cause oil prices will rise. This has led to a spark of confidence in the Russian economy, which briefly saw a large increase in the value of its share prices (see Figure 1), specifically in the oil industry. Across Eastern Europe, it is greatly hoped that by increasing commodity prices and accelerating growth, the problem of a shrinking middle class may cease to exist. Charlotte Alder
Figure 1: Russia MICEX Stock Market Index (14. Feb – 19. Feb)
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Latin America On Wednesday Mexico’s central bank unexpectedly increased the key lending rate by half a point to 3.75 in an attempt to nip in the bud the prospect of rising inflation. The bank, which followed the US Federal Reserve in lifting rates in December when it lifted rates by a quarter of a point, and had been expected to stay in step with the US, stressed its decision was not the start of a rate raising cycle. On Wednesday the peso, which has tested historic lows against the dollar, persistently surged almost 5% on the rate rise news, up to 18.2 against the dollar. It had shed almost 10% so far this year against the dollar. Mexican authorities until now have said the plunging peso would not spark an inflationary spiral, but the Bank of Mexico (Banxico) said in its statement that international market volatility had increased since December, and the outlook for the Mexican economy had “continued to deteriorate”. Analysts believe the impact of that on the peso had increased inflation prospects so that they were no longer in line with the permanent objective of 3%. A further factor and one that Mexico has very little influence in is that emerging market traders have hammered
it because it is used as a proxy, due to it being the most liquid emerging markets currency. The unexpected rate rise comes as Mexico is preparing to make new cuts in public spending for next year’s budget and to throw a financial lifeline to Pemex, the state oil company, where stagnating oil production and a plunge in international prices has pushed the company into a financial crisis. So in the same vein as the rest of Latin America, 2016 may prove to be a painful year for Mexico, which brings me on to a previous article in which I commented on the possibility that Venezuela may have the possibility of a default. Furthermore, Venezuela’s debt woes are compounded by the fact that the economy is forecast to shrink by almost 5% this year after 8% in 2015. Furthermore, annual inflation is predicted to be around 180%. However the crux of the default issue is the exorbitant servicing costs which are around 20$bn a year which equates to 90% of all Venezuela’s oil exports. Max Brewer
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Africa At the African Transformation Forum (ATF) in Kigali, this Monday, economists, policymakers, investors, and civil society are trying to plan ways of breaking the dependence of many African countries on raw natural resources. The case is now more urgent than ever for resourcebased African economies to diversify. The downside of dependence on raw natural resource exports is being felt around the continent: for example, Nigeria, which has been dependent on oil exports for 70% of government revenue, faces a huge budget gap in the face of dropping oil prices; Zambia had lost some 80% of the value of its currency against the dollar as China’s demand for the red metal cooled down, resulting in prices half of what they were a few years ago; Angola has cut its budget by 40% from two years ago, resulting in reduced public services. One of the main topics to be discussed by Africa’s top economists, policymakers and business leaders at the first African Transformation Forum (ATF) in Kigali is how to use agriculture as a base for the continent’s economic transformation. A surplus-generating agricultural sector can provide cheap food, ensuring adequate nutrition for the population, including its workforce, and also increase the amount of disposable income left to individuals
and families after the food bills have been paid. This generates demand for other goods and services, creating direct and indirect jobs. The Bank of Mozambique has once again increased its key interest rates in its struggle to bring down inflation. A statement issued by the Bank's Monetary Policy Committee on Monday, after its monthly meeting, announced an increase of 100 base points in the Standing Lending Facility (the interest rate paid by the commercial banks to the central bank for money borrowed on the Interbank Money Market). This rate thus rises from 9.75% to 10.75%. This is the highest interest the Bank of Mozambique has charged since September 2012. The Monetary Policy Committee said it has increased the interest rates because of “the probable impacts of the adverse international conjuncture, as well as the expected effects of drought in the South and centre of the country and floods in the North”. In addition, the Mozambican Gross Domestic Product was growing at less than the initial forecast, while “projections for domestic inflation show the prevalence of pressure in the short and medium terms”. Sreya Ram
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NEFS Market Wrap-Up
Middle East A perfect storm is about to smash into one of the most sensitive areas of Egyptian policy – the bread subsidy programme. The government sells bread to its people at 0.05 Egyptian pounds a loaf, a programme that is expected to cost an enormous US$4.8 billion dollars this year. While local farmers have planted enough wheat this year to ensure an estimated harvest of 8.1 million tonnes by the end of June, the rest must be imported from abroad. But as stated last week Egypt is currently experiencing a foreign currency reserve crisis, meaning it has been having problems financing these imports. For example, the government has delayed letters of credit for wheat suppliers, causing shipments to be delayed. This made traders somewhat reluctant to sell wheat to Egypt. With a low supply, an increase to the price of bread may be the only option left. However a sharp hike in the price of a loaf in 1977, designed to take pressure off the government’s budget, backfired dramatically when riots broke out across the country overnight, causing the government to quickly reverse the price increase. For the future, I believe the government must persevere to maintain the subsidy programme and restart wheat imports if a situation similar to 1977 wants to be avoided.
In other news, the drop in oil prices to below $30 a barrel has fuelled fears among the younger Saudi generation of what a future of cheap oil will mean in the Arab world’s largest economy. Low oil prices have knocked a chunk out of the government budget and now pose a threat to the unwritten social contract that has long underpinned life in the kingdom. For decades, the royal family has used the kingdom’s immense oil wealth to lavish benefits on its people, including free education and medical care, generous energy subsidies and well-paid (and often undemanding) government jobs. The shift is already echoing through the economy, with government projects delayed, spending limits imposed on ministries and highlevel discussions about measures long considered impossible, like imposing taxes and selling shares of Saudi Aramco, the state-run oil giant. For Saudis below 35 — shown by the graph to take up over 70% of the nation’s population — the oil shock has meant a lowering of expectations as they face the likelihood that they may have to work harder than their parents, enjoy less job security and receive fewer perks. Harry Butterworth
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Week Ending 21st February 2016
EQUITIES Financials After what has been a frantic two months, with financial markets crumbling, we begin to see things settling down. The performance of the financial sector is seemingly improving from the offset of this turmoil, and this brings hopes of rising stock prices for investors. It therefore makes sense to review how some of the largest financial bodies have coped so far this year, with some having obviously struggled under the pressure. Focussing on two major central banks: Bank of China, Bank of Japan, as well as the second largest financial influencer in North America: the Bank of America, whose shares all plummeted to an annual low last week, we are beginning to see a rebound in this drop. This is shown by the figure below, which depicts the past month’s variations in stock prices of these three. With the very cause of the poor performance in financial markets arising from alterations in central bank’s policy, it’s no surprise to have seen both the BoC and BoJ suffer themselves (whilst BoA was hugely impacted by the adjustments), and hence all incurred a loss of confidence from investors. This turnaround saw Bank of America rise 7% since its downfall, whilst Bank of Japan recouped a massive 17%, and Bank of China climbed a minor 3% from last week. These
gains are a strong indication of a recovery within this market, and with them being from major influencers in the financial markets we see an upsurge in investors’ confidence in this sector. This is shown by a pattern that is forming all across the financial market, with the majority of companies showing some form of recoup from the sector-wide plummet in stock prices on the 11th of February. Morgan Stanley’s stock price had fallen 8% on the day from $23 to $21.23, and has since made a 13% gain to close this week at $24. Further to this, J.P. Morgan experienced a drop of 5.5% on the same day from $56.0 to $52.92, but has recovered 9.4% since. The recovery is not just unique to US financial firms either, where improvements are being seen across Europe, with Deutsche Bank recovering 15% from last week’s €13.12 low to closing this week at a higher €15.20. This surge in stock prices seemingly concludes better financial equities than what was the case last week, and with firms’ performance gaining traction; we see high expectations from investors and companies alike for this trend to continue in hopes of establishing higher valued stocks. Daniel Land
Figure: Bank of America, Bank of Japan, Bank of China
BoC BoJ
BoA
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Technology This week’s technology news has been dominated by the privacy dispute between Apple, the FBI and The US Department of Justice. The FBI would like to investigate the contents of an iPhone belonging to the San Bernardino Shooter. However, this requires Apple to unlock the iPhone, which the technology giant is unwilling to do due to privacy issues. The US DoJ has got involved in the debate, supporting the FBI and accusing Apple of putting “brand marketing concerns ahead” of legal obligations. Elsewhere, telecoms firm T-Mobile has increased its market share in the US market by attracting 917,000 new customers in Q4 of 2015. The company points to the new services they have launched to improve user experience, such as allowing customers to watch streaming websites, including Netflix and Hulu, without eating into their data allowance. Furthermore, the new Jump on Demand service allows customers to change their handsets up to three times a year. Earnings per share of the company exceeded market analyst expectations by 126% in the quarter, while net profits were at $297 million. However, although
the share price did momentarily increase on Wednesday, as shown below, due to the company’s high debt to earnings ratio of 2.5, the share price has remained relatively constant. Game maker, Ubisoft saw its share price increase 21% this week to 23p after it announced a plan to increase revenues 60% by 2019. This plan was announced in an attempt to fight off a rumoured acquisition from rival company, Vivendi. Vivendi, controlled by notoriously aggressive businessman, Mr Bolloré, had already launched a takeover bid of Gamesloft – a company similar to Ubisoft. As a result, Ubisoft will shift its attention to producing multiplayer games to create “more predictable” revenues. The company announced it expected to free up €300m of cash flows once changes had been implemented. Although there was a strong response from the market, the founders of the company, the Guilleot family, only have a 9% share in the company, leaving them more vulnerable to a takeover, therefore, I would be cautious in investing in Ubisoft shares. Sam Ewing
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Retail Retail equities have slightly improved given positive early year results and improving sentiments over prospects for the sector. They have benefited from positive January results, boosted by clearance sales, as reported by the British Retail Consortium. The Dow Jones Consumer Goods index rose by 2.9% before Friday’s trading and the FTSE 350 General Retailers index also had an upbeat week, rising by 4%. As shown below, Walmart's share price took a 5% hit last Thursday, despite gaining approximately 10% in the last four months. Its price had previously declined since the start of 2015 by around 32% up to November given that it had warned of a reduced sales growth outlook. Thursday’s results marked the company's worst sales performance in 35 years due to a plethora of factors including mounting online competition from the likes of Amazon and the impact of a strong dollar affecting the profitability from overseas trade. In response, Walmart announced that it is closing 269 stores globally as they failed to become profitable. In the UK specifically, the company, which owns Asda, also reported its sixth consecutive quarter of decline, with sales dropping 4.7% for the full year. One factor which is worrying investors on Walmart’s outlook is same store
sales, which missed the already low estimate of 1% by 0.4%. As food prices are related to the price of oil, Walmart has argued that food deflation has had a large impact on its performance, yet investors remain sceptical and wonder whether this is an example of wider shifts in consumer behaviour or specific issues related to Walmart’s management. In response to its extended poor performance, Asda has announced cuts to hundreds of jobs at its head office in Leeds. Having identified that consumers are shopping in a more fragmented way, without so much bulk buying, Asda had hoped to adjust to this structural change by lowering regular prices in order to maintain its position as part of the 'big four' supermarkets. As single large-shopping trips are less common, German discounters Aldi and Lidl have been able to nab 10% of the market. A rise in footfall and sales for the start of the year has been broadly based on postChristmas price cuts but has also been helped along by cheaper energy costs, which have helped to boost confidence and spending. It will be interesting to see if this trend is set to remain over the coming months. Sam Hillman
Walmart’s share price since the 19th November
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Pharmaceuticals This week we have seen the FTSE 350 Index Pharmaceutical & Biotechnology increase by 3.41% and the NASDAQ Biotechnology Index increase by 4.33%. The Pharmaceutical & Biotechnology sector has been stable and this week’s increase is in line with the S&P 500, which also rose 4.7%.
exclusivity of a branded medicine by threatening to challenge its patent in court. GSK’s share price has fallen 2.7% from £1423.40 to £1384.50 in the last week. GSK is unlikely to be affect by this penalty and will still remain as one of the top British Pharmaceutical companies in the world.
Shire, a London-listed drug maker has put a stop to the $50bn acquisition spree it had accumulated over the past three years as the company looks to focus on integrating assets and launching new products. Shire had acquired Baxalta for $32bn and two other US biotech companies, NPS and Dyax for more than $5bn over the past year. Revenues in 2015 were up 7% from 2014 at $6.4bn and Shire predicts a double-digit percentage increase in sales and growth in earnings per share from 7% to 10%. All in all, Shire’s shares have fallen by over 30% in the past 6 months but this is due to a wider sell-off in biotech shares across the sector.
Pfizer Inc. has agreed to pay $784.6 million to settle claims over Medicaid rebates, resulting in the drug company’s downward revision of its fourth quarter results. As a result of this settlement, Pfizer revised its fourth quarter results to a loss of $172 million, or 3 cents a share. In other news, the world may be just a few weeks away from a viable Zika virus test, but the vaccine is still many months away from large-scale trials as reported by the World Health Organization. Some of the companies working on the vaccine are French-based pharmaceutical company Sanofi and Iowabased NewLink Genetics.
GlakoSmithKline (GSK) has been fined £37m for illegally preventing the launch of a cheap rival drug making it the largest penalty levied so far by the new UK’s competition policies. The Competition and Markets Authority (CMA) said that GSK was guilty of having this so called ‘pay-for-delay’ deals where the generic manufacturers seek to break the market
It was a good week for the Pharmaceutical & Biotechnology sector as share prices increased by an average of 3% to 4%. IPOs in the sector are predicted to slow down this year but on the flip side, there is a greater possibility of largerscale Mergers and Acquisitions this year. Samuel Tan
NASDAQ Biotechnology Index (NBI) Credits: Yahoo Finance
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Week Ending 21st February 2016
Oil and Gas Since the last update, there has been word from OPEC: the world’s petro states have come close to organising a production freeze at January output levels. Number one oil producer Saudi Arabia and number two Russia, initiated the accord, contingent on the other big oil producers backing the freeze. Qatar and Venezuela have since come on board, but Tehran’s withdrawal on Wednesday has proved an element of hesitancy in amongst dealmakers. Credit rating agency Standard & Poor’s, however, are sceptical about the deal and are not predicting any effect on its oil price assumptions. Indeed, the financial services group went on to downgrade Saudi Arabia by 2 points from A+ to A- on Wednesday. This is a real issue, considering that this leaves the country only 4 rungs away from non-investment grade territory. To put this in perspective, this is often referred to as “junk”. In addition, Bahrain’s credit level was downgraded as a direct consequence of its now 20 month-long decline in oil prices. Brazil, Kazakhstan and Oman also had their levels lowered. Ultimately, the actions taken by S&P illustrate quite clearly the massive risk that the oil price slump is having on the global market. Investors
are worried; oil has typically been a relatively safe investment – this is, however, no longer the case. Concern has been raised over the economic effects; it is quite possible that the Saudi riyal will have to be unpegged form the US dollar. The Gulf Kingdom is not the only region to be ailed by this so-called ‘Dutch Disease’ (overreliance on one export). Norway, too, is feeling the pinch as the PM Erna Solberg acknowledges that “None of us can be sure where the oil price will go.” She went on to say that “The Norwegian economy has to diversify.” Unfortunately, for economies such as the aforementioned and those in the Gulf Kingdom, diversifying is a long-term endeavour; it is unlikely that now that the negative effects have already been felt, that they could be reversed. Surpluses have dwindled and are now transformed into gaping budget deficits which will have ripple effects not only in the domestic economy but globally. Below is a graph showing the decline in the price of Brent crude of which the effects are being felt globally. Tom Dooner
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NEFS Market Wrap-Up
COMMODITIES Energy Oil dropped markedly on Friday, but is still likely to make its first weekly price rise in a month. Earlier in the week, four of the main oil producing countries - Russia, Saudi Arabia, Venezuela and Qatar - agreed to freeze their oil production by maintaining their output at January levels. The oil market, on balance, took this as negative news. Despite the fact that keeping supply constant will allow demand to catch up to rebalance the oil market, Russia and Opec’s production was already at multiyear highs, so supply is being frozen an at extremely high level. Additionally, the market believed that Iran was planning to increase production to its pre-sanction levels, and therefore the sentiment was that global supply was unlikely to tail off any time soon. However, surprisingly late on Wednesday, Iranian Oil Minister, Bijan Zanganeh, expressed his support for a deal to hold supply constant, provoking a rally in oil price. The deal agreed by Russia and Saudi Arabia would only have held
if other large exporters, mainly Iran, joined. Hitting $32.40 on Wednesday, the news caused Brent Crude to rise to over $34 overnight and continue up to around $35.40 during Thursday. The volatility continued on Friday, as prices dipped overnight in response to news that US crude stocks had hit record highs. Inventories of US crude rose by 2.1 million barrels last week to reach a height of 504 million barrels. However, there was also some good news on Friday from Iraq, Opec’s second-largest oil producer. The country’s Oil Minister gave verbal support for measures undertaken by Russia and Saudi Arabia to restore ‘normal’ prices, he also stated he ‘welcomed’ the participation of Russia as a non-Opec country. Oil prices have risen throughout the day on hope of a wider deal to curb production, with Brent crude expected to close around the $34.00 mark above the open this week of $33.15. William Norcliffe-Brown
Brent Crude Price Chart (Source: MoneyAM)
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Week Ending 21st February 2016
Agriculturals Much of the major news in the expansive sector of agricultural commodities revolves around Egypt, in much the same vein as last week, largely to be expected given the country’s influence on global wheat and grain markets. Whilst the author last week speculated as to the reaction of traders to Egypt’s recent contamination furore, it appears that merchants are exercising a degree of flexibility and extending a hand to Egypt, lowering the risk premiums demanded to make trades with Gasc, the country’s grain authority. As a result, Gasc made its biggest order since October, purchasing a total of 240,000 tons of wheat, with an additional 30,000 tons of US hard red spring wheat, a variety high in protein, representing the first purchase since 2010. The reduction in risk premium comes after a written document was released by Egypt, outlining its specifications. Despite this, the number of tenders was remarkably low, at 5, compared to the usual 20 or so. As a result, the value of wheat futures on the Chicago Mercantile Exchange rose 1.0% this week.
level, breaking the earlier 2016 sell off which caused the New York exchange to fall around 10%. Much of the forecasted rally is supposedly due to the intrinsic nature of the cocoa market, with concerns over the West African crop being compounded by sub-optimal weather forecasts which are set to keep the Ghanaian crop at approximately last year’s disappointing levels, and significantly less than VSA Capital’s previously forecasted output. As a result, the net long position from Hedge Funds and other speculators increased significantly within cocoa futures, adding supportive evidence to VSA Capital’s forecasts and elucidating the sizeable market impact of the predicted fall in output and thus supply. Due to similarly inclement weather conditions, other crops, such as soybeans, may also exhibit fluctuations in output, and by extension supply, affecting markets in a similar manner to cocoa futures. As such, agricultural commodities remain an interesting and dynamic group of markets to follow in coming weeks. Jack Blake
Elsewhere in the agricultural commodities sector, broker VSA Capital predicted that cocoa futures are set to rally past the $3000 a ton
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NEFS Market Wrap-Up
Precious Metals The outcome of the Federal Reserve meeting on the 17th February implies a turning point in adjusting the interest rates as soon as March. Certainly, this change would have a significant effect on turning the appreciation of precious metals towards the opposite direction. The key factors raising concerns include sinking oil prices, slowly declining inflation rates (relatively low already) and volatility in equity markets. According to the Fed's Bullard, raising the interest rates now is most likely to hurt the US economy.
commented on depreciating banking stocks and weakening emerging market economies. The main worry for banks is decreasing commodities prices, mostly affecting the banks financing suppliers, due to the increasing risk. Discussions raised had a negative shock on metals prices. The value of gold topped on the 11th at 1246.70 USD/t. oz. and, after a slight tip on 16th (Figure 1), slightly strengthened by the 19th to 1232.48 USD/t. oz. A short period of depreciation could be explained by a slowing demand in physical gold purchases on early trade. In the meantime, the demand for physical silver on ready trade remained relatively stable.
This forecast cannot be called unexpected as earlier. On 10th February, J. Yellen, the chairwoman of Fed, suggested that the rise in the interest rates should be delayed. The economist added that the main factor initiating financial market volatility is increasing uncertainty on China’s exchange rate policy. M. Perez-Santalla, the VP of business development at Bullionvault, reflected that in the upturning event, strengthening China’s economic position, gold would certainly depreciate.
In other metals markets the situation is also similar. Silver also peaked on the 11th and remained depreciating up to 19th Feb., from 15.794 USD/t. oz. to 15.405 USD/t. oz. Meanwhile, Platinum fell from 960.20 USD/t. oz. to 943.28 USD/t. oz. Regression analysis by Dennis Boyko, GoldMinerPulse Stock Researcher, projects a 1/3 chance for Gold ending the year with an overall appreciation. Otherwise, 2016 is likely to end without a clear trend. As evident in the Figure 2, Gold entered 2016 at just above 1060 USD/t. oz. and sees a slight upward trend in the 1st quarter.
While we continue waiting for a further increase in interest rates this year, the Bank of America Merrill Lynch is already changing its prediction. The Bank suggests that increases of the real interest rate should be reduced to 2 times rather than 3-4 times as forecasted earlier. Similarly, the EU is observing a worsening distribution of economic performance. On 15th February M. Draghi, the President of ECB,
Figure 1
Goda Paulauskaite
Gold
Figure 2 Figure 2
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Week Ending 21st February 2016
CURRENCIES Major Currencies This week the USD was fuelled by higher-thanexpected US CPI, which triggered a higher demand of USD. The core inflation at a yearly basis rose to 2.2%, above expectations of 2.1%, while on a monthly basis, it advanced 0.3%. The core inflation is a surprise in the face of declining oil prices. Inflation plays a major role for the monetary policy of the Fed. Recently, the market expectation of further increases of the interest rate by the Fed slightly rose again. However, the majority is still expecting that there won’t be a further increase this year. Additionally, the surprisingly strong performance of the US-industry backed the USD. Hence, after the USD was worth 0.898 Euro on Wednesday, it was expected to increase its worth to 0.9005 Euro today. This week the EUR/USD declined resulting in a 2-week low. As the graphic below shows the EUR/USD went down to 1.10859 on Friday. On Tuesday EUR/USD lied at 1.1166, on Wednesday at 1.130 USD. As for the ECB a decision for its next meeting on March 10th has not been made yet. However the ECB may decide to act if the recovery of an inflation near under 2% is endangered. “The main thing for us discussing our decisions is the prospect for inflation going forward. We don’t expect to
reach our goal in a short time, but to go in that direction”, said ECB Vice President Vitor Constancio to Reuters. The ECB is trying to boost inflation with the help of QE. However, low energy prices, stagnating growth and weak lending still keep the inflation rate far away from the ECBs target. The Euro to Pound exchange rate is currently between 0.7776 and 07817. The GBP/EUR exchange rate softened and is currently trading around 1.2846 mainly because of rumours, comments and speculation on the second day of EU reform talks, where David Cameron is currently battling for Britain’s national interests as he said in a recent statement. However, the Prime Ministers hopes of securing a reform to Britain’s EU membership have been already diminishing after several Eastern European countries rejected proposals to restrict child and in-work benefit payments to EU migrants. Italian Prime Minister Matteo Renzi stated “some timid steps forward on migration, some steps back on a UK deal… I’m always confident, but a bit less optimistic than when I arrived.” Alexander Baxmann
EUR/USD 16.-19. February
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NEFS Market Wrap-Up
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