Week Ending 7th 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 9 China India Russia and Eastern Europe Latin America Africa South East Asia Middle East
Equities 16 Technology Oil & Gas Pharmaceuticals Financials
Commodities 20 Energy Precious Metals
Currencies 22 EUR, USD, GBP
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Week Ending 7th February 2016
MACRO REVIEW United Kingdom George Osborne stated that 2016 was opening with “a dangerous cocktail of risks from the global economy”, referring primarily to global stock market volatility caused by the slowdown in China, weak commodity markets, and the fall in oil prices. Last Wednesday, the World Bank revised down their prediction for global GDP growth in 2016 from 3.3% to 2.9%. The Bank of England (BoE) published their quarterly ‘Inflation Report’ on Thursday. This provides an assessment of the economy and acts as a tool for transparency, allowing the central bank to share their thinking and explain their decisions to the people it affects. In this report, the BoE cut their forecast for UK growth in 2016 to 2.2%, down from the 2.5% forecast in November’s Inflation Report. Annual growth in 2015 was 2.2%, down from 2.9% in 2014, and is the slowest pace of growth the UK has experienced for three years. Despite this the UK is still one of the fastest growing advanced economies. Last week, official figures were released stating that the UK economy grew by 0.5% in the last quarter of
2015, as shown in the graph below. On Thursday, George Osborne wrote in an open letter to Mark Carney, Governor of the BoE, that he is concerned about the risks of a weaker outlook for nominal GDP. The forecast for average weekly earnings was also revised down in the Inflation Report from 3.75% to 3%, due to persistent low inflation alongside increases in population. The BoE predict that average weekly earnings will return to pre-crisis growth rates only in 2018, which is the same year that they expect inflation to return to target. Markets had been expecting a rate rise this year, however following the publication of the dovish Inflation Report, expectations have considerably changed. Markets now anticipate the first rate rise to occur in August 2018. This is bad news for savers who have had low returns on their money for almost 7 years now, but good news for those in debt or with mortgages. Shamima Manzoor
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NEFS Market Wrap-Up
United States The US Labour Market started the year with a sharp slowing in the pace of job creation from the final quarter of 2015. In a statement released by the US Bureau of Labour, the department stated that the economy created 151,000 jobs in the first month of 2016, a number which is significantly lower than the revised figure of 262,000 in December 2015. This trend is in line with the graph below, the US economy has witnessed a downwards trend in the unemployment rate since mid-2010 despite the occasional short-term upsets. However, things are not as bad as they look. The wage growth in hourly earnings accelerated above forecast by 0.5% despite slow hiring which brings optimism that the jobs market is holding its ground in the face of the market turbulence. Surviving the damaging winds of poor overseas demand and a stronger value of the US dollar, the manufacturing sector created 29,000 jobs in January which is almost equivalent to the total number of jobs created in the whole of 2015 for this sector. Interestingly, some economists may argue that the prolonged poor expectations and low consumer confidence that follows high unemployment are the real plague for the developed economies. The scars of the subprime mortgage crisis can now be
witnessed in the shockingly low US home ownership rate, especially amongst the “millennials”- those aged 18-34, who represent the largest proportion of the US population. Being victims of mortgage defaults, almost a third of this group lives with their parents. Moreover, given poor credit scores on their profiles the struggle to find a successful lender may persist even longer if the slowdown in the labour market creates doubts amongst these economic agents. In other news, all eyes are set on the US 2016 Presidential elections which have been set underway following the first caucusing of voters in the state of Iowa. Hilary Clinton clinched a narrow victory at the start of the week, edging out Bernie Sanders by a close margin. A successful start for the democrats may be hit by several roadblocks as the campaign seems unpopular among the younger voters who do not see Ms Clinton, the former secretary of state as sufficiently progressive and “very liberal”. Infamous for his controversial statements and hysterically radical propositions, Mr Donald Trump claims that this year’s elections will cause a dramatic upheaval in US politics something only time can tell. Vimanyu Sachdeva
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Week Ending 7th February 2016
Eurozone Inflation in the Eurozone has hit its highest level of since 2014, now at 0.4%. However, economists remain convinced that the European Central Bank will unleash another round of monetary stimulus in March. While headline inflation has not been as high since October 2014, it remains well below the ECB’s target of just below 2%. Price pressures will almost certainly become more subdued in the months ahead as the latest slump in oil costs are factored into the index. Headline inflation across the single currency Eurozone rose in the year to January to 0.4% from 0.2% the previous month, according to Eurostat, the European Commission’s statistics bureau. The core measure of inflation, which strips out more volatile price changes for goods such as food and oil, rose from 0.9%to 1.1%. The ECB looks set to react to the drastic fall in oil prices and the China-led slowdown in emerging markets after central bank’s president Mario Draghi said his policymakers would “review and possibly reconsider” their policy stance at their next policy vote, held in early March.
The Bank of Japan’s decision earlier on Friday to follow the ECB’s lead into negative territory and cut a key interest rate to minus 0.1% has raised the prospect of more action from officials in Frankfurt. “The ‘currency wars’ may have entered a new phase. The Bank of Japan’s announcement of a negative interest rate, with its communication today leaving the proverbial door open for further reductions, has seen the yen fall sharply,” said Ken Wattret, economist at BNP Paribas. “The exchange rate implications for the Eurozone of the Bank of Japan’s actions increase the already high likelihood of a further deposit rate cut by the ECB in March and will add to speculation of a bigger than 10 basis point cut.” With retail sales rising, and better than expected unemployment levels in 4 years despite the fears surrounding the slowdown and volatility of the markets, coupled with monetary stimulus, the Eurozone is slated to have a slow but stable growth and comeback into the global economy. Erwin Low
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NEFS Market Wrap-Up
Japan Against the backdrop of last week’s surprise decision by the BoJ to cut interest rates into negative territory, this week, in which markets have had time to digest the news, has been relatively subdued. The intended consequences of the cut, and likewise the immediate effects it had, have to a large extent been reversed with both the Nikkei 225 stock index and the dollar exchange rate against the yen falling to the same level they were before the cut. On Wednesday, BoJ governor Haruhiko Kuroda made an announcement regarding the outcome of a monetary policy meeting. In response to assertions that the BoJ was running out of policy options he insisted that there was no limit to monetary easing and that they were prepared to cut interest rates even further if it would help them to achieve their inflation target of 2%. What’s more, he claimed that he would invent new tools if necessary. In other news, two new surveys for January were released this week; one regarding business confidence and the other consumer confidence. The final manufacturing PMI (purchasing manager’s index) for Japan, which is based on a survey that asks purchasing managers to rate the relative level of business conditions, was released on Monday.
Meanwhile, the figures for consumer confidence, which are based on a survey that asks households to rate relative economic conditions, were released on Wednesday. For both measures a score above 50 indicates overall confidence and means that, in the case of the final manufacturing PMI, businesses are likely to expand and, in the case of consumer confidence, that households are likely to increase spending. The forecasted score for the final manufacturing PMI was 52.4 and the actual score was 52.3. For consumer confidence the forecasted score was 43.8 and the actual score was 42.5. As we can see in the graph (see below) consumer confidence has been stagnant for many years, and after last month, when a government official said that it was ‘showing signs of picking up’, sliding oil prices and an equities rout have prevented it from improving. The score for final manufacturing PMI is a positive sign though, and as production processes are usually medium to long term, it indicates that businesses remain positive about the overarching economic environment and that they are unwilling to be swayed by short term market woes. Daniel Nash
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Week Ending 7th February 2016
Australia & New Zealand Reports on Australia’s trade balance came in this week, presenting the fourth worst trade deficit on record. The diagram below shows that the previous 2.91 billion deficit rose by 30%, overshooting the 2.45 billion forecast by coming in at 3.54 billion, the largest deficit since June last year. Goods and services exports fell by 5% and non-rural goods fell by 7%. In addition, the value of iron ore and mineral exports fell by 16%, with coal down 8%. Andrew Hanlan, Westpac economist, stated that iron ore was the “big story of the month’s figures”. Meanwhile imports of goods and services fell by 1% but imports of non-monetary gold rose 39%, whilst services debits rose 1%. This weakening of trade performance may result in the next international investment figures, released in March by ABS, showing that Australia’s net foreign debt may surpass the $1 trillion marker. New Zealand’s unemployment rate in December 2015 was released this week. The rate fell from 6.0% from the previous period to 5.3% in the three months to December, well below the 6.1% forecast. Meanwhile employment increased by 0.9%. However, data suggests that although the number of people
employed has risen, there has been a rise in the number of people who are not participating in the labour market, resulting in a fall in the labour force participation for the third quarter in a row. The information suggests that more people are opting out of the labour market therefore becoming inactive. So the rate of unemployment was falling as there fewer people are actively seeking jobs and instead may be studying or staying at home. But employment has been strong for 20- 29 year olds, as 26,800 more are employed, with the largest rise in the construction industry. New Zealand’s economy has created 21,000 jobs over the last quarter of 2015. The Economic Development Minister, Steven Joyce, claimed that the figures were “a real tribute to the New Zealand businesses that continued to grow and invest in the economy”. He added that these results had a number of contributing factors including a strong construction industry, especially in Auckland, increases in trade and technical professions as well as significant regional improvements. Meera Jadeja
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NEFS Market Wrap-Up
Canada It has been announced that the Canadian unemployment rate has increased by the small amount of 0.1% to 7.2%. It had been stable at 7.1%, as you can see from the diagram below for two consecutive months. This is the highest unemployment rate recorded by Canada since December 2013. By looking the graph of the Canadian unemployment rate below you can see that unemployment in Canada had been stable at 6.8% for six months. However, it is of importance to note that the increases in the unemployment rate since August 2015 have been relatively small. The increase in the Canadian unemployment rate was caused by the increase in the number of unemployed people in Canada, which increased by 3,900. The number of part time employed people decreased by 11,300 and those working full time rose by 5,600 people. Therefore, there was an overall decline in the number of people in employment of 5,700. The size of the Canadian labour force declined by 1,800 in the month up to January 2016. Between January 2015 and January 2016 the
unemployment rate increased by 1.0% from 6.2% to 7.2%. The largest increase in the number of job losses was in the Canadian provinces of Alberta, Manitoba and Newfoundland. Alberta experienced a decrease of 10,000 in the amount of jobs available, in the month to January 2015. In comparison, the number of jobs available in Ontario has increased by 1.5% over the previous year. In other news, it has been announced that the Canadian trade deficit is the smallest since July 2015. Exports increased by 3.9% to $45.4 billion (CAD) and imports rose by 1.6% to $45.9 billion (CAD). This created a merchandise trade deficit of $585 million. Whilst the trade deficit has become smaller, the existence of the trade deficit is disappointing if we consider that in 2014 Canada had a merchandise trade surplus of $4.8 billion (CAD). Kelly Wiles
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Week Ending 7th February 2016
EMERGING MARKETS China Before the majority of the mainland population take a break to visit their families for the Lunar New Year celebrations next week, Chinese authorities have released several key statistics indicating sentiment within both sides of the Chinese economy. The Chinese Federation of Logistics and Purchasing released PMI figures for both the manufacturing and non-manufacturing sectors for the month of January on Monday. The official factory gauge came in at 49.4, a threeyear low, signalling the sixth straight month of declines. The figure was slightly below a forecast of 49.6 and last month’s figure of 49.7. According to the National Bureau of Statistics, manufacturing PMI fell due to weak demand and efforts to reduce overcapacity. Nonmanufacturing PMI came in at 53.5, falling short of last month’s 16-month high figure of 54.4, as shown in the graph below. The divergence in sentiment between the manufacturing and services sectors is evident once again in the figures released this week. The key question here is whether the growth of the services sector can offset the deterioration in the manufacturing sector, the main driver of the “old” Chinese economy. This only adds to
the problem of the balancing act that policymakers face. An injection of monetary stimulus would support the slowdown in growth but could also exacerbate capital outflows, adding further pressure to the yuan. Capital outflows from China reached approximately $1 trillion for 2015. Policy has been accommodative to stabilise the manufacturing sector so far. Between the end of 2014 and the end of 2015, the People’s Bank of China (PBOC) cut the interest rate six times to a record-low of 4.35%. The Chinese central bank has also lowered the reserve-requirement ratio for big banks, another form of monetary stimulus. Confidence in the Chinese economy has been a global concern. Deflation seems to be the biggest risk factor in the Chinese economy this year. Markets should see a shift from monetary to fiscal policy in 2016 as the government leaders and policymakers try to stimulate growth. Next week’s foreign exchange reserve and trade balance figures should give an indication of the extent and outcomes of local stimulus as well as consequences of weak global demand. Sai Ming Liew
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NEFS Market Wrap-Up
India The RBI this week maintained India’s interest rate at 6.75%, a move anticipated by forecasters but criticised by some who believe that keeping the rate constant is holding back the economy. Elsewhere, the pace of growth in India's manufacturing sector improved slightly along with infrastructure output which came in at 0.9%, a swift rebound from the 1.3% drop seen in the previous month. With economic expansion for the current fiscal year recently being revised down to 7-7.5% from 8.1-8.5%, the interest rate and speculation surrounding the annual budget will be the two factors guiding investors in Indian shares this month. Within the past year the RBI has lowered the rate four times, going beyond the expectation of forecasters, as shown in the graph below. This time however, it decided to keep rates on hold until it can assess the economic reforms due to be announced in the government budget on February 29th. Raghuram Rajan, the central governor, stated that despite leaving the interest rate unchanged, the Reserve Bank remains accommodative and that in order to create more space for monetary policy to support growth, it is crucial that structural reforms in the forthcoming budget boost growth whilst also controlling spending. Rajan’s push for a reduction in state spending seems to contradict the government’s recent decision to increase the salaries and pensions for approximately 10 million current and former government
employees by 24%. How this planned pay hike is implemented could determine the path of inflation in coming months. On a more positive note, growth in manufacturing reached a four-month high in January, climbing into expansion territory following the contraction seen at the end of last year. The Nikkei Purchasing Manager Index for manufacturing measures the sectors performance and is derived from a survey of 500 manufacturing companies. Last week the index posted a cheerful reading of 51.1 in January, compared with 49.1 in December. A reading above 50 denotes expansion. Infrastructure output also displayed a marginally improved performance, but the many voices stressing the importance of boosting infrastructure investment sooner rather than later, cannot be ignored. On one hand, government reforms are making it easier to do business in India whilst at the same time, the infrastructure that firms need and expect to be in place just does not exist. For now, the ball is firmly in Finance Minister Arun Jaitley’s court, and his budget announcement is sure to be an interesting affair. Homairah Ginwalla
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Week Ending 7th February 2016
Russia and Eastern Europe Russia is continuing to delve deeper into economic meltdown as the year progresses, with the Ruble’s value falling even further. Resulting high inflation, and the recent 2016 budget cuts to education, health care and social spending, are greatly eroding the Russian standard of living. To halt the impending likelihood of a repeated 1998-99 financial crash, the Kremlin is considering privatising various large, state companies, including Rosneft, Sberbank and Aeroflot. Yet as the situation worsens, many hope that Russia will eventually be forced to remove troops from Ukraine, and end all financial support being sent to Syria.
Consequently, any sector reforms will see huge costs for the public.
However the financial crisis in Russia is making evident the overreliance of Belarus on Russian energy imports. Russia provides 90% of Belarus’ energy, and a third of Belarusian export revenue is derived from refining Russian oil ($16 billion annually). With Russia facing financial difficulties, the Belarusian economy is struggling to remain stable (see graph below). Whilst many are in favour of investment into nuclear power, or turning to new trade partners (although very unlikely), it is clear the Belarusian energy sector needs reforming. The sector is extremely inefficient, having been built during the Soviet Union with out-dated technology. It faces abnormally high energyconsumption rates and requires large Government subsidies to keep prices low.
Elsewhere, many Eastern European states are looking away from Western European support to increased links with other developed countries. Bulgaria, for example, is extremely keen to establish trade ties with Brazil, which is home to the second-largest Bulgarian community in Latin America. It is hoped cooperation between the two nations will greatly advance car manufacturing, agriculture and pharmaceuticals. Likewise, Hungary and Indonesia are hoping to strengthen their trade ties (with 2015 trade totalling US$139million), and achieve large developments in communication technology, infrastructure and tourism.
In the Czech Republic, economists are noting the excellent state of its economy for adopting the Euro, which could potentially be achieved by 2020. In the meantime however, it is still necessary for the Czech Republic to increase incomes to EU standards. Whilst many look forward to the increased trade that a removal of trade barriers would induce (no exchange rate risk and uncertainty), others still fear the consequences of a loss of control over monetary policy, especially in the event of financial crisis.
Charlotte Alder
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NEFS Market Wrap-Up
Latin America Venezuela is facing an imminent economic collapse and a possible humanitarian crisis. Plummeting crude oil prices, paired with years of economic mismanagement have crippled the country’s economy and now the country could face a default. There are widespread food shortages due to falling imports. Imports have collapsed from a value of $50bn in 2007, when Brent crude averaged $72 a barrel, to $30bn last year, a remarkable 40% contraction that has led to shortages of medicines, nappies and basic foods such as milk and rice. Despite the complete failure of his policies, Mr Maduro has made it a priority to meet payments on sovereign debt, even at the cost of squeezing imports further. This is because a default would threaten the regime’s existence: it could allow creditors to seize oil cargoes and assets abroad, choking off the revenues on which the regime depends. The theme seems to be that political instability is hampering economic progress and solutions. The country is also witnessing an all-time high in corruption of 17 points out of 100 on the Corruption Index. A country or territory’s score indicates the perceived level of public sector
corruption on a scale of 0 (highly corrupt) to 100 (very clean). The woes of the current government will be compounded in the coming years as the economy looks set to shrink at 7% in 2016. Furthermore the IMF estimated that output shrank by a tenth last year; and it is clear that people are suffering acute hardship. As discussed earlier, due to Venezuela’s dependence on oil as is source of primary income the performance of their economy is likely is likely follow oil prices. So the fact that is that oil prices have reached record lows, circa $34, has meant that the value of Venezuela’s exports have been slashed. Unless oil prices recover, even cutting imports further will not be enough to plug the financing gap. With the risk of social unrest rising, most analysts believe a default is inevitable. On a closing note this week the Zika virus, which seems to be spreading rapidly through South America, has been declared as an International Public Health Emergency by the UN. There is no vaccine and there could be up to 4 million cases in the coming years. Max Brewer
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Week Ending 7th February 2016
Africa The US-Africa Business Summit is underway in Ethiopia on Tuesday as African Heads of State and American business leaders meet with the objective of boosting trade and investment between the region and the US. In the opening of the summit, Ethiopian Prime Minister Hailemariam Desalegn highlighted the need to increase economic interaction, between the two sides. Challenges such as poor infrastructure and corruption in the African continent have kept American companies away despite the continent being an investment magnet for emerging economies such as China. In the coming days, the summit is expected to explore investment opportunities in various sectors in Africa and announce business deals.
climb down from the average of $51 a barrel predicted in October last year. In reviewing the crude prices, the World Bank cited prospects for continued abundant supplies and weak demand. It said oversupply of crude oil is expected to be sustained during the year as members of the OPEC have declined to reduce output to protect their market share. Further supply would be heightened by Iran's comeback into the crude market following lifting of sanctions imposed by the West. However, the global demand for crude oil is expected to decline during the year in response to slowing economic growth in China, one of the largest consumers globally.
After reaching initial agreements with several neighbouring countries, Ethiopia aims to become a leading electricity exporter in Africa. The Country has recently signed agreements with countries such as Uganda, Rwanda, Burundi and Tanzania to interconnect with infrastructure, including electric power. The Ethiopian government is aiming to develop into a middle-income country by 2025 and electricity is a major player and the driver of socioeconomic development.
Royal Dutch Shell, the parent company of Shell Petroleum Development Company of Nigeria, has unfolded plans to cut its global workforce, including Nigeria's, by about 10,000 in 2016, as it battles increasing pressures from declining global oil prices on its operations. Mr. Beurden, the CEO of the group, said on Thursday that this was part of holistic changes the company was undertaking to restructure and refocus its operations in 2016 and thus significantly curtail spending by reducing the number of new investment decisions and designing lower-cost development solutions in its operation.
The new crude price estimate as contained in the World Bank's latest Commodity Markets Outlook report is $36 a barrel, a significant
Sreya Ram
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NEFS Market Wrap-Up
South East Asia With a slowdown in the Chinese economy and a decrease in the price of commodities, which represents more than 50% of Indonesia’s exports, the Indonesian economy is now growing at its slowest pace in five years. However, President Joko Widodo’s efforts to boost public spending began to come to fruition after it was announced South East Asia’s largest economy expanded faster than expected in the last few months. According to government figures, gross domestic product growth reached 5.04% in the last quarter of 2015 driven by a 7.3% increase in public spending shown in the graph below. Additionally, many economic analysts are signalling this growth and latest data will drive investor optimism and lead to a multiplier effect. Beyond the immediate pick-up in demand for extra jobs, goods and services for the infrastructure projects, there will be even further rises in consumption in sectors such as retail. It seems Widodo is putting government spending as the driving force to growth even though private consumption makes up more than half of the country’s GDP. Fuel suffered a sharp subsidy cut last year and as a result private consumption grew just 4.92% in the last quarter of 2015. This meant consumers had less
disposable income to spend on goods within the retail sector, particularly luxury goods. Moreover, Widodo has announced a series of economic reforms which include streamlining and cutting overlapping regulations, making the minimum wage more predictable and providing greater benefits to foreign investors. Additionally, the finance ministry continues to extend large tax cuts in nine major industries, including crude oil and telecommunications. There is a clear intent to secure Indonesia as South East Asia’s largest economy; at the heart of the administration plan there is a $450bn target for infrastructure spending in the next five years. What is particularly worrying, however, is that investors will expect quarter on quarter growth. The economic reforms are expected to take a few years to impact the Indonesian economy. With the threat from rising interest rates in partnering countries and China’s economic slowdown, it seems vital that Indonesia have a focus on the situation at present to retain their position as South East Asia’s largest economy and to prevent countries such as Singapore and Vietnam from overtaking them. Alex Lam
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Week Ending 7th February 2016
Middle East The World Bank’s latest Quarterly Economic Brief for the MENA (Middle East & North Africa) region on Wednesday has revised estimates of economic growth to 2.6% in 2015, falling short of expectations from the 2.8% predicted in October. Being constrained by war, terrorism and cheap oil, short term growth prospects remain “cautiously pessimistic”. The report examines the different ways in which civil wars are affecting the economies of the region, including the important channel of forced displacement, which has become a crisis. It also explores how economic fortunes will turn around if there is peace. Five years of civil strife in Syria and spillovers to the neighbouring countries, including Lebanon, Jordan and Iraq have cost close to an estimated $35 billion in output, measured in 2007 prices, equivalent to Syria’s GDP in 2007. As seen in the graph below, Syria has experienced a drastic drop in its GDP annual growth rate, with a 2.3% fall. Continued conflict has reversed the years of educational attainments in Syria, Yemen, Iraq and Libya, while more than half of all schoolage children in Syria were prevented from
attending school during 2014-2015. Shanta Devarajan, World Bank Chief Economist for the MENA region has stated that the forced displacement crisis created by the civil wars is the “biggest since World War II”. However Lili Mottaghni, World Bank economist and author of the report, did maintain optimism in the region’s prospects if peace was reached. “A peace settlement in Syria, Iraq, Libya and Yemen could lead to a swift rebound in oil output allowing them to increase fiscal space, improve current account balances and boost economic growth in the medium term with positive spillovers to the neighbouring countries,” In the event that conflicts subside in the region, a peaceful transition to democracy will surely increase economic growth by encouraging investment, schooling, economic reforms, public-good provision, and reducing social unrest. Some estimates have gone so far as to state that if nations in the region were able to transition to full-fledged democracies, average GDP growth, currently expected to be about 3.3%, may reach 7.8% in five years. Harry Butterworth
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NEFS Market Wrap-Up
EQUITIES Technology The NASDAQ 100 again continued its recent trend this week by falling from its peak if 4300 to 4166 by Friday. This, again, is perhaps a reflection of the macroeconomic environment we find ourselves in coupled with the uncertainty surrounding central banks’ monetary policy decisions. The social media site, LinkedIn, suffered a huge drop in its share price following a revision in its expected profits, as well as announcing a loss of $8m for 2015. Analysts had forecast the earnings per share of the company to be $0.74, however, the recruiting website announced they expected this figure to be $0.55. The market reacted as one would expect, with the share price falling 28% during Friday’s trading, as shown below, wiping $7bn from its stock market value. Many analysts speculated whether these poor figures were due to the lack of demand in global labour markets or a fundamental problem with the company’s structure. Chief Executive, Jeff Weiner, pointed to the firm’s continued expansion into markets outside of the USA, while the decision to end
part of the failing business-to-business marketing service will reduce the expected profit of the company by $50m this year. Meanwhile, the portable camera firm, GoPro, announced this week that it would be discontinuing three of its six camera products, on top of job cuts due to a fall in sales forecasts. This followed the miserable holiday period the firm experienced when sales fell $65m short of analysts’ forecasts of $500m. The founder and chief executive, Nick Woodman, explained that these figures were not due to heightened competition, as some analysts have said, but rather GoPro needed to develop improved software to improve its user experience. The company has announced that it will be releasing three more products this year, which could bolster sales and improve the share price which has slipped 85% since august last year. However, with no back up plan if these products do not reap reward, I expect the company to be a risky investment. Sam Ewing
(Chart showing the significant fall of LinkedIn’s share price Source: Yahoo! Finance)
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Week Ending 7th February 2016
Oil and Gas The dismal affair of oil prices unfortunately has seen little improvement since last week’s update. The number of oil rigs in operation has declined sharply just in the past 7 days; oilfield services group, Baker Hughes, quantified this with the knowledge that only 467 rigs were drilling this week, down a full 31 from last week. To put his in perspective, it was the steepest drop for the last 10 months. By extension, the number of operative rigs has dropped 71% from its 6 year peak in October 2014. It’s clear and expected that these declines are likely to contribute to a vacancy in US oil production over the coming months. While drop-off in drilling has had little effect on US crude production (peaked last April at 9.7m barrels a day), analysts expect production to drop after the 16% drop in benchmark US crude this year to $31 per barrel, amounting the total decline since June 2014 to 71%. All this bad news comes with US producers announcing their outlook: a decline in output and another round of capital spending cuts in a desperate effort to liquefy. By example, Continental Resources has planned this year’s spending to be 66% lower than last years; oil
and gas output is also expected to drop by 59% in 2016, ending the year as it has undoubtedly started: dwindling. (The graph below shows exactly why these evasive actions are being taken). On the contrary, BP boss Bob Dudley is optimistic, expecting the market to rebalance over the next six months as, supposedly, demand converges with supply. While the majority of analysts are dismissive of his sanguinity, he went on to say that the return to equilibrium should augur a price recovery from $50 to $60/barrel by the end of the financial year. These announcements came after revelation that BP made a record loss of $5.2bn in 2015. There is some truth in what he says, especially when we consider the price elasticity of oil demonstrated last year when low prices led to a steep increase in demand – 1.8m barrels/day, which was double the average growth of the last 10 years. It is becoming quite clear that this slump will have its winners and losers, only time will tell whether there will be more of one and less of the other. Tom Dooner T o m D o o n e r
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NEFS Market Wrap-Up
Pharmaceuticals This week has been rather stable as we have seen the FTSE 350 Index - Pharmaceutical & Biotechnology fall by 4.43% and the NASDAQ Biotechnology Index fall by 3.11%. This is due to the systematic risk in the market and the Pharmaceuticals & Biotechnology sector is still poised to outperform the S&P 500. Also this week, we have seen the first two IPOs of 2016, with BeiGene and Edita listed on the NASDAQ. These two IPOs can be viewed as a measure of the market sentiment’s appetite for biotech companies, and whether or not it would be able to raise money on the public markets after a month long of sell-offs triggered by the announcement of Hillary Clinton’s to tackle the drug pricing problem if elected as president of the US. BeiGene is a company that develops cancer treatments that raised $158m by pricing 6.6m shares at $24 each on its IPO and managed to meet its expected valuation range. Editas is a company working in the area of gene editing and managed to raise $94m by pricing 5.9m shares at $16 a share. This week we have continued to see Pharmaceutical M&As flourish from last year’s record of $724bn in M&A activity. GlaxoSmithKline (GSK) has further expanded its alliance with Adaptimmune to speed up the development of a ground breaking cancer drug in a $500m deal. US healthcare company Abbott Laboratories have also announced this
week that it has agreed to acquire Alere, a diagnostic group, for $5.8bn. Alere shares soared by 45% to $53.84 when the deal was announced. Also on the same day, medical device group Stryker also announced a $2.7bn deal to buy Sage, which makes products to prevent infections in hospitals In other news, GW Pharmaceutical’s CEO Justin Gover has to make important decisions in the next few weeks as his company has continued to push for medicines made from marijuana. There are positive results from trials of Epidiolex, an experimental drug for childhood epilepsy and this would be make or break for the UK Company’s success. Initially GW was not favoured by the market for most of its first decade, but since adopting a dual listing on NASDAQ in 2013, it has managed to raise $450m. As the M&As of the Pharmaceutical & Biotech Sector continue to flourish, I believe that the sector would continue to be the best performing sector in the short to mid-term. Given the volatility and uncertainty in the stock markets, fundamentals of a company may not give you an accurate picture of the price of stocks. Prudence should continue to be maintained and investors should remain defensive. Samuel Tan
NASDAQ Biotechnology Index (NBI)
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Week Ending 7th February 2016
Financials The start of 2016 is continuing to prove difficult for the financial industry due to an exposure of slowing economic growth and intensifying credit losses, causing companies to consistently underperform than previous years, leaving a sense of doubt in investors. Indeed, this uncertainty is proven through the tumbling stock prices across the financial industry, with some shares reaching their lowest yet. A view on the bigger picture sees poor financial performance being a frontrunner in the decline of the FTSE 100 index, along with other measurements of the stock market’s performance. The FTSE All Shares Bank index, as shown by the figure below, has fallen 15.7% in the year-to-date, undoubtedly representing a huge loss in confidence within the sector. But this performance is not restricted to London only, but is of a similar concern in the US, where the financial sector is the worst performing major sector so far this year, with the S&P 500 Banks index being down almost 14%. Indeed this is a pattern seen on a global scale, with the Euro STOXX and Topix bank indices, representing Europe’s financial sector and Japans financial sector respectively, also dropping in value this year.
Looking more specifically, we see that one of Europe’s leading financial firms, Credit Suisse, has recently had stock prices fall to a 24 year low. This massive downfall for the company came around due to far worse than expected fourth-quarter results last year, establishing a gloomy outlook for the company’s future. Upon digestion of the recent company report on the 4th February, investors retaliated by dumping shares in the Switzerland based firm amidst fear of greater losses being inevitable, causing share prices to plummet a massive 11.49% in a single morning to 14.4 Swiss Francs. With Credit Suisse experiencing a year-on-year fall in revenues, from 37.42bn to 35.06bn Swiss Francs, and net income dropping 19.4% from 2.33bn to 1.88bn Swiss Francs, it is an unsurprising reaction from investors to discard this stock. Further analysis shows that dividends per share have remained flat over the past few years, whilst earnings per share have fallen 17.9%. The repercussions of such poor performance should offput investors from further purchases of this stock, whilst certainly instituting a sustained reason for selling. Daniel Land
Figure: Global Bank’s Performance
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NEFS Market Wrap-Up
COMMODITIES Energy Shell and BP have announced this week that they expect the oil price to rise by the end of the year as demand begins to re-equilibrate with supply. BP CEO – Bob Dudley stated ‘supply is levelling off’ and if the trend of rising demand continues, then prices will stabilise late this year. Most analysts agree with the sentiment; despite expecting prices to fall further in the first quarter of 2016, some temporary pressure is expected on demand as a multitude of refineries are requiring essential maintenance. However, there are indicators that this bullishness might be overly optimistic. Currently
the market is oversupplied by 1 million barrels per day. Once trade sanctions are lifted on Iran, there will be a further influx of supply into the market. This means it is unlikely that the gap between oil output and consumption will close during 2016; and by some forecasts, it is thought it could rise to 1.5 million barrels per day. This excess supply could therefore weigh down further on prices, and even cause an overall drop in the oil price in 2016. That would make a run of three years in a row in which the price of oil has dropped. William Norcliffe-Brown
Brent Crude Price Chart (Source: MoneyAM)
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Week Ending 7th February 2016
Precious Metals The beginning of 2016 forecasts a number of significant shocks in the precious metals’ market. The three main uncertainties concerned with China’s economy will have a strong effect on the market. These include predicted economic growth in the country, influenced Chinese consumer demand on commodities and identification of other markets to replace China’s growth gap. With increasing confidence in the market, Gold continues to appreciate. On Thursday, 4th February, gold prices peaked at 1148.76 USD/t oz. (Figure 1) – highest in the last 3 months. Analysts identified a number of contributing factors; the US Dollar remains in a relatively weak position, aided by the expectations that Fed. Reserve is not likely to raise interest rates soon. Dropping European bank shares and falling bank stocks cannot be ignored either. Apart from rising metal prices, buyers and sellers can observe an increasing global uncertainty in the market. London Gold’s market, covering ¾ of the bullion dealing, might experience significant changes. London Bullion Market Association proposed an introduction of electronic systems, recording historic Gold trade transactions. At the moment, the direct exchange is not transparent as they usually take place over a telephone call. The key issue involves lack of information on the amount of Gold exchanged daily. However, the dilemma of whether a change would be beneficial remains and, due to the increasing uncertainty
Figure 1
Gold
and falling trust, R. Norman, chief executive of Sharps Pixley, commented on the rising consumers’ preference on investment in physical Gold and jewellery rather than the papers. In general, a positive future is expected in the precious metals market. Silver prices also experienced a slight positive shift as were supported by increasing Gold prices. From midJanuary to 4th February (Figures 1,2), when Gold experienced the greatest appreciation, Silver shifted upwards by 8.34%, from 13.748 USD/t oz. to 14.895 USD/t oz. London Bullion Market Association’s findings expect metal prices to rise in 2016, with Platinum and Palladium already appreciating by 5.4% and 12.7% respectively during 1st-15th January, 2016. These effects were mainly caused by increasing importance of US Fed price hikes, weakening US Dollar as well as political and economic uncertainty in the EU, Asia and the Middle East. In contrast, ISM Non-Manufacturing index is expected to soften slightly from 55.1 to 55.3, while the US ADP is expected to print 193K this year. The latter forecast might strengthen the US dollar, dragging Silver prices towards depreciation. Differently, the increasing index may weaken Gold’s position in the market, slightly strengthening Silver. Goda Paulauskaite
Figure 2
Silver
Silver prices (2012-2016)
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NEFS Market Wrap-Up
CURRENCIES Major Currencies This week the US Dollar’s performance has been highly volatile. A 2.88% depreciation in the middle of the week was followed by 0.5% increase on Friday. The labour market performed particularly well, with the unemployment rate declining to an eight-year low of 4.9%. Additionally, wages rose more than expected (by 0.5% instead of a 0.3% forecast), which supports the Fed’s intention to keep increasing interest rates. Thus, the expectation that the Fed would further tighten its monetary policy led to the appreciation of the US Dollar to $1.1161 per Euro at the end of this week. However, most economists see the scenario of raising the interest rate four times this year as overly ambitious, given that the Chinese economy is struggling and could complicate the recovery of the US, pushing the inflation rate even further below the 2% goal. Thus, many traders bet in January that there won’t even be one further raise of the interest rates. However, this week, US short-term interest rates futures contracts slid as a result of the new labour market strength, suggesting that there is a 45% chance that the Fed will increase the interest rate by December 2016, up from 20% before the report.
While the Fed is expected to follow restrictive monetary policy less quickly than initially expected, there are signs that the ECB will also wait before choosing to loosen its monetary policy further. The ECB Director Yves Mersch stated recently in an interview with the Wall Street Journal published on the 2 nd of February that the decision about future steps will be made in March and that there are several options: “I would not be carried away by analysts in some institutions who want us to do what they like, what they would consider to be helpful.” Thus, when the monetary policy in the US won’t be as restrictive as predicted while the policy measures by the ECB will be more conservative than expected this would explain why the Euro appreciated against the US Dollar, as shown in the graphic below. The GBP/USD and GBP/EUR fell below 1.454 and 1.3, respectively, although the Bank of England stated on the 4th of February that there won’t be any change in its policy, which was originally expected. The fall could probably be explained with Monetary Policy Committee Member, Ian, McCafferty, who previously voted for a slight rise, changing sides.
Euro per US Dollar
Alexander Baxmann
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Week Ending 7th February 2016
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. as well as providing NEFS members with quality analysis, keeping them up to 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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