Week Ending 31st January 2016
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 3 United Kingdom United States Eurozone Japan Australia & New Zealand Canada
Emerging Markets 10 China India Russia and Eastern Europe Latin America Africa South East Asia Middle East
Equities 17 Financials Oil & Gas Retail Technology Pharmaceuticals
Commodities 22 Energy Precious Metals Agriculturals
Currencies 25 EUR, USD, GBP AUD, JPY & Other Asian 2
Week Ending 31st January 2016
THE WEEK IN BRIEF
Global growth remains an issue Amid sustained slow growth in China, low growth rates continue to persist among economies across the globe. While China’s growth rate was 6.9% for 2015 was roughly in line with the targeted rate of “around 7%”, the pace of the economy has showed a significant slowing at the back end of last year and into the start of 2016, and is impacting heavily on growth rates across the board. Africa’s exports of raw materials to China have fallen significantly, hindering producers across the continent, particularly those in the mining industry. Meanwhile, falling demand from China is affecting exports out of countries ranging from India to Australia, dragging on their economic growth performance. With the outlook for China seeming gloomy, it seems that growth figures of those countries that depend on China for exports (of which there are many) could be restrained for some time.
Oil price slump worsens… Before Christmas, the dramatic fall in oil prices amazed many, and as the price of Brent Crude Oil dipped below $40 per barrel, down from a peak of $112 per barrel in 2014, it seemed as if the price could go no lower. Yet since then, price falls have showed no let up, and this month we have seen prices plunge, even dropping below the $30 per barrel price for a short period. While the price recovered to some
extent later in the month, the World Bank has cut average price forecasts by over a third for 2016 from $52 per barrel to $37 per barrel. Given that current oil prices have remained so low for what is becoming a long time, pressure is increasing on OPEC to come to a deal with Russia to reduce oil production, in order to boost prices.
… Continuing to restrain inflation Such low oil prices are continuing hold down prices across the board in a global economy that is already experiencing a low level of inflation. It seems that we could still be waiting a while longer for any sign of an increase in the interest rate by the UK’s Bank of England. Across the pond, while Janet Yellen initially indicated that there could be up to three or four increases in the Federal Reserve’s interest rate in the US this year, given that inflation seems to be restrained, it appears that further rate hikes may be somewhat later than many had predicted at the end of the last year. Perhaps most significantly, the Bank of Japan surprised most of us on Friday, voting to cut interest rates on reserves held by financial institutions with the Bank to -0.1%, demonstrating the difficulty that it is facing in guiding the economy to its inflationary target of 2%. Unless oil prices begin to return to more normal levels, it seems hard to imagine Japan, or indeed many other countries, including the UK, to achieve inflation targets any time soon. Jack Millar
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NEFS Market Wrap-Up
MACRO REVIEW United Kingdom Since December, the Bank of England’s (BoE) Monetary Policy Committee (MPC) held their monthly meeting to make their decision on the Bank Rate and money supply that should be set for the UK. Predictably, interest rates were held constant at 0.5% for the 82nd consecutive time since March 2009. The BoE’s monetary policy objective is to deliver price stability, which is defined by the Government’s inflation target of 2%. CPI inflation, shown on the below chart, was just 0.2% in December 2015, improving slightly from 0.1% in November. Oil prices have been falling since mid-2014 due to global supply exceeding global demand. The price of a barrel of crude oil fell to under $30 last week, for the first time in 12 years. Alongside China’s slowdown in growth, this has meant that inflation has been subdued in many countries, in addition to the UK. Mark Carney, the Governor of the BoE, stated last week in his “The Turn of the Year” speech that a rise in Bank Rate would be considered when inflation, GDP, and average wage growth rise to normal levels. He added that the MPC aim for inflation to be on target in two years, hinting that a rate rise would not be any time
soon. In response to his dovish speech, pound sterling fell to $1.42, a seven year low. One of Carney’s first moves as Governor of the BoE in 2013 was to announce his Forward Guidance policy, which was not to raise Bank Rate from its current level of 0.5% at least until the headline measure of the unemployment rate reached the 7% threshold. Unemployment fell more quickly than anticipated, as shown on the second graph below, leading to revisions of the policy and eventually rendering it unsuccessful. Unemployment is currently at 5.1%, far below the 7% guideline the MPC were hoping for. Yet wage growth has not accompanied the employment increase, and this is one of the factors holding back an interest rate rise. The ONS released their Labour Market Statistics report last week, stating that average earnings is around half the rate it was pre-crisis. This has been due to a combination of factors: higher employment in low paid jobs; low inflation - firms consider 2% growth in pay a generous offer in a 0% inflation climate; slack in the labour market, giving workers bargaining power; and ongoing effects of the 2008 financial crisis, as workers sacrifice their pay in order to hold on to a job. Shamima Manzoor
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Week Ending 31st January 2016
United States Following the encouraging economic signs and the strengthening US jobs market as discussed in the pre-Christmas market wrap-ups, in a unanimous voting decision the US Federal reserve raised the short-term interest rate for the first time in nearly a decade since the economy was struck by the worst financial crash of modern times. The Fed announced a quarter point increase in the target range for the federal funds rate to 0.25% - 0.5%, a small but mighty change. The initial Federal Open Market Committee's forecast implied three or four more increases through this year, to end at around 1.25%, however, if the inflation remains as weak as it appears, rates could rise much more slowly. As per the numbers, the biggest challenges facing the US economy are coming from abroad, as the drastic fall in commodity prices has contributed to a slowdown in overseas growth. The Fed has to tread carefully with its decision on the interest rate as the US exporters still seem very vulnerable to currency appreciation. The Fed’s actions have led to an appreciation in the greenback, which has caused a significant drop in US exports by
nearly 2.5% as goods become relatively more expensive to consume internationally. The relatively poor expectations among oil producers have led to a global fall in oil investment, which has consequently eroded the demand for drilling-related equipment. The American manufacturers have faced a knock on effect given such uncertainty within the global energy market. The collapse in price of crude oil has led to investment falling by 2.5% as the US crude plummeted by 17.9% in the fourth quarter of 2015. Optimists may argue that the rise is a sensible approach to stay ahead of inflation and avoid the zero-rate liquidity trap. The economy has added 13.6m jobs since it bottomed in 2010 and despite signs of further improvement, the concerns regarding slow wage growth means a slowdown in growth cannot be neglected. The chairman of the Federal Reserve, Janet Yellen, said the committee was confident the economy would "continue to strengthen" but acknowledges that there is "room for improvement". Vimanyu Sachdeva
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NEFS Market Wrap-Up
Eurozone European equities rebounded as the European Central Bank said there were "no limits" to the stimulus measures it might take to boost the Eurozone economy.
0.30%. The idea is to make banks pay for leaving money unused and push them to lend it instead, thus increasing capital flow in the market.
After plunging by 3.5%, London, Frankfurt and Paris were modestly higher in early afternoon trading, ECB chief Mario Draghi said the bank is "determined" to do what it takes to steer Eurozone inflation back up towards its target of 2%.
"With new downside risks to economic growth and a significant drop in oil prices depressing the near-term outlook for inflation, chances have risen that the council may then agree to an additional stimulus," Schmieding added.
"We have the power, willingness and determination to act. There are no limits how far we are willing to deploy our policy instruments," Draghi told a news conference after the Eurozone’s central bank held its key interest rates unchanged at its first policy meeting of the year. That stance was expected as inflation is stuck at low levels in Europe and both the ECB and the Bank of England will probably keep borrowing costs at very low levels for a while longer. "The ongoing decline in the price of crude oil, weakening outlook for growth in emerging economies and further softening of inflation expectations have all increased downside risks to the outlook for inflation in the Eurozone," noted Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ. Last month council also cut the interest rate on deposits at the central bank from commercial banks by 0.10 percentage points to negative
Weak inflation is a sign of a sluggish economy, and falling prices can hurt growth if they become entrenched. The ECB focuses on inflation because that's its legal mandate under the European Union agreements that established the euro. Central bank stimulus can have far-reaching effects on businesses, investors, savers and consumers. The ECB stimulus has meant a stronger dollar against the euro, adding a headwind for US exporters to Europe. It has also slashed returns on savings in conservative investments such as bonds, insurance policies and bank accounts for people looking ahead to retirement. With the Eurozone bogged down by the refugee crisis and stagnant growth, it is hopeful that quantitative easing would drive an increase of capital and spending in the market. Erwin Low
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Week Ending 31st January 2016
Japan The Bank of Japan (BoJ) voted on Friday to reduce interest rates on excess reserves held by financial institutions with the BoJ to -0.1%. This move, which follows in the footsteps of the ECB and others, comes as a surprise to many as the governor of the BoJ Haruhiko Kuroda had previously denied that the central bank was considering negative interest rates. This is a bold step by the BoJ, which demonstrates its willingness to do what it takes to achieve their inflationary target of 2%, and the cut comes after the expected time frame for reaching this target was pushed back for the third time in less than a year. As a result of this news the Yen plunged 1% against the euro and yields on Japanese government bonds fell. The bank claims that it is moving because of the recent slowdown in China and the fall in energy prices rather than because of weakness in the domestic economy, however many will point to the fact that the growth in household spending, at -4.4%, was much lower than expected. Although unemployment remained low at around 3%, companies have opted not to increase wages, which is good news for investors but may add to the deflationary pressure. Indeed, a slew of other weak data for December may also have spurred the BoJ into making this announcement; retail sales at 1.1% were lower than expected, industrial
production at -1.4% also failed to meet forecasts, and both imports and exports fell. Mr Kuroda did, however, claim that underlying inflation was strong and pointed to a price index that excludes energy prices, which reports inflation as 1.3%, as evidence of this. By instigating negative interest rates the BoJ hopes that borrowing cost for companies and households will fall and that this will increase the demand for loans and encourage investment in higher yielding assets. Critics argue, however, that this will only promote “tit for tat” currency devaluations, deprive commercial lenders and their customers and encourage fiscal indiscipline by the government. In other news, Akira Amari, one of the key players in the ‘Abenomics’ programme, a strategy designed to end the age of stagnant prices (see diagram) in Japan, resigned over corruption allegations. This will be a blow for Prime Minister Shinzo Abe as it may make it more difficult for him to implement some of his key economic policies and could therefore jeopardise the aforementioned move by the BoJ. Daniel Nash
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NEFS Market Wrap-Up
Australia & New Zealand A combination of economic events arose during the festive period in Australia. Westpac’s consumer sentiment measurement declined from 3.9% to -0.8% in December, with a further depreciation by 3.5% towards the end of December, driven by family finances and international factors including spill over effects on financial markets. Australia’s seasonally adjusted unemployment rate remained unchanged at 5.8%. This was slightly below market consensus with 1000 jobs were lost, the smallest decline since May 2010. But local newspapers advocate that young Australians are pessimistic about finding jobs and are reluctant to take entrepreneurial risks. Flat exports and a 1% rise in imports resulted in a further decline in the trade deficit from -2.40 billion to -3.31 billion, stumping forecasters who made a -2.61 billion prediction. The main drag on trade was an unexpected reduction in exports of metal, along with non-monetary gold. JP Morgan analyst, Tom Kennedy, stated that it was merely “temporary” factors which resulted in a lower Australian trade deficit. This week Australia awaited for the CPI inflation figures to be released. There was a marginal decrease by 0.1%, presenting itself at 0.4% in the three months through December, with the annual rate at 1.7%. Tobacco along with
domestic and international vacation travel were the main contributors to the rise in consumer prices, although slightly offset by falling prices of motor fuels and telecommunications services. In New Zealand, the reserve bank lowered the official cash rate from 2.75% to 2.50%, as expected by forecasters in December. CPI inflation was below the 1-3% target (a result of the strengthening of the New Zealand dollar and a 65% fall in world oil prices in 2014) and so the country’s monetary policy needs to be accommodative to this. During the holiday season, the trade deficit improved from -905 million to -779 million. This week, we saw another significant improvement, from -799 million to -53 million, indicated by the graph below. Causes include an increase in the value of imported goods by $1.3 billion, although the total value of petroleum products fell by $2.5 billion. Consumption goods such as clothing, toys and games led the rise of imports through a $1.5 billion increase, while capital goods imports rose by $526 million, mainly in machinery and plant capital goods. Meera Jadeja
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Week Ending 31st January 2016
Canada The forecast for GDP growth in Canada has been reduced for the second time in the last month, from 1.7% to 1.3% for 2016, by one of the largest banks in Canada, CIBC Markets. One of the major contributions to the reduction in the prediction of GDP growth is the fall in the price of oil. In 2014, oil exports out of Canada were valued at $128.6 billion and accounted for 27.2% of Canada’s total exports. This indicates that oil exports are a significant contribution to GDP values in Canada. In the year to December 2015, oil prices declined by 40% which was one of the main reasons cited by CIBC for their first reduction in the prediction for GDP growth. It has also been announced that Canadian GDP growth increased to 0.3% in November, this is in comparison to zero GDP growth in October and a decline of 0.5% in September 2015. This comes as good news after Canada performed weakly last year, entering a recession at the beginning of 2015, after GDP growth declined for two consecutive months. The Federal agency states this increase in GDP growth was mainly accounted for by
improvements in the performance of retail and wholesale trade, manufacturing and energy extraction. Wholesale trade increased by 1.3% in November after decreasing for four consecutive months. Retail trade growth rose by 1.2% and manufacturing by 0.4%. Natural resource extraction increased by 0.6% and gas extraction by 2.1% in November 2015. However, despite this improvement in the Canadian economy, GDP growth for the final quarter of 2015 may have only increased by a fractional amount. The senior rates strategist at T D Securities, Andrew Kelvin, stated that the increase of GDP growth in Canada puts GDP growth for the final quarter of 2015 at zero. This is exactly what the Canadian central bank had predicted previously. For the Bank of Canada, "it doesn't change anything there," Kelvin said. Consequently, whilst the slight improvement in GDP growth is a reason for some hope, the Canadian economy is still performing weakly and there still a long way to go to recover from the technical recession of early 2015. Kelly Wiles
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NEFS Market Wrap-Up
EMERGING MARKETS China The global market selloff over the last month can be largely attributed to the sentiment present within and around the Chinese economy. Locally, major equity indices in China are down by approximately 20-25% since the start of the New Year. The Caixin manufacturing purchasing managers index (PMI) for December was released at the start of the new business year with a dismal reading of 48.2. This was below a forecast of 48.9, representing yet another month of declines in manufacturing. A survey figure below 50 indicates a contraction in the sector, and is a leading indicator of economic health. The release of this data preceded the triggers of the newly implemented circuit breakers. Trading was halted for 15 minutes on the first trading day after the CSI 300 fell by 5% before closing early for the day after it fell further to -7%. The circuit breakers were activated once again later in the week after just 30 minutes of trading. Designed to limit market swings, the ineffectiveness of the mechanism led to its suspension. China recorded gross domestic product of about $10 trillion in 2015. Inflation-adjusted fourth quarter GDP figures came in at 6.8%, representing a full-year growth rate of 6.9%, the slowest rate since 1990, but this was roughly in
line with China’s target of ‘around 7%’. The services sector, comprising sectors such as finance and healthcare, accounted for approximately 50% of GDP. Consumption contributed to 60% of growth. The target growth rate for 2016 has been set at 6.5%. There is a consensus that China’s maximum potential growth is slowing as an aging population shrinks the labour force and growth from a shifting labour force to the modern economy is exhausted. President Xi Jinping has established that policy in 2016 will focus on supply-side reforms. However, demand-side stimulus from the central bank will still take place, evident in the recent devaluations in the Yuan. The recent devaluations in the Yuan have also rocked global markets. It is worth remembering that the Chinese have kept the Yuan relatively strong in recent years to facilitate the economy’s transition from a manufacturing and investment-based one to one that is driven by services and consumption. Credibility of its growth figures still remains an issue. Improvements in transparency of the economy and less market intervention can help turn China into a country the world can trust. Sai Ming Liew
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Week Ending 31st January 2016
India Aside from the optimistic growth rate reported in November, the rest of the holidays were disappointing for India, as the country’s trade deficit widened further and the inflation rate shot up to a fifteen-month high of 5.61%. The unstable global economic climate also increased concerns about India’s exposure to external shocks, with the recent Fed rate hike as well as volatility surrounding China being the leading causes of uncertainty. Although investors believe that India is much better placed in terms of growth than its emerging market peers such as Brazil and Russia, a recent poll conducted by Moody’s showed that 35% of the respondents saw external shocks as the key hurdle to the economy. Dried up demand from India’s largest customers, the US and Europe, coupled with China’s slowing economy and the recent devaluation of its currency can be attributed to the continuing decline in India’s exports. This has led to fears that reaching the once comfortable $300bn mark this fiscal year is merely a remote possibility. There are also still concerns regarding India’s currency valuation. The Fed rate hike announced in December coupled with the general optimism surrounding the recovery of
the US economy has led to large cash outflows from emerging markets as investors seek higher interest rates elsewhere. A weaker rupee and stronger dollar may also erode the positives that India has been enjoying from external factors such as falling world oil prices, a benefit which will have limited effects this year anyway. In light of this fading boost to the economy, the spotlight will once again settle on government policies and macroeconomic fundamentals. Concerns regarding external issues was followed by 32% of respondents viewing sluggish reform momentum as the biggest threat to growth and 19% are worried most about infrastructure constraints. Alongside calls for more rapid reform, as discussed in previous weeks, the government has also come under pressure to encourage more private sector investment and as a result have recently announce the ‘National Investment Grid’ initiative as a part of the Invest India scheme. This will allow the private sector to contribute more towards growth and ensure that the burden does not fall solely upon public investment, which is unsustainable in the long run. Homairah Ginwalla
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NEFS Market Wrap-Up
Russia and Eastern Europe With reports published over the Christmas period confirming last year’s economic growth rates throughout Eastern Europe, it is a fair conclusion to draw that 2015 has seen a very mixed bag of results. Russia’s financial situation has continued to worsen, with GDP shrinking by 3.8% throughout the year (as shown on the graph below). The Ruble has lost more than half its value in the past 18 months, leading to very expensive imports and high inflation rates. Wage growth is at a new low, and as consumers adjust to lower real disposable incomes, Russian retail consumption has fallen by 8.9%. Investment rates have fallen throughout the year, with a drop of 8.7% in December. With increasing unemployment and government unable to take economic action against falling oil prices, social discontent is rising rapidly. Unfortunately the Belarusian economy is not much better. After 20 years of positive growth, 2015 saw Belarus fall into recession (3.9% drop in GDP). Whilst some argue it is due to Belarus’ loss of a strong trading partner (Russia), others suggest that Belarus faces a structurally unsound economy that will require large economic reforms to amend. Ukraine is also in a difficult position, despite its EU free-trade agreement. Tax evasion and corruption amongst the elites has prevented economic
meltdown, however Ukraine still faces particularly low GDP growth rates (1% in 2015), and increasing inflation rates. On a more positive note, Bulgaria did extremely well in 2015. It greatly surpassed expectations by reaching growth levels of 3%, and it is hoped that growth will reach 4.5% in 2016. The Czech Republic has also been successful, with unemployment at a low level in comparison with other European countries (at 10.5%). 2016 looks positive for Slovakia and Romania, with continued high levels of growth predicted. In Hungary, the government introduced growthenhancing measures, which should ensure GDP growth levels of 2%. Unfortunately however, some fear that these measures are unaffordable, and will worsen the economic divide between the dynamic centres of western and central Hungary and the struggling Eastern regions. Finally, Poland has continued to do well, with 2015 growth reaching a four-year high of 3.6%. This should be sustained throughout 2016, with increasing trade and rising private consumption levels. Consequently, whilst the coming year will be turbulent for Eastern Europe, particularly in Ukraine and Russia, many economists predict that various states will see a successful year of economic growth and reform. Charlotte Alder
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Week Ending 31st January 2016
Latin America The Christmas break has seen some interesting developments within emerging markets, particularly in Latin America, where we have seen the likes of Mauricio Macri take power in Argentina. Meanwhile, with Brazil facing its highest levels of inflation since 2002, the country’s central bank has been left with some challenging decisions, as policymakers struggle to curb rising inflation amid a deep contraction. Considering this, Brazil’s central bank left its benchmark interest rate unchanged at 14.25% at its January 20th meeting; the Selic rate was left on hold at a 9-year high for the fourth straight meeting. Argentina’s new centre-right government has been busy with a 30% devaluation of the Argentine peso, shortly after Mr Macri took power, alongside the removal of stringent capital controls put in place by Ms Fernández de Kirchner in 2011. However this move fuelled inflation fears even though economists at Barclays described the move as “perfectly orchestrated”. Yet, although the new market-friendly administration has made a “strong start”, including a well-received devaluation, many serious challenges lie ahead. These include
tackling inflation of about 30%, a fiscal deficit of almost 8% and a decade-long legal dispute with creditors in the US that are blocking Argentina’s access to international capital markets. However, progress is being made: in an effort to end the debt saga, Argentina will make a proposal to the group of hedge funds led by Paul Singer, a US billionaire, by next week, say government officials. The approach is sooner than many analysts had expected and could open the door to economic normality for Argentina. ”. Further deals are being negotiated and the government is expected soon to announce a $5bn loan from a group of international banks, led by JPMorgan and HSBC, to boost central bank reserves which had been depleted by the previous leftist administration. The future is looking more promising for Argentina, as last week the new finance minister announced plans to reduce the primary fiscal deficit by 1% and bring inflation down to between 20 and 25%. The opposite could be said for Brazil, and it could be in for a very painful year even with the Olympics set to take place over the summer. Max Brewer
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NEFS Market Wrap-Up
Africa Years of rapid economic growth across subSaharan Africa fuelled hopes of a prosperous new era where economies no longer depended on the fickle global demand for Africa’s raw resources. However the recent slowdown of the Chinese economy and as its once seemingly insatiable hunger for Africa’s commodities wanes, many African economies are tumbling quickly. The outlook across the continent has grown grimmer, especially in its two biggest economies, Nigeria and South Africa. The International Monetary Fund, on Tuesday, has sharply cut its projections for the continent. They also predicted an increase in the unemployment rate of 0.8% in the 1st quarter of 2016. As Africa’s biggest exporter of iron ore to China, South Africa is suffering from a slump in mining as well as in other sectors like manufacturing and agriculture. The economy of South Africa is expected to slide into a recession this year. South African Reserve Bank governor announced on Thursday a 50 basis-point increase in the repo rate to 6.75%, in line with the consensus and therefore the prime lending rate will be 10.25%. Lending rates have increasing continuously since 2015 owing to expectations of higher inflation. Inflation is still expected to breach the upper end of the target set by the central bank.
With oil accounting for 80% of government revenue, the government may also lack the resources to quell potential unrest in the Niger Delta, the source of the country’s oil. In addition, weakening currencies make it harder for Nigeria and many other African governments to repay China for loans used to build large infrastructure projects. But experts also see bright spots on the map. While previously high-flying commodity exporters, like Angola and Zambia have been hit hardest by China’s slowdown, other countries are showing greater resilience. The International Monetary Fund has urged Kenya to diversify its economy to take advantage of new promising sectors with huge opportunities for growth in the face of gloomy projections for world growth. IMF Kenya representative cited the need to enhance productivity in the country's agricultural sector which will lead to new business opportunities in other sectors. Eventually this would translate into deeper insertion of Kenyan products in global markets, especially when the ongoing investment in infrastructure upgrades start to pay off. Sreya Ram
Nigeria, Africa’s biggest oil producer, is reeling from the further fall in crude prices this week.
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Week Ending 31st January 2016
South East Asia Indonesia, Southeast Asia’s largest economy, continues their ongoing struggle to promote economic growth and enhance living standards. It comes after the central bank of Indonesia cut its 2016 forecast GDP growth for the second time this year and now expects yearly growth of 5.2%-5.6%, with Trading Economics predicting that the slowdown could be far greater, estimating that growth could reach a decade low of 4.1% in 2016, shown in the graph below. Additionally, Singapore who were facing an economic crisis by being in touching distance of technical recession in 2015 now have a greater positive outlook with annual GDP growth of 2%. Moreover, Vietnam, Asia’s fastest growing foreign direct investment location, continues its astonishing rapid growth, at 7.01%.
There have been signs that Indonesia will put China as their driving force to revive growth, after they put Japanese investors to one side and agreed a $5 billion contract for a high speed rail link to China. However in the past month, agreements have stagnated after the chief executive of the joint venture running the project announced construction would not begin until the correct permits were issued. The railway project, known as the Jakarta-Bandung link, China’s first project in South East Asia, is seen as a test of ability of Chinese companies to operate with other complex democracies. It is being closely watched by other South East Asian countries including Malaysia and Singapore, who are considering the potential gains of Chinese high-speed rail.
Indonesian President Widodo has vowed to speed up infrastructure development to boost India’s struggling economy due to the country’s poor record; many companies are discouraged from outsourcing in Indonesia and many projects have been dropped in recent years due to difficulties in land acquisition, environmental and political disputes. This is highlighted by this staggering statistic; Indonesia received 155 foreign direct investment projects last year in comparison to 241 FDI projects in Vietnam.
To conclude, it seems Indonesia have an underlying problem in their infrastructure, meaning that Vietnam have an advantage in foreign direct investment. Permit problems are persistent among foreign investors in Indonesia and Widodo must address this to avoid being left behind by their neighbouring countries. Alex Lam
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NEFS Market Wrap-Up
Middle East Generating economic growth in the Middle East is crucial to defeating extremism, Iranian President Hassan Rouhani said on Tuesday, putting forward his country as a regional trade hub and pillar of stability. This comes as Rouhani makes a four-day trip to Italy and France, looking to rebuild Iranian relations with the West some two weeks after financial sanctions on Tehran were rolled back following the implementation of its nuclear deal with world powers.
ambitions to develop its own economy after years of curbs and hardship. As the graph below shows, Iran has struggled with a wide scale deterioration of its economy for the past 4 years, directly as a result of Western sanctions to its past nuclear ambitions. With Iran’s GDP per capita having fallen 10.7% since 2011, Rouhani is hopeful that these new deals will begin a much needed revival of the domestic economy amid the strife of Islamic State in the region.
Italy announced some 17 billion euros of business deals with Iran on Monday. Sizeable contracts are also in the offing in France, reflecting EU countries' keenness to cash in on the diplomatic thaw with the Islamic Republic. One particular highlight is the ongoing negotiations with European aircraft maker Airbus to buy 114 planes, in what would represent an upgrade for a fleet that has an average age of 25 years and includes some aircraft that predate the 1979 Islamic revolution.
"If we want to combat extremism in the world, if we want to fight terror, one of the roads before us is providing growth and jobs. Lack of growth creates forces for terrorism. Unemployment creates soldiers for terrorists," Rouhani said.
Underscoring the growing warmth, Rouhani said he expected Italian Prime Minister Matteo Renzi to visit Iran in the coming months to help boost bilateral economic alliances. "We are ready to welcome investment, welcome technology and create a new export market," Rouhani told a business forum, saying Iran had
However problems have arisen with Iran's emergence from the diplomatic cold. Sunni arch-rival Saudi Arabia – alarmed at these new deals with the Western Powers – has sought to deflate hopes that Tehran would be a bonanza for foreign investors. The two powerhouses of the gulf have ended all diplomatic and economic relations in response to the recent execution of Sheik Nimr al-Nimr, a popular cleric and activist against the Saudi elite. Harry Butterworth
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Week Ending 31st January 2016
EQUITIES Financials On January the 29th, Tullet Prebon announced it is to cut 7.5% (70 people) of staff within Europe and North America. The move, combined with a higher profit margin forecast, pushed the company’s shares up by 8% over the following day, establishing a solid start to the year with a positive prospective forming for shareholders. This future outlook sees share prices forecasted at an annual median of 383p on the London Stock Exchange, representing an impressive 14% rise of the current value. Furthermore, dividends of 17p are expected over the following fiscal year, representing a rise of 0.9%. This positive potential for this company intrigues investors, who are holding onto shares in the meantime. But the low returns offer a reasonable excuse for not buying. Earlier this week, the Bank of Japan shocked investors with a surprising announcement of adopting a negative interest rate, with rates being cut to minus 0.1%. This ended what was a month of volatility surrounding the central bank and as a result have seen equity benchmarks jumping, alongside a plummet in the yield of 10-year Japanese government bonds with a drop of over half to 0.10%, settling a record low return.
The monetary attempt to encourage economic spending saw Bank of Japan’s shares tumble, with their shares valued at 41,000 JPY at the start of January, and finishing the month on a less satisfactory 38,200 JPY. Comparisons to the Nikkei 225 stock index (the price-weighted average of Japans top 225 performing companies) present a predictable story, where the index has followed in a similar pattern to the Japanese bank’s performance, with it beginning the month at 19,000 JPY and now falling to around 17,500 JPY. The figure below describes the infliction the bank’s performance is having on Japans economy, with the last third of the graph representing the month of January, which witnessed a correlated plummet for the two. The bank’s announcement of contractionary policy had also spread its impact beyond the Tokyo Stock Exchange to international markets. This simply furthers what has been a difficult January for the global financial sector, with Wall Street’s S&P 500 index having fallen 7.4% over the past month. Daniel Land
Figure: BoJ vs Nikkei 225 Index
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NEFS Market Wrap-Up
Oil and Gas Before the Christmas break, the oil situation was bad – not dire. Now, one month on you’d struggle to find anyone optimistic. Prices have plummeted; ongoing is, to put it bluntly, a glut. What’s more is that the effects are being felt; producers’ equities have fallen further at the start of this year. So disastrous is the current nature of oil prices that the governor of Alaska is in favour of introducing what will be the first state income tax in 35 years. This is designed to compensate for the losses in oil-related tax revenue, which, in Texas, has amassed to approximately 50% in both oil and gas. Last year over 17,000 oil and gas workers were laid off in the US – this is a significant amount especially when we consider that the Texan working population is held up largely by the oil and gas industries. On top of the job losses, 42 North American companies have filed for bankruptcy protection, stressing the acknowledgement of volatility in the industry. An analyst for Oppenheimer & Co even went so far as to say that more than half of independent drilling companies in the US could go bankrupt before prices bounce back.
Often forgotten too, are the companies that issue credit cards to regular gas consumers, which, incidentally, take a 3% transaction fee. Because of this, the $120 billion less spent at the pump has translated into a $3 billion fall in these companies’ revenue. Furthermore, along with bankruptcy and revenue losses, the risk of oil companies defaulting on drilling loans has sky-rocketed, particularly problematic for banks such as Bank of America Merryl Lynch and Wells Fargo who have $27 and $17 billion in oil and energy loans respectively. Ultimately, however, we have to remember the words of James Hamilton, economics professor at the University of California, who reminded us that the worst affected locations in the US will be the same as those in the 1980s oil glut: those who export the most. Consequently, then, the overall effect on the US, a net importer, will be positive. These words also, however, translate, onto a global scale and so we can say that the effect for a net exporter like Russia and OPEC will be negative, very negative. Tom Dooner
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Week Ending 31st January 2016
Retail Retail equities have not come off unscathed by recent bearish investor sentiments. The FTSE 350 retail index has fallen by 6.54% since the 7th of December, the date at which NEFS released its last market wrap up. Coming up to Christmas, retailers witnessed a relative fall in sales from previous years which is alarming for a sector that traditionally expects to achieve 14% (according to the Office for National Statistics) of its sales during the month of December. A relative trading slump occurred before Christmas this year with the share price of bluechip retailers including Next plunging as a result. Next’s sales were down by 0.5% in the 60 days before Christmas, well below city forecasts, causing its share price to tumble by 5% after its festive results were announced on January the 5th. Warm weather has been cited as an explanation for poor fourth quarter results and Next even produced the rather convincing graph below to explain. The years busiest day for internet shopping occurred on Black Friday in November as retailers offered a multitude of discounts to
battle for sales. Consumers are obviously becoming increasingly savvy when it comes to seeking out these deals as more people are going online to take advantage of Black Friday and the Boxing Day sales instead of regular shopping in the 2 weeks before Christmas. For example, John Lewis reported a 10.7% rise in online sales on the first day of its discounts: Christmas day. Although Next shunned the Black Friday sales and still performed well on the day, its lack of stock and relatively weakening online presence is being reflected in its share price which has fallen by 13.6% since the 2nd of December. Overall, Christmas has been relatively downbeat for retailers, especially those who failed to invest heavily in online trade. Online giants including Amazon and Ebay have certainly soaked much trade away from highstreet brands as they focus on sales instead of profits. However, this has had severe consequences as even they took huge share price hits, both falling by 12% following poor earnings reports. Sam Hillman
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NEFS Market Wrap-Up
Technology In general, the technology heavy, NASDAQ index has fallen 8% in the last month, mainly due to the strengthening dollar, interest rate hikes and the Chinese stock market crash. In the past week the news has been dominated by firms releasing their Q4 results, with many of the market giants making headlines. For example, Apple [NASDAQ: AAPL] has had to recall 12 years’ worth of plugs which have caused safety concerns due to overheating. Amazon [NASDAQ: AMZN] was one of the week’s top losers due to an unpredicted small increase in sales. The online shopping firm reporting a 21.8% rise in fourth quarter sales, pointing mainly to the holiday shopping season and increased used of its cloud computing system. However, this increase was 5.7 times less than the sales figures predicted by city analysts. This shortfall sent Amazon’s share price tumbling 13%, as shown on the graph below, as investors felt the market had overvalued the company. This event continued Amazon’s trend of missing analyst forecast. Five out of the last eight predictions have been missed, which has baffled many shareholder as the company has invested in increasing its workforce by 50%, as well as buying new machinery. The firm also announced earlier in
the week that it will be pumping more cash into “Amazon Web Services”. This is likely to reduce its cash flow further, while the return on this investment is unknown, therefore, I would warn against investing in Amazon. As I briefly mentioned earlier, the Christmas period has brought about a large increase in sales of cloud computing services. Consumers of these services are not just households but also large corporations, such as high street banks, who can save vast amount of investment on infrastructure by “renting” the memory storage service. Microsoft [NASDAQ: MSFT] has particularly benefited from this increase in sales, with revenue for its cloud services division rising 5% to $6.3bn in the last quarter. However, company profits for the final three months of 2015 fell 15% to $5bn. Many point to the fall in PC sales, which could be due to the strengthening US dollar making purchases for foreign customers more expensive. Unlike Amazon, however, these Q4 results where much better than expectations, thus the share price rose 5.5% during Fridays trading. Sam Ewing
(A graph of the Amazon share price in the last week. Source: Yahoo! Finance)
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Week Ending 31st January 2016
Pharmaceuticals With the advent of the New Year, we have seen the FTSE 350 Index - Pharmaceutical & Biotechnology fall by 4.46% in the last month and the NASDAQ Biotechnology Index fall by 16% also in the last month. This is due to the ‘Irrational’ sell-offs in the Pharmaceuticals sector in the recent weeks. 2015 had been a good year for Pharmaceuticals & Biotechnology stocks as they outperformed the S&P 500 yet again by a healthy margin.
revenues this year would be below analyst expectations.
GlaxoSmithKline and Qualcomm are in currently in negotiation to set up a joint venture potentially worth up to $1bn to develop medical technology. This is one of the latest examples of mergers between the healthcare and technology industry, and we may very well see more of this type of convergence happening. After months of unhappiness and resentment against the high drug prices, the Pharmaceuticals & Biotechnology sector met up in San Francisco at the annual JPMorgan Healthcare Conference to hopefully start off the New Year on a positive note.
In other news, the NHS has recently approved a £5,700-a-month skin cancer drug called Opdivo as it is marketed by its Manufacturer Bristol-Myers Squibb. Opdivo is the second of an important new class of cancer drugs to be recommended by the National Institute of Health and Care Excellence in the past four months. This has triggered a 3.12% rise in the price of Bristol-Myers Squibb Co, and is likely to continue this trend and to outperform the market.
The sentiment is that the recent Pharmaceutical sell off would pose a threat to the IPO market. Shire PLC has started off the year by announcing its long awaited $32bn takeover of US-based Baxalta, but investors have shown signs of loss of confidence in mega deals as the proposed deal pushed down the shares in both companies subsequently. Another large-cap biotech company, Celgene has also trimmed its profit forecast and is predicting that the
Industry executives are on the defence as they argue that investors are not seeing the bigger picture as biopharma companies are discovering more drugs than they have in years, such as cancer immunotherapies, a breakthrough towards countering tumours which have been untreatable till date.
It is rare to see one single industry group remain the market leader in performance for more than year or two but the Pharmaceutical & Biotechnology stocks have done just that since 2011 until last year in 2015 when it started to show signs of reversion. 2016 will be a much more challenging year for this sector, and we would have to closely observe the different headwinds of the economy to make a better assessment of the year’s forecast. Samuel Tan
NASDAQ Biotechnology Index (NBI) Credits: Yahoo Finance
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NEFS Market Wrap-Up
COMMODITIES Energy Over the past weeks, there have been major changes in energy markets. Weakening economic indicators in China caused a fairly major stock market sell off, which caused the demand for energy to diminish markedly. Notably, Brent crude hit its lowest price in 12 years, trading briefly at $27 a barrel last week. Since then, the prices of Brent crude and West Texas Intermediate have made sharp rises. This was in part due to minor rises in global stocks. However, the bounce back can mainly be attributed to the announcement that the Russian energy minister will hold talks with OPEC with regard to a potential oil supply cut. The initial reaction was for Brent crude oil futures to shoot up by around 7%. Currently it is thought that a 5% cut in production is what is on the table, although it is still highly improbable that any action will actually be taken from these talks. Talks could be unfruitful given that Saudi Arabia, the largest producer in OPEC, maintains the view that Russia would be unable to cut production. The significance of these
talks has been further downplayed by Rosneft (Russia’s largest state-controlled oil producer). A spokesperson from the group claimed that nothing had changed that would increase the likelihood of oil production cut. In the light of these recent developments surrounding the oil market the World Bank has slashed its estimates of the average oil price during 2016. The previous forecast, from just 3 months ago, is down from $52 per barrel to $37 – an almost 25% drop from the average 2015 price. It cited the main factor in the decision was the unexpectedly aggressive slowdown in the Chinese economy, which has been shown to have substantial effects on commodity prices in general. The bank also stated that the recent oil drop in the early part of 2016 has had little to do with fundamentals, and was therefore part of an irrational market sell off. Furthermore they predict a steady price rise throughout 2016. William Norcliffe-Brown
Brent Crude 4 Hour Candlestick (Source: Oanda)
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Week Ending 31st January 2016
Precious Metals Gold entered 2016 with a significant appreciation over the last 12 weeks from around 1066.60 USD/oz to around 1114.30 USD/oz. A number of factors which played the key role in determining the price in the first week of January, 2016, as illustrated in the first figure below. One of the key drivers identified was lower oil prices combined with strengthened US dollar. The metal is regaining a stronger position since a sharp fall in October, 2015, when the Fed Statement had a negative effect on investments. According to Thomson Reuters GFMS, as long as the prices stabilise or, preferably, recover further, Gold should expect a greater investor interest in Asian markets. Furthermore, GFMS forecasts a steady gradual increase in the metal’s price in the second half of 2016 by up to 5%. This prediction is mainly being brought on by the shrinking supply from the mining industry and, again, reinforced by the increasing demand from Asia. On the other hand, there are concerns of equities markets falling, weakening Gold’s position in the market. There also are worries that a similar trend to the one in 2008 could arise. A significant fall in the metal’s position resulted in the early 2008 as a combined outcome of a sharp decline in energy prices, a shift in higher real interest rates and partly due to the credit crisis.
This year Silver seemed to be slowly regaining its position in the market up to 26th January, 2016, while still lagging behind Gold. Whilst industrial demand is slowing, increasing interest from investors could force the price up and change the current depreciation. The amount of Silver sold increased by 61% between 2009 and 2015. As prices remain steadily decreasing (as shown in the second figure), a lower level production is to be expected due to the declining profitability of the metal. In turn, a lower supply may shift prices back up to a new stable equilibrium to meet the demand. However, this week, the price slowly dropped between 26th and 28th January from 14.564 to 14.255 USD/t oz. Platinum supply was lower in 2015. However, the demand followed a similar trend. According to Johnson Matthey, although both indicators are moving in the same direction, it is still surprising to observe a lack of response with respect to the price level. 2016 projects an expansion of the metal’s supply because of the increasing scale of “recycling”, while demand is also expected to rise. Overall, P. Duncan, JM General Manager, expects a net deficit to result in the coming months. Goda Paulauskaite
Silver prices (2012-2016)
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NEFS Market Wrap-Up
Agriculturals During the preceding Christmas holiday period, Agricultural Commodities exhibited a number of fluctuations in a number of different markets, driven in no small part by concerns over Chinese demand and weakness in emerging markets. Wheat, for example, as measured by the Chicago board of trade index, fell over 2% over Russian plans to eliminate a proposed tax on wheat exports. The tax was originally intended to mitigate rising food prices within Russia through incentivising domestic producers in turn to supply a domestic market, increasing supply and lowering price within Russia. Had the tax have been implemented, global supply would be lowered, increasing prices and allowing wheat to continue its quintuple session rise. In contrast, however, the tax has now been deemed unlikely to be implemented, with First Deputy Agriculture Minister Evgenii Gromyko stating that his ministry were proposing either lowering, or more drastically, completely eliminating an export tax on wheat. In the simple but accurate words of US Commodities Analyst Jason Roose, “if they reduce the tax, that simply means more wheat in the world�. In
other words, increased supply, which will in turn lower global wheat prices, as exhibited by the aforementioned price correction on the Chicago exchange. Elsewhere in the expansive field of agricultural commodities, we have seen other fluctuations in price, due to a plethora of factors, including, but not limited to, technical factors. For example, expectations of unusually high South American soybean crops have caused a bullish market reaction from traders, with market rallies expected to be limited as a result. "When we dip into some support areas, we'll see that buying from time to time, but I don't really look for this buying interest to be maintained or sustained unless weather in South America is very dry in the long term," said Brian Hoops, analyst at Midwest Market Solutions. Whilst there were other movements in similar markets, such as corn futures in particular, wheat and soybeans exhibited the most notable changes in the preceding period. Agricultural commodities remains an interesting sector to cover, with inevitable macro-economic fluctuations driven by Chinese economic concerns undoubtedly affecting prices across a range of commodities. Jack Blake
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Week Ending 31st January 2016
CURRENCIES Major Currencies On Wednesday, the 28th January 2016, Janet Yellen declared that the Fed probably won’t increase the interest rate in March, which is not surprising considering the low inflation rate. Many economists already expected anyway that the next rise of the interest rates will follow not earlier than June. With the lifting of the interest rate to approximately 0.25% in December, the Fed finally ended the era of cheap money in the United States. Yellen now wants to follow a policy of slow but steady return to 2% on the medium-term and between 3 and 4% on the long-term. However, the expected inflation rate stays unchanged at a low level, too. On the other hand the labour market in the US is improving which was pivotal for the last uprating for the times being. To be able to further raise the interest rate higher inflation would be necessary as a strong Dollar actually hurts the US-industry. The inflation rate in the Eurozone on the other hand raised from 0.2% in December to 0.4% in January which is its highest level since October 2014. However, as M3 money supply decreased to 4.7% in December 2015, from 5% in November and M1 money supply decreased from 11.1% to 10.7% during the same period, many experts doubt that the expansive
monetary policy of the ECB is actually working. Additionally, the perpetually low oil prices continue to force the inflation rate down, as well. Furthermore, president of the ECB, Mario Draghi pledged unexpectedly to review the ECB stimulus programme in March this year. After a relatively stable performance of the Euro on the exchange market last week, Draghi’s statement led to higher volatility at the end of this week. After it showed a positive trend at the beginning of the week – the EUR/USD appreciated on Thursday to 1.091, but devalued again to 1,083 during Friday’s trading. However, zero interest policy in Europe remains unchanged favourable which is why the Euro will predictably depreciate again against the dollar throughout 2016 if the Fed follows its “return-to-normal” strategy. As there is a large gap between the target inflation of nearly under 2% and the actual inflation rate, the ECB surely will follow policies to approach this goal. Therefore, the weaker Euro will exert upward pressure on inflation in 2016. Accordingly, predictions by the ECB assume the inflation rate will rise to 0.7% in 2016. Alexander Baxmann
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NEFS Market Wrap-Up
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly knowninas NFS2011 and and UNIS). consists teams of analysts closely The Research Division was formed early is aItpart of theofNottingham Economics monitoring particular markets and providing insights into their developments, digested in our and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teamsNEFS of Weekly Market Wrap-Up. analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, providing NEFS with quality them up date with The goalasofwell the as division is both themembers development of the analysis, analysts’keeping writing skills andtomarket the knowledge, most important financial news. NEFS members with quality analysis, keeping them up to as well as providing date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Jack Millar at jmillar@nefs.org.uk For any queries, please contact Josh Martin at jmartin@nefs.org.uk. Sincerely Yours, Sincerely Yours, Jack Millar, Director of the Nottingham Economics & Finance Society Research Division Josh Martin, Director of the Nottingham Economics & Finance Society Research Division
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