Week Ending 25th October 2015
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 India China Russia and Eastern Europe Latin America Africa South East Asia
Equities 16 Financials Oil & Gas Retail Technology Pharmaceuticals Industrials & Basic Materials
Commodities 22 Energy Precious Metals Agriculturals
Currencies 25 EUR, USD, GBP AUD, JPY & Other Asian 2
Week Ending 25th October 2015
THE WEEK IN BRIEF
China slowdown continues
Monetary stimulus in Europe
China’s growth rate has continued to fall, dropping below 7% for the first time in six years. This comes despite the recent devaluation of the Chinese currency, which has clearly not been enough to prevent Chinese growth from falling further in the third quarter of this year. The slowing of economic growth in China is impacting negatively on a number of other economies globally. Japan has seen a reduction of exports to China, holding back their own economic performance, whilst Singapore has also felt the effect of China’s falling growth, only narrowly avoided moving into recession this week. The current trend in Chinese growth seems set to continue as China grows into a more developed economy.
Mario Draghi, the president of the European Central Bank, indicated that further quantitative easing in the Eurozone is imminent. Whilst Euro area growth has improved to some extent in recent times, suggesting that domestic demand is strengthening, Draghi pointed to slowing growth in the emerging markets, China in particular, as the reason for the Eurozone’s sustained poor performance. Draghi’s speech shocked the markets, with the Euro moving closer to parity with the Dollar, while the FTSE Eurofirst 300 index surged up 4% following the news. It remains to be seen whether the stimulus, expected to come in December, can help take the Eurozone back towards pre-crisis growth levels.
Falling unemployment
Oil prices remain low
Unemployment reached its lowest level for seven years in the UK, falling to 5.4% this week, which points to a domestic strengthening amid global uncertainty. The same pattern can be seen in the US unemployment figures, as the rate currently sits at 5.1%. There was also good news in Spain this week, as the measure far exceeded expectations, with the percentage of people unemployed falling to its lowest level for four years.
While there was some rebound of oil prices later in the week, the downward trend of oil prices has continued, contributing to falling inflation globally, with UK inflation falling to -0.1% earlier this month. Sustained low oil prices have contributed to reduced profits and job losses within the industry, while share prices within the industry look set to continue to fall, despite a recent improvement. With BP and Shell announcing further cuts to their investment plans in the UK this week following reduced profits, the future of the sector is uncertain. Jack Millar
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NEFS Market Wrap-Up
MACRO REVIEW United Kingdom This week marked the state visit of China’s president Xi Jinping to the UK, with trade and investment deals worth £30bn being agreed. This comes amid commitment by the UK to build a stronger relationship and closer economic ties with China, now becoming its largest European partner. The main deals include investment in nuclear energy, oil, electric buses and education. The single largest, and most controversial, is China’s £6bn investment into a new nuclear power plant, an unprecedented deal giving China a 33% stake, which has provoked concerns regarding national security. Indeed, the UK’s closer partnership with China has drawn criticism both domestically and internationally. Cameron has been accused of putting China’s human rights issues aside in order to secure billions of pounds of investment. China has also been accused of dumping steel on global markets, meaning selling it at uneconomic prices, which has caused a collapse of global steel prices. This has led to thousands of job losses for the UK steel industry. On the other hand the UK recognises China’s importance as a growing economic superpower, and how it could beneficial, so aim to capitalise on this by securing a long term economic partnership.
highest level in 10 years. An official survey of graduates last summer showed that 76.6% had found jobs, suggesting that the economic recovery has finally reached young people. In addition, retail sales this September surged to a 2 year high, being boosted by falling shop prices and rising real wages. This should allay fears of a slowdown in the third quarter and provide a further boost to consumption led growth, the main driver of the UK economy. The graph below shows how retail sales have grown in recent years. The Bank of England (BoE) has come out in support of Britain remaining within a reformed EU, after a speech by Mark Carney. This follows the release of a preliminary report by the BoE on Britain’s EU membership, in which it states that overall Britain is a “leading beneficiary” of Europe. However Mark Carney’s intervention into a political debate has been criticised since the BoE has a role to remain independent of politics. Matteo Graziosi
Meanwhile unemployment has fallen to a 7 year low to 5.4%, providing a confident outlook on the UK economy despite the global economic slowdown. In particular the outlook for the graduate job market is promising, with a study of 100 leading employers showing that graduate vacancies will rise 8.1% this year to its
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Week Ending 25th October 2015
United States There were two key data releases concerning the housing market this week, along with weekly data on first-time filing for unemployment insurance. Building permits data from the Census Bureau showed that permits for new construction declined month on month by 5% to an annualised 1.1 million, falling short of a forecast of 1.16 million. Permits for new construction typically give an indication of future demand. However, economists warn not to read too much into the data due to substantial revisions in the future. The National Association of Realtors released data showing that existing home sales beat forecasts of 5.38 million to reach an annualised 5.55 million for the month of September, a 4.7% improvement on last month’s figures. Conversely, the share of firsttime homebuyers fell from 32% in August to 29% in September. New buyers are crucial with regards to the long-term health of the housing market as it represents new demand rather than trading in the property market.
The FOMC will make a statement about monetary policy next week and this will hopefully give us a better idea of the timing of a rate rise. Next week’s data on consumer
Elsewhere, in a report from the Labour Department, initial claims for state jobless benefits increased by 3,000 to a seasonally adjusted 259,000 for the week ending 17th October. This was lower than the forecast of 266,000 and is hovering around 42-year lows. The labour market is approaching full capacity with the last reported unemployment rate standing at 5.1%, similar to levels seen back in early 2008. This week’s robust labour and housing data demonstrates strong domestic fundamentals in the US economy. A firming housing market and lower unemployment levels are boosting household wealth, driving economic growth through consumer expenditure. It can be argued that the recent growth in strength of the dollar has mimicked a rate rise and with global growth for 2015 at approximately 2.6% (the long-run norm is 3%), tightening monetary policy too early could hinder the US economic recovery. 65% of economists surveyed by the FT predict a rate rise at the end of this year and 85% expect a second increase by June 2016. confidence and advance quarter on quarter GDP should help too. Sai Ming Liew
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NEFS Market Wrap-Up
Eurozone Consumer confidence within the Eurozone, which calculates the level of optimism consumers have towards the economy, has fallen by 0.6 points from -7.1 in September 2015 to -7.7 in October 2015, as measured by the Consumer Economic Sentiment Indicator. As you can see on the diagram below, which shows consumer confidence in the Eurozone between January and October 2015, the indicator has reached its lowest level since January this year. However, when comparing these figures to 2009, when the value fell to record lows of 34.30, it is clear that consumer confidence is much less weak now than it was during the financial crisis. When taken in this light, the implications of this month’s figures may not be too serious for the 19 countries within the Eurozone. Consumers situated in the Euro area have had the benefit of low inflation rates during 2015. Inflation in the Eurozone was -0.1 per cent in September 2015, as measured by the Harmonised Index of Consumer Price (HICP), taking a negative value for the first time in six months. A large proportion of the decline in inflation was due to the decrease in the price of fuel and oil, which fell by 0.71%. As inflation decreases, consumers are more likely to increase their spending as prices are lower.
Therefore the significance of a small decline in consumer confidence in the Eurozone is somewhat diminished. The European economist at Capital Economics, Jack Allen has said “Looking ahead, economic conditions are broadly supportive of consumer confidence. The EC index measures consumers’ optimism about their own financial and employment prospects, as well as the wider economic outlook, over the next twelve months. The slow but steady labour market recovery, along with low inflation, should support households’ real spending power. And low interest rates on household borrowing are likely to persist, keeping debt service costs down”. As such, even though consumer confidence has fallen in the last month, the long term prospects of consumer optimism and spending is looking somewhat more positive. Elsewhere, there was positive news to come out of the Spanish economy this week, with the release of unemployment data on Thursday; unemployment has fallen sharply from 22.4% to 21.2% there, beating forecasts of 21.9%, and is now at its lowest level since 2011. The fall further hints at some degree of underlying strength within the Eurozone economy as a whole. Kelly Wiles
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Week Ending 25th October 2015
Japan Trade figures released by the Ministry of Finance show that Japan’s annual export growth fell to just 0.6% for September, below the expected 3.4%. The cause of this slowdown has been due to the falling sales to a slowing China has reduced the volume of Japanese exports. With trade accounting for approximately 17% of GDP last year this will have serious implications for growth in the third quarter, possibly forcing Japan into a technical recession following a 0.3% contraction in the previous quarter. Growth in Japanese manufacturing output was a welcome shock following the disappointing export figures, with the latest Flash Purchasing Managers’ Index (PMI) reading at 52.5. The PMI is essentially a survey to measure the health of the manufacturing sector – a reading above 50 indicates expansion. Released on Thursday, the Flash PMI is a first estimate of the final PMI indicator expected next week. The figure was well above the forecast of 50.5, and also means that operating conditions in Japan have improved at their fastest rate in over 18 months. This news shows a marked improvement in the Japan’s manufacturing sector and that international demand remains resilient despite the backdrop of declining emerging economies.
The Regional Economic Report published by BoJ paints an equally rosy picture of the Japanese economy as the pace of economic improvement in all of the country’s regions continues to be in “moderate” or “steady” recovery. However, the trend rate of growth of almost zero for the last decade, shown by the black line on the graph below, gives a less optimistic assessment. This inertia has become the norm for the nation, and has made it the poster child for economic stagnation. Speaking at the end of last week BoJ Governor Haruhiko Kuroda reiterated that the monetary policy approach under “Abenomics” is working, but said the situation will continue to be monitored closely for any potential shocks. Dismissing the genuine optimism expressed by the BoJ thus far, many analysts are still expecting the Bank to cut their growth and inflation forecasts at a review meeting at the end of October. If the inflation and unemployment figures released next week continue to be consistent with Japan’s “moderate” trend, then it would not be surprising to see mounting pressure for a more active approach from the Bank in the coming weeks. Loy Chen
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NEFS Market Wrap-Up
Australia & New Zealand Westpac, Australia’s second largest bank has announced an increase in variable mortgage rates by 0.2 percentage points for home loan customers. The first such rise in three years was announced on 14th October and will take effect on the 20th November. Westpac stated that such changes were due to the bank “being forced to hold 50% more capital against mortgages as a buffer for absorbing losses”, a regulation created after the financial crash in 2008. Essentially this means an increase in the cost of doing business for Westpac and therefore an inevitable increase in prices (mortgage rates) for consumers. Consumers took the news with heavy hearts. The ANZ Roy-Morgan consumer confidence index has fallen by 2.0% (to 113.3%), indicating a downward pressure on consumer expenditure. This index measures the monthly consumer confidence of households and examines how this affects their regular spending. An increase in variable mortgage rates was bound to create a negative sentiment among consumers, with less disposable income and slowing momentum in Australia’s residential property market, consumers are simply buying less. How bad have the effects been? The ‘two boom property markets’; Sydney and Melbourne experienced a reduction in auction clearance
rates in the past week. Rates in Sydney fell to 65.1%, the lowest in three years, and to 73% in Melbourne. The Reserve Bank of Australia (RBA) said there were “tentative signs of some slowing in the Sydney and Melbourne housing markets”. Consumers are more reluctant to engage in activity in the property market, despite the large numbers of first time buyers, and many find that property prices in these cities are out of their reach. In other news, CPI in New Zealand was 0.3% in the September quarter, meeting the Reserve Bank of New Zealand’s forecast, but lower than the 0.4% in the June quarter. Despite cheaper vehicle relicensing fees, the change was caused by a rise in price of vegetables, which has created downward pressure on consumer spending. However, the annual pace of inflation was unchanged at 0.4%, slightly ahead of the Central Bank’s forecast. Annual inflation in New Zealand hasn’t been within the Central Banks 1-3 percent range for three quarters. As shown by the graph below, the last time inflation was within the range was in July 2014. Cheap oil prices, low interest rates (a base rate of 2.75%) and a strong Kiwi dollar have all kept consumer prices down, stalling an increase in inflation rates. Meera Jadeja
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Week Ending 25th October 2015
Canada Emerging from its first recession in six years, Canada’s economy has bounced back thanks to the benefits of a low currency. However, the mid-term economic outlook remains weak. The Bank of Canada’s mandate is “to promote the economic and financial well-being of Canadians”, and one of the key ways in which it seeks to achieve this is through the manipulation of monetary policy. On Wednesday, the Bank of Canada announced that its target for the overnight rate of interest, otherwise known as its key policy interest rate, would remain unchanged at 0.5%. This comes as no surprise – the CPI index currently stands at 1%. This is on the lower boundary of the Bank of Canada’s symmetrical target of 2%, so keeping the interest rate low should help to boost inflation. In spite of this, Stephen Poloz, the Governor of the Bank of Canada, has stated that inflation may only reach the 2% target in mid-2017 due to excess capacity, or slack, in the economy.
the GDP growth rate are 2% next year, and up to 2.5% in 2017. This ensues as the economy still struggles to adjust to the new environment of low commodity prices, driven by the longterm falls in the oil price. As a result, the resource industry, business investment, and moreover the Canadian dollar are being adversely affected. In an attempt to revive the economy, the Bank of Canada may decide to engage in further monetary stimulus by cutting the interest rate, but in doing so, this deters overseas investment for fear of low rates of return. The likelihood of more rate cuts means the Canadian dollar is down by about 15% over the past 12 months. The rate fell further as investors sold the currency following the GDP predictions in the Bank of Canada’s quarterly monetary report published this week. As shown in the chart below, the target for the overnight rate of interest has already been lowered twice this year. The next decision by the Bank of Canada’s Governing Council will be made on the 2nd of December.
Although GDP has picked up and household spending is expected to increase, growth is still expected to remain subdued. Predictions for
Shamima Manzoor
Target for the overnight rate 1.25
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NEFS Market Wrap-Up
EMERGING MARKETS
India Last week India was once again handed a BBBinvestment rating from global rating agency Standard & Poor’s, the lowest grade that can be given. Despite the country’s hope for an upgrade given recent economic success, S&P decided to retain this rating, whilst predicting a ‘stable’ outlook for the future. India’s low per capita income and high government debt are key barriers to an improvement in the country’s sovereign rating and in a statement issued last week, S&P stated that “the outlook indicates that we do not expect to change our rating on India this year or the next based on our current set of forecasts.” Moody’s and Fitch Ratings, two other global agencies, have also accredited India with the same. Most recent data for government debt suggests that it currently stands at 66.1% of GDP - higher than it was in the previous year. This figure has been deemed unacceptable, with the agency making it clear that unless it reaches below 60% of GDP, India cannot be credited with a higher rating. Another requirement is that the fiscal deficit, which is currently 3.9% of GDP, must be lowered to the target of 3% by 2018. In order to address both of these issues, S&P have stressed the importance of generating more revenue and controlling spending on subsidies for food, energy and fertilisers, which in 2015 was the equivalent of 2% of GDP.
The government simply does not yield enough revenue to be able to spend a sizeable amount on subsidies whilst also implementing new reforms and lowering net debt. A new goods and services tax, which is set to be rolled out in April 2016, would be a significant step in reforming taxation and shows that India is ready to employ measures that will eventually redress its public finances. The ‘GST’ Bill will amalgamate several Central and State taxes into one single tax, creating a common national market and hopefully increasing revenue for the government. Low per capita income is also a concern, estimated at only $1700 in 2015. Measures such as improving labour market flexibility and strengthening the business climate in order to create more employment will help raise income levels, but realistically this has to be a long term goal, and the threshold of $5000 issued by the agency will take a long time to reach. On a brighter note, S&P expects growth to average just under 8% from 2015-2018 and the positive impact of the governments new reform agenda has been recognised globally, most recently by the US Treasury which reported that India has the potential to become a global driver of growth. However, if India’s outlook really is to remain ‘stable’ in this fragile economic climate, there are vast improvements still to be made. Homairah Ginwalla
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Week Ending 25th October 2015
China This week we learned that China’s annual growth rate slowed to 6.9% in the third quarter of 2015. While this came in slightly above expectations, the figure signals the lowest rate of growth in China since 2009. Growth has slowed dramatically in 2015, averaging at 7% this year compared to nearly 9 % in the period from 2009-2014. Additionally, the ongoing correction of the Chinese Stock Market may lead to further slow-down of economic growth due to its impact on the financial sector. However, in order to attain higher growth rates the Chinese government has two options. It could either boost investment or focus on increasing private consumption. The Chinese people have traditionally been keen on saving money, though, and as such, China’s investment-to-GDP ratio is one of the highest in the world. Yet, its savings still exceeded investments in 2014, and consumption counted for only 38% of GDP in the same year. Nonetheless, declining labour force growth and a recent shift towards less capital-intensive industries could be seen as indicators for slower future investment growth. On August 11 this year, the People’s Bank of China (PBoC) announced a change in the
setting of the daily reference rate. This shift in foreign exchange policy led to a depreciation in the RMB of 2.3% in September. It seems that the reason for China’s depreciation of the RMB has come as an attempt to hide the current underlying problems within the Chinese economy by boosting export-led growth. As can be seen in the graph below, the PBOC’s reference rate has differed little from the daily close rate since the introduction of the new settings, hinting that the market has actually been playing a bigger role in setting the exchange rate than before, prior to the recent devaluation. A more flexible approach in China’s foreign exchange regime is required to win greater status for the Yuan. However, on August 19 the IMF said its board has decided that if it opts later this year to include the RMB in the “Special Drawing Rights” (SDR) basket, this will not take effect until September 2016. As being part of the SDR currency basket would make the RMB officially a reserve currency, it is not surprising that the IMF decided to postpone its inclusion; being a reserve currency requires open and developed capital and stock markets which China still lacks. Alexander Baxmann
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NEFS Market Wrap-Up
Russia and Eastern Europe Russia has dominated news this week, coming under severe scrutiny as its economy sees a 4.3% contraction in the third quarter. This, alongside a worsening inflation rate of 15.7% and a reduction in industrial production, combined with increased defence spending, all point towards further woes for Putin’s economy – although he himself does not concur. Figures released this week showed a decline in capital investment of 5.6% and a 3.7% reduction in industrial production – the latter its lowest since March. So reliant on industrial production is Russia that it takes its place as her second most important economic driver and consequently represents a real problem for the Soviet state. In addition, the third quarter figures (4.3% contraction) only reiterate the economic worry and assert the relevance of the Western sanctions, having a knock-on effect on the already plummeting oil prices, whilst also disincentivising investment in Russian equities. Not surprising, then, is the petition for bankruptcy of Russia’s second biggest airline, Transaero, filed by Russia’s biggest bank, Sberbank. While this is being put down to a “bad business model”, it is clear that the worsening economic situation has played a central role. Inflation, too, is way above its 4% target, hovering around the 16% mark and is making its presence known as real incomes have dropped 9.7% this September and the Ruble continues to depreciate, contributing to the
10.4% decrease in retail sales as consumers have their spending power stripped. Rising prices is also giving birth to a poverty rate climb up to 15.1%, representing 21.7 million people. Economic minsters now face a tough decision between cutting rates now or waiting for signs of stabilisation – ING Bank advises a mixture of the two, expecting the Bank of Russia to start monetary easing next week, cutting its key rate to 10.5% (50 basis points at each of the coming policy meetings) by the end of the year. Despite what seems like a black swan facing the Russian economy – or “three black swans” as Sberbank CEO, Herman Gref, says – there remains some hope. Against all the criticism and, in particular, a Moody prediction of a fall in Russian credit-worthiness to 2009 levels, both Putin and Andrey Kostin (president and chairman of VTB – Sberbank’s biggest rival) deny the Western assumption that this is the end for Russia. Kostin ensures that this “is not another 2008”, saying that the economic slump has reached its bottom and can only improve from here. Officials claim that the economy is “not in tatters” and that it is “under control”, predicting slight growth for early next year. Putin himself remains confident, seeing the Ruble depreciation not as a negative, but as a competitive advantage, telling his people to “make use of it”. Tom Dooner
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Week Ending 25th October 2015
Latin America On October 15th the Central Bank of Chile (CBC) rose its benchmark interest rate by 25 basis points (bps) to 3.25% in an attempt to curb inflation. Whilst policy maker have been struggling with high consumer prices, analysts were expecting the bank to leave the key rate unchanged at 3%, amid sluggish growth. The annual inflation rate came in a 4.6% in September 2015, well above the bank's 2 to 4 percent tolerance range. Yet, as shown in the graph below, annual growth rates have stalled in recent years, falling from 5.4% in April 2013 to 1.9% this August. Although September’s vote was 3-1 in favour of holding interest rates at 3%, this month’s increase in the rate was not entirely unexpected, with the CBC’s comments in September signalling that rates may rise soon. Runaway growth and overheating of the Chilean economy are not the factors leading to the bleak inflationary outlook, but some policymakers point to the current monetary stimulus programme and the need to cut it in the short-term. While the asset purchase (QE) scheme run by the CBC is increasing upside inflationary to some extent, it is not the only factor influencing inflation rates. The wider economy is in a fragile state and growth is disappointing, see graph below. In the
past 12 months the current account has swung from a 1202M USD surplus to a forecast deficit of 693M USD in November. These results persist despite the fact that the peso has lost 13 percentage points against the dollar over the last year. This, in theory, should make exports more desirable and imports more expensive, hence suggesting a surplus should instead have been maintained (or increased). But it is not all doom and gloom for Chile as, although unemployment is predicted to be up 0.2% next week, it will still remain strong at 6.7%. So what lies ahead for Chile’s inflationary policy? As this initial increase of 0.25% is likely only to be effective in the medium term. If the combination of weak economic growth and high inflation persists, then the CBC and Chilean government may have to bite the bullet on either growth or inflation, for a more immediate remedy. They face the choice of increasing interest rates further, contracting the already weak consumer demand, or implementing aggressive fiscal stimulus, with the inflationary consequences that would follow. Next month the signs are pointing towards a further increase in the benchmark rate, so we could see rates increase another 25bps. Max Brewer
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NEFS Market Wrap-Up
Africa The greatest shock this week was the news that Egypt may soon overtake South Africa, to become the continent’s largest economy. Despite being plagued by uprisings and violence in recent years, Egypt’s GDP will reach $315bn this year, marginally behind the $317bn economy of South Africa, according to Renaissance Capital. Last year Egypt slumped far behind with a GDP of $286bn, a result of low tourism and foreign investment, and high energy prices. Even in 2015, Egypt continues to face a weak currency that has already seen two devaluations in the past week. Whilst this should encourage foreign investment and increase tourism, it has made imports very expensive and sustained high GDP growth unlikely. On Tuesday Chinese Government officials confirmed their $50bn pledge intended to industrialise Africa, including the provision of 50 power plant technical experts, 40,000 training opportunities and 200,000 industrial managers to train local workers. This will very effectively enhance the long-term self-sustaining and independent nature of the African economy. However it comes amidst a period of great turbulence for China who has had to reduce foreign investment by 84% over the past year, due to its slowing economy, and yet in the same time period has nearly doubled investment into
African extractive industries (from $141.4m to $288.9m). This has incited old accusations of China trying to gain control of Africa’s undiscovered natural resources. Further criticism is that the pledge may inevitably become too focused on South African development, whilst other African economies are left behind. A big topic of contention this week has been the proposed 11% university tuition fee increases in South Africa, which has consequently provoked widespread protests across the country. A fee cap of 6%, as suggested by the Higher Education Minister Blade Nzimande, has also been rejected. Whilst budget cuts have made the fee increases necessary, in order to continue developing other important economic sectors, affordable and readily available higher education is of primary importance to the longterm, sustainable development of the continent. Johan Fourie, an economics professor at Stellenbosch University, predicts that 95% of South Africans already can’t afford the current university fees. Whilst higher fees will reduce pressure on the South African government, it will also widen the poverty gap and greatly slow down growth in the services sector. Charlotte Alder
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Week Ending 25th October 2015
South East Asia Optimism will inevitably have increased for the citizens of Singapore as it has been revealed that their economy grew in the third quarter of this year, and thus avoided recession, which refers to two consecutive quarters of negative economic growth. Released on Wednesday last week, gross domestic product growth for this quarter at 0.1% is shown in the graph below. This is a significant boost for Singapore as growth for the previous quarter was -2.5%, a major low since the global recession. The Monetary Authority of Singapore stated in its Semi-Annual policy statement that it would slightly reduce the value of the Singapore dollar against the currency of nation’s main trading partners, in an effort to revive economic growth. This is expected to support output, as a depreciation in the Singapore dollar will lead to an increase in exports, as the price of Singapore’s exports become cheaper, making them more attractive to Singapore’s main trading partners - Malaysia, China and the US. It is hoped that the increase in exports will benefit Singapore by creating growth and more jobs, particularly in the manufacturing sector, which contracted 6 percent in the third quarter. Moreover, an increase in economic growth will lead to an increase in inflation with more individuals spending on consumer goods. This
would not necessarily be a good outcome in normal circumstances, however with Singapore’s inflation rate at -0.8%, it would reduce uncertainty and inflation would be welcomed with open arms. There is certainly a reason for Singapore to be optimistic as growth for the first quarter in 2016 is estimated at 3.48% and by 2020, inflation is expected to be at a more desirable rate at 2.21 percent, according to Trading Economics. But how realistic are these predicted figures? With globalisation more present than ever before and Singapore being so reliant on foreign trade, activity in other countries must be considered. Singapore’s second largest trading partner is China, which has had a staggering annual GDP growth rate in recent years, exceeding 10% in some cases. However, many are predicting that by 2020 this figure will have more than halved to around 5%. China’s rapid growth interferes with their goal of reducing carbon emissions and becoming greener as a country. With China’s growth slowing and their manufacturing sector declining, it will have a knock-on effect. Countries in South East Asia such as Singapore will lose the economic benefits of a world leader in China. So will Singapore grow as expected? Only time will tell. Alex Lam
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NEFS Market Wrap-Up
EQUITIES Retail Walmart’s recent share price drop, despite being driven by a plethora of factors and conditions almost unique to the venerable retailer, has resulted in a sizeable knock-on effect for a number of large retailers, who have seen largely negative changes in share price and, by extension, company valuation. Walmart, in a conference for investors around a week ago, announced that it not only expects sales growth to be decidedly below analysts’ predictions, at around 3%, but that it shall expect to raise operating costs significantly, adding $1.2 billion through various initiatives and structural problems within the company, such as a wage hike and investment in employee training schemes. The market, as aforementioned, reacted badly to the news, with the nature of Walmart’s business without doubt contributing to the largest one day drop in the retailers’ share price since April 2000, shedding more than 10% by the close of trading. Walmart is a company renowned for paying increasing dividends to their investors, a condition which, by its very nature, precludes a protracted period of falling profits. As such, increasing costs and low sales growth, resulting in predicted earnings per
share of 6-12 cents less, will no doubt have rattled large institutional investors, prompting a sell-off of a vast number of retail equities. Whilst retail equities were particularly affected by the Walmart news, with the S&P consumerstaples index falling by 1.1%. The ramifications of the Walmart sell-off were widespread and pronounced, coming at a particularly precipitous time for consumer stocks, given that investors had already been rattled by weak predictions of only a 0.1 % increase in consumer spending, amidst a backdrop of upwards pressure on wages. Indeed, the consumer sector as a whole has been hit by lowered commodity prices not translating into sales growth, as well as continued concerns on China and the sustainability both of its growth and price of exports. These factors, despite the large fall in retail equity prices, will no doubt have institutional investors questioning whether or not the fall in retail equity prices were a necessary correction to a fundamentally struggling market. Jack Blake
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Week Ending 25th October 2015
Financials The financial industry news this week has been dominated by the conference call given by the ECB president, Mr Mario Draghi, with the pleasing news that there may be further quantitative easing in the new year. This caused a positive response in the markets on Friday with the FTSE Eurofirst 300 climbing 4% in less than 24 hours after the announcement. Across the pond, the financial sector experienced broad gains, with the NYSE Financial Index up by 2.0% for the week. Thanks heavily due to commercial lender, CIT Group’s share price climbing almost 15% to $45.50 following an announcement that it will explore strategic alternatives for its $10 billion commercial air business. There was further good news for the retail banking industry as regulators suggested an end to the wave of regulations which have hit the market since the crisis of 2008. On Wednesday the FCA announced the regulations heaped on the City of London would be substantially reduced. Tracey McDermott, the Chief Executive of the FCA, said many boards were only focused on compliance with regulations, such as the launch of Williams and Glynn by RBS, or HSBC moving their UK retail headquarters to Birmingham. This reduces innovation in the market and has been
detrimental to industry growth, while also creating barriers to entry for challenger banks such as Virgin Money. On top of this, the Competition and Markets Authority also produced a 34-page paper on Wednesday indicating there would be no end to freebanking. This spelt good news for retail banks such as Santander (BNC), who has seen its share price increase 3% since mid-week. Although RBS, HSBC and Barclays saw a fall in their share prices on Wednesday due to regulatory fines from the US Federal Court, prices managed to recover by the end of the week. Elsewhere in the markets, Swiss-based insurers ACE Limited (ACE) announced on Wednesday an increase in its operating income of 0.8% in Q3 to $897m while its take-over target Chubb Corporation reported an increase of 4.8% taking operating income to $547m. This caused the share price of ACE to rise 5.35% during the week as the merger sets it to become one of the world’s biggest insurance companies. With such great prospects, I expect the company is undervalued by the market suggesting the share price may grow in the future months. Sam Ewing
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NEFS Market Wrap-Up
Pharmaceuticals Since August pharmaceutical companies have come under fire for excessive profiteering by gauging drug prices. Pharmaceutical stocks can be great investments because companies are protected by patents which allow them to recoup their research and development. Biotech and pharmaceutical stocks have surged recently, backed by new discoveries and acquisitions. However, these rises have been backed by the idea that companies can achieve premium prices in the US. Growing uncertainly is clearly gaining on investors who are fearful that premium prices will not be sustained in the US, as the NASDAQ Biotechnology Index has fallen 13% since August 17th, as shown in the graph below. Most notable outcries relate to Turing Pharmaceuticals, a company founded in February by Martin Shkreli, a young yet experienced hedge fund manager within the sector. Last month, with $55 Million of their $90 million venture capital, the company obtained licenses to pyrimethamine, a drug used to treat multiple life threatening parasitic diseases. Branded under the name Daraprim, it is most commonly used to treat patients infected with HIV. Although the patent for this drug has long expired, no other company in the US has been able to manufacture it, and Turing Pharmaceuticals ensured strict distribution
controls before the purchase to ensure its niche. Practically overnight, Turing pharmaceuticals jacked up the price of the drug by over 5,455% from $13.5 to $750 per pill. Like other price-gauging cases, Mr Shkreli attempted to justify this rise by claiming that it is needed in order to fund additional research and development to lessen the drug’s side effects, but this excuse is not being bought. It is likely that this rise will have a larger effect on insurance companies than patients, who will not pay for the pill themselves. Even so, presidential candidates such as Hilary Clinton, are campaigning for greater accountability on drug prices and politicians including Bernie Sanders put the company into an on-going congressional investigation. Additional public pressure eventually forced Mr Shkreli to promise a price drop, despite his previous reluctance to change price. Just today it has been announced that San Diego-based competitor Imprimis Pharmaceuticals Inc. has been able to make a mix of approved compounded drug ingredients to compete with Daraprim for $0.99 per capsule. Spiking a 17% rise in its stock, it's an encouraging action for an industry which is being continually exploitative. Sam Hillman
NASDAQ Biotechnology Index
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Week Ending 25th October 2015
Oil & Gas An agreement for BP to sell liquefied natural gas to China Huadian Corporation was one of the many Sino-British trade deals crowned with the arrival of President Xi Jinping to Britain on Wednesday night. The deal is worth £6.5 billion: an impressive amount, though the figure will only be achieved over a period of two decades. After the agreement was signed, BP PLC (LSE) share value has been rising since Wednesday to $35.92, an increase of 2.5%.
$45.38 a barrel, while Brent Crude (ICE EU) also rose 23 cents, or 0.5%, to $48.08 a barrel. Buying interest for oil returned after some recent declines, but the “rally is stalling amid a weaker euro due to talk of further stimulus in the eurozone,” according to Matthew Smith, commodity analyst at ClipperData. The Dow Jones Oil & Gas Index (as can be seen below) also highlights a precarious situation for the sector, with a modest rise in the index since the beginning of October.
In other energy news, on Thursday the EIA reported that US supplies of natural gas rose 81 billion cubic feet for the week ending Oct. 18. That was less than the forecast of analysts polled by Platts for a climb of between 86 billion and 90 billion cubic feet. Natural Gas (NYMEX) initially held on to earlier gains in the wake of the data, before losing ground. It settled 1.8 cents, or 0.8%, lower at $2.386 per million British thermal units.
It remains to be said however, that due to the persistent fall in the price of oil, around 5500 people directly employed in the oil industry have lost their jobs since last year – around 15% of the total workforce, according to Oil & Gas UK. Even after the temporary uplift, oil price could stay lower for many more months. As the industry adapts to these expectations, a predicted 10000 further jobs will be lost from the sector. The Standard & Poor’s 500 energy sector’s index also reflected these expectations, as third-quarter earnings per share are forecast to show a 66% decline year on year.
The future is also looking a little less dire for oil, as it rebounded slightly on Thursday to settle with a modest gain as investors hunted for bargains after prices recently fell near a three-week low. Crude Oil (NYMEX) closed 18 cents higher on Thursday, or 0.4%, to settle at
Andrea Di Francia
19
NEFS Market Wrap-Up
Industrials & Basic Materials The Industrials & Basic Materials sector has faltered in the past year, losing 10.8% of its market share, and within the 10 sub-divisions of the sector, only a meagre three had a positive return over the year. The Mining and Metals industry has lost over 34% in the past year and the outlook does not appear poised to improve anytime soon. The Chinese, long one of the biggest buyers of mined commodities, are awash in steel, local debt and a hard landing on its economy, and with neither India nor Brazil ready yet to assume the mantle of emerging market growth engine, this leaves the mining industry with major issues. There is also considerable and increasing pressure on the coal industry due both to the decline in oil prices and the increasing concerns over the environment. Putting all these together, it is no surprise that mining companies are the worst performers of late. Glencore is a Switzerland-based natural resource company and are listed on the Basic Materials sector within the United Kingdom Main Market. The Company has operations in the Americas, Asia, Europe, Africa and Oceania, and its portfolio of diversified industrial assets consists over 150 mining and
metallurgical facilities, offshore oil production facilities, farms and agricultural facilities. Despite both size and market positioning, the company is going through a very rough patch and has lost over 65% of its share price since June, which has experienced a much greater drop than the FTSE 100 index as a whole, as shown in the graph below. This has largely been due to the sharp fall in commodity prices, a supply glut from overproduction in the market and investor concerns over its highly leveraged balance sheet. Glencore succumbed to shareholder pressure and announced plans to reduce its debt to $20 billion and also to raise cash through streaming deals, asset sales and other moves which could potentially cut more than $12 billion of its debt. The measures announced by Glencore represent a positive step towards strengthening its balance sheet and this is necessary in the current commodity price environment Is the worst over for Glencore? I am inclined to think so, and their lack of exposure to iron ore is favourable. Volume growth for its brownfield projects will also provide much needed support in a weak commodity price environment. Erwin Low
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Week Ending 25th October 2015
Technology This week US technology stocks strongly outperformed the US stock market as a whole, leading the overall market higher. The NASDAQ 100, the American/Canadian stock exchange, depicts largest gains over the last week for the tech-giants in particular. Apple’s share price rose 4% from $110.71 to $115.47, whilst Intel Corporation saw a rise to $34.40 from $32.76. Not all seemed constructive for the tech market though, with Google stocks falling down to $651.79 from $664.36, but only a seemingly minor plummet for the huge corporation. Microsoft maintain their high stance in the technology market, with a 2% rise in share values over the past week, settling on $48.03. This continues what has been a compelling cycle of sudden rises and falls over the past year, with shares being an annual low of $40.40 in January. Their now recuperating performance reflects the prosperous release of their Windows 10 update earlier this year, which has been a hit with consumers, implementing intuitive features that further enhance the user’s experience. Whilst the update had experienced some bugs in the software over the summer, which were reflected by the drops in the firm’s share prices over the past months, it clearly hasn’t had too much of an effect on Microsoft’s
performance, with them quickly regaining ground upon every shortfall. In other news, Micron Technology, a prevalent producer of semiconductor devices, still dwells within what has been a disappointing year for the multinational corporation, with share prices still falling, currently valued at $16.72 – an 11% drop compared to last week with shares running at $18.74. This is a huge contrast to last year’s performance, where stock prices were valued at an all-time high of $36.49 towards the end of December. With forecasts expecting this pattern to continue throughout the final quarter of the year, this gradual decline in share price could cause a loss of investors for the American company if not challenged. For this reason, it comes as a potential relief for shareholders to hear that Micron might be in talks to buy the American company, SanDisk – the third largest global manufacturer of flash memory. This would provide significant gains due to the company’s technology and portfolio leadership in the flash semiconductor and enterprise flash systems market, perhaps sparking a recovery in performance from Micron, seeing them progress back onto the successive path set up over the past years. Daniel Land
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NEFS Market Wrap-Up
COMMODITIES Energy Energy commodity prices faced persistent falls in the past week, data has shown. As shown in the graph below, the price of crude oil fell sharply this week, reaching a six-year low, while only ethanol out of the energy commodities has seen any increase in price, rising 0.9%. This signifies that the production war between OPEC and “fracking” producers is still yet intensifying. Of course, energy prices have been steadily falling for a year now, ever since it became clear that OPEC nations were attempting to drive out firms employing the recent fracking technique. As OPEC nations are still able to make a profit for lower oil prices than fracking producers, they hope that by constantly lowering the oil price, they will reduce the profitability of fracking. As a result, this would allow OPEC to continue to dominate the market, allowing them to collude, raising prices (and profits) together. So how does this continued price drop affect everyone? For those living in net oil importing nations, the price drop has meant that consumers have had to spend less at the petrol pumps and on many other goods. The price
drop has caused inflation to be very low in many economies, such as the UK, whose inflation rate fell to -0.1% earlier this month (13th Oct.). This is due to the fact that oil is a key factor of production in the production in a wide array of goods, and thus the lowering of costs has allowed firms to also lower the price of the final good to the consumer. Many governments burdened with heavy gasoline subsidies have also greatly benefited; a lower price of oil has greatly increased the opportunity cost of these subsides, and as a result administrations around the globe now can shift funds to other more imperative projects and developments. However, it is not all good news. The drop in price has greatly affected all net exporting oil nations, and caused many job losses in all of the large oil firms; yesterday a key economic journalist at Forbes grandly stated that “the collapse in oil prices has so far claimed more than 200,000 jobs worldwide”. Unless things drastically change, 2016 will be a year of more layoffs and asset sales if Crude Oil continues to descend into pre-21st century levels. Harry Butterworth
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Week Ending 25th October 2015
Precious Metals The uncertainty and expectations of a rate hike and weakening US Dollar has caused a surge in gold prices since early August. However in the last week, we have seen the shiny metal fall from 1187.90 to 1175.69 in USD per ounce as of 20th October 2015, the largest drop for three months, as signs of a comeback for the US economy is imminent. Analysts believe to have attributed this to the recent jobless claims in US, low inflation rate and higher consumer sentiment. Jobless claims in the US have fallen 0.2% from 262,000 to 255,000, the lowest level in the last 40 years. Consumer sentiment has also risen from 87.2 in September to 92.1, outperforming economists’ expectations. Stronger economic data released would prompt investors to speculate the possibility of a sooner interest rate hike, although reports have shown that it is unlikely that it will happen anytime this year. Higher interest rates would lead to a lower claim for gold as it would not generate interest as compared to other asset classes. Historically, gold has always been seen as a reserve during economic uncertainty, and its prices have been co-related to the inflation rate. The inflation rate has fallen for two straight months since July, and based on the chart below and past trends,
the price of gold has fallen whenever inflation rates falls. South African labour wages and working conditions for gold miners have resulted in unrest, and the industry is in dire need of a restructure. Newcrest Mining Ltd, Australia’s largest gold producer has also seen output falling by 13% due to a halt in operations at two mines following the reported death of workers. Given these potential decreases in the output of gold, it is likely that gold prices would bounce back towards an upward trend. However, given the slowing down of China’s growth, the uncertainty of the Fed’s rate hike and the shakiness of the economy of Europe, investors will turn to gold in times of financial uncertainty and gold prices should start to see a rally as the end of the year comes. In other news, the price of palladium, which is used in catalytic converters to filter exhaust fumes from gasoline cars has increased by 19.5% from USD579.4 to USD692.4 since Volkswagen rigged diesel vehicles to bypass emissions tests in September. Platinum prices have climbed 3.5% from USD984.3 in the last week to reach USD1019.94 as of 20th October. Samuel Tan
US 10 year break even rate measures inflation
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NEFS Market Wrap-Up
Agriculturals Over the last month the trends in corn and coffee prices - representing grains and softs respectively – captured the attention of many, and still leave predictions for the coming days difficult to forecast. Corn prices have declined significantly since 6th October, before which price rates had steadily increased to $398.25/bu. But by 19th October this value had fallen to $373.00/bu, its lowest level since June 2014. This rapid depreciation caused concerns for producers but, if the trend remains stable, the reduced price may result in other industries benefiting, such as livestock (~35% of the corn grown consumed), as a result of the number of animals that are fed by this crop. The industry continues to grow and expand worldwide, in order to satisfy global population growth and for the increasing production of ethanol (~40% of the corn grown). Alongside this, a bumper corn harvest this year boosted supply, whilst a decrease in demand has driven down prices of the commodity. However, the 22nd October showed a significant increase in the price of corn by $9.25/bu compared with the
19th October, leaving a more positive prediction that the industry can avoid more significant losses. Similarly, the monetary value of coffee has been steadily declining since October 2014 (when it was $220.40/lb). The 23rd October reflects a significant decrease to $119.70/lb, as shown in the graph below. On 15th October the price was still $133.70/lb with the commodity depreciating by 6.17% by the next day. Better than expected rainfall levels have aided the growth of coffee, leading to similar supply side expansion as in the market for corn – again, the rise in supply was significant enough to overshoot today’s demand, leading to downward pressure on prices. With the production of both crops being heavily dependent on the weather, it remains to be seen how the price of the two commodities will fluctuate in the future – but if conditions remain favourable, then we could see falls in the price of both of these goods. Goda Paulauskaite
Key Corn Coffee
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Week Ending 25th October 2015
CURRENCIES Major Currencies EUR/USD Whilst the pair initially traded flat, on Thursday the Euro took a huge hit against the dollar after the European Central Bank (ECB) signalled that it would consider extending its quantitative easing programme into 2016 and beyond, whilst also announcing a further 20 bps cut in the deposit rate to -40bps by December. Investors were primed to take confidence from the announcement, and in the day after the announcement the FTSE Eurofirst 300 climbed 4%. Draghi appears to regard the exchange rate as the most effective tool to influence inflation, as a stronger euro constitutes a risk to growth. However, the main surprise was the backtracking of a previous policy pledge not to cut the deposit rate; this raises questions as to whether QE will be enough on its own, and I believe this is the main force driving investors away from the Euro. Whilst it did make some headway in early trading on Friday, it has since slumped further and is now at its lowest level since August 10th. With the pair now trading dangerously close to parity, we could now see the euro trading 1:1 with the dollar in the run up to years end. Next week sees the next FOMC meeting announcement, and the release of US GDP figures, so there is certainly room for more downward pressure on the Euro. In Friday’s trading, investors appeared to be consistently
shorting peaks; I believe the pair will continue to fall next week, but may meet some strong resistance around parity. If broken, I would expect the euro to fall sharply, as this would be a significant event in the pair’s history. Recommendation: Short EUR/USD, stop loss ~ 1.115 GBP/USD With a 1.55 resistance dating back to August only temporarily being broken during midSeptember, the pair continues to range down to 1.52. The pound managed to gain ground on Thursday after better than expected retail sales (Actual +1.9% vs Forecast +0.3%). This helped to erode most of the dollar gains of the previous week, with the pair finishing up at ~1.53 on Friday. Whilst this week has been quiet and there have been limited trading opportunities, next week sees a flurry of announcements for both countries, and there will certainly be increased volatility. On Tuesday morning, the UK releases preliminary Q3 GDP results. Later that day the US consumer confidence is announced, whilst Wednesday sees the Fed’s interest rate decision and Thursday sees US GDP released. Next week will give the market a much better idea of where these currencies may be heading in the coming weeks. Adam Nelson
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NEFS Market Wrap-Up
Minor Currencies The Canadian dollar began this week’s trading against the US dollar within a similar price range to last week. The USD/CAD pair met strong resistance when reaching the 1.305 level and found support just above a price of 1.290. This range was only broken once on the previous week due to the announcement of US CPI but quickly returned to above the 1.290 level of support.
Mid-day in Friday’s trading the Canadian Consumer Price Index (CPI) was released. Prices fell 0.2% when they had been forecasted to rise 0.1%. This highlighted further frailties in the Canadian economy, as falling prices lengthen the odds of an increase in interest rates in the near future. CAD fell further in trading causing the USD/CAD pair to quickly break through its new resistance level.
During this week however, CAD was considerably weakened against the dollar because of the Bank of Canada’s Monetary Policy Report on Wednesday October 21st. The report stated that the bank would continue to keep overnight interest rates at 0.5% after cutting the rate twice previously this year. Fundamentally this means there is lower demand for the Canadian Dollar, as fewer people want to buy Canadian bonds because they yield a relatively lower return. The bank also downgraded its forecasts for growth in the coming 2 years because the “complex readjustments” needed for the resource sector to adapt to the low oil price were taking longer than expected. News of the report caused USD/CAD to break through its previous resistance level of 1.305 finding new resistance at 1.315, as shown on the graph below.
Over the coming week, we can expect USD/CAD to trade within a higher range where the 1.315 level will become the main support price. In previous weeks the level of 1.330 has been highly significant and so I am expecting resistance around this area. Across other minor currencies, the Australian Dollar had a quiet week with no major news. AUS/USD was trading within a clearly defined range between 0.720 and 0.730. Japanese Yen had a poor week against the dollar but this was mainly corrective after a couple of overly strong weeks post the US non-farm payroll report. On top of this, US retail sales were better than forecast which also caused the Yen to decline comparatively. Overall, USD/JPY rose from around 119.5 at the beginning of the week to pass the 121.0 point by Friday. Will Norcliffe-Brown
USD/CAD 1 hour candlestick (Source: OANDA)
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Week Ending 25th October 2015
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