Week Ending 10th February 2017
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 3 Eurozone United Kingdom United States Japan South Korea Australia & New Zealand Canada
Emerging Markets 10 China India Russia and Eastern Europe Latin America Africa Middle East South East Asia
Equities 18 Financials Technology Oil & Gas
Commodities 21 Energy
Currencies EUR, USD, GBP 23 AUD, JPY & Other Asian
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Week Ending 10th February 2017
MACRO REVIEW Eurozone This week has seen troubling developments surrounding the Eurozone’s financial future. Following a recent report from the International Monetary Fund (IMF), attention has been drawn to the alarming trajectory of Greek debt, which continues to rise despite years of attempted austerity and economic reform. At the end of 2016, Greece’s government debt-to-GDP ratio stood at 176.9% (see below). Primary cause for concern comes from the opposing solutions held by Greece’s international creditors, namely various Eurozone governments and the IMF, as to how this debt load should be made more manageable. Failure to find a solution could see several Eurozone countries (namely Germany, Finland and Denmark) refusing to further finance Greek debt relief. The IMF is currently demanding reduced austerity levels and additional debt relief be granted to Athens, despite Greek creditors ruling out any further relief before the current rescue programme expires in 2018. However, the IMF is also still refusing to fully participate in the debt relief programme. As a result, only the European Stability Mechanism (ESM) has thus far been lending to Greece, to a total of €174billion.
government, who are well aware it is their taxpayers who will have to finance an even greater burden of the debt. The leader of the German party Free Democrats (FDP), Christine Linder, has expressed the view that whilst Greece should remain with the European Union, it should leave the Eurozone before it receives any more debt relief. Yet Klaus Regling, the Managing Director of the bailout fund for the ESM, disagrees with the negative view held by the IMF over rising levels of Greek debt. Regling states that Greece’s debt levels provide no cause for alarm, hence no additional debt relief is yet needed. Instead, the government should focus on implementing reforms to thus avoid delays in the future issuing of ESM loans. Regling argues that the failure to meet the requirements for the issuing of the loans would have a far more disastrous impact on the Greek economy, than the loss of additional funds. Charlotte Alder
Yet the solution proposed by the IMF is strongly opposed by other creditors of Greek debt, such as the German
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NEFS Market Wrap-Up
United Kingdom Most weeks, these articles have been shrouded in ambiguity, with positive signs depressed by negative undertones and uncertainty, primarily under the auspices of Brexit. This week, however, news has only been good. Manufacturing surged, the trade deficit narrowed, and construction boomed, all pointing towards a growth record far surpassing what most economists suggested post-referendum. The “hat-trick” of good news, comes as the ONS recorded the UK’s strongest figures in all three areas (and overall growth: see below). Clearly, then, the growth path of the UK is much more balanced, and less dependent on consumer spending. Whether this is just the referendum being ineffectual, or the result of quite sturdy governance since; for all the criticism Theresa May has received, we cannot deny the clarity of her message and direction over exiting the European Union. Manufacturing sector figures increased by 2.1% in December, largely because of the pharmaceuticals sector, and the construction sector, which grew by 1.8% after the strongest increase in house building since early 2016. In addition, after a trade deficit widening in Q3 which augured worry, in Q4, it narrowed to £8.6 billion – note the ONS found this was not to do with the weakness of the pound, which indicates that the economic strength is founded, and importantly, long-term. Also of interest, is the ripple effect this may have at the Bank of England, where interest rates sit still at 0.25%. In light of the “hat trick” there may be pressure to raise rates, perhaps coinciding with a potential Fed
hike. Ally this with a lucrative UK-US trade deal, and the UK will be in an enviable position going into 2019. Of course, a lot surrounding interest rates is still variable, and dependent on inflation - Howard Archer highlighted that there has been a sharp rise in the price of imported goods, which are up 9.1% in December from last year, indicative of a consumer price inflation spike. As regards actual predictions for the future, PwC consultants say that although the UK economy will feel the loss of the trading bloc, the trough will occur in 2020, from which point it will only be upwards. If we get trade deals that work, or more importantly, if the government gets the right trade deals, the UK could become the fastest-growing economy of the G7 between now and 2050. PwC also point out that the fastest growing economies globally will likely be emerging economies, alongside China, which all lie outside the EU. If, then, the UK can latch onto their growth paths, she could find herself on a long and fruitful journey herself. Thomas Dooner
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Week Ending 10th February 2017
United States President Trump, on the 3rd of February, signed an executive order to begin the rollback of Dogg-Frank. With his aim to foster economic growth, investors reacted positively as the Dow gained 186 points. However, there are those who feel the loosening of financial regulation might lead the economy into another financial crisis. Dogg-Frank is a piece of legislation introduced by the Obama administration in the wake of the Great Recession. The law was crafted to instill greater consumer confidence in the financial sector by reducing the amount of risk large banks are able to acquire and by increasing the levels of capital reserves required by banks. Furthermore, the law prohibits the Fed from providing bailouts for large banks with taxpayer funds. That being said, the Whitehouse now believes the law is “overreaching”. As Tyler Cowen, a professor of economics at George Mason University, argues “DoddFrank has made mortgage lending more expensive, thereby slowing the economic recovery”. Additionally, another critical critique of Dogg-Frank is that it overburdens community and mediumsized banks with large legal fees. According to a 2015 survey by the Fed, only 50% of small business received the total amount of credit or loans they had
applied for. While 79% were only approved a portion of the amount. Austan Goolsbee, an economic adviser to former President Obama, expressed fears about the President desires to roll back Wall Street regulations. He believes the President may be setting the stage for another 2008-like crash. He is within reason to think so as The Financial Crisis Inquiry Commission, put in place by Congress in 2009 following the economic crisis, found that the crisis was caused by two factors. The first was that financial rules at the time were either too lax or in some cases did not exist. The second places the blame directly on large banks which took advantage of the situation by over indulging in very investment. Despite concerns, the Whitehouse believes this is the best course to encourage economic growth. One thing is for sure, says Elise Gould, an economist at the Economic Policy Institute, "President Trump is inheriting an economy on its way to full employment”. As seen in the chart below, the economy did fall short of the typical growth rate during the Obama administration. However, included in the chart is what economists believe economic growth under Obama would have been without the crash. Disun Holloway
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NEFS Market Wrap-Up
Japan A few macroeconomic indicators surprised investors as they rolled out last week. Growth in machine orders came in hotter than expected for the month of December. Recovering from a dip in November, core machine orders, excluding volatile orders, grew by a seasonally adjusted 6.7% month-on-month. This indicator measures increases in capital investment by domestic companies. However, the data released by the Cabinet Office last Wednesday also showed a -16.2% decline in overseas demand for Japanese machinery. Central bank officials have linked the success of the Japanese economy to continued improvements in overseas economies, and as this measure is an indicator of future exports this slump will be of some concern. Exports improved overall for December, rising 1.8% relative to November. Imports also saw an uptick, as the total value of goods purchased from abroad rose above the high-water mark set last January. Both aggregate amounts of imports and exports took a tumultuous course in 2016, seeing marked declines in the first quarter, and – following a relative devaluation of the yen – this resurgence in the final months of the year. Preliminary GDP estimates for the October-December quarter will be released early next week, and these numbers will be buoyed by the strengthening in external trade.
Data released last Friday also showed producer prices rose year-on-year in January, which ended a streak of falling prices since March 2015. Boosted by the rising costs of petroleum and chemical products, the measure of inflation rose 0.5% y/y. Economists at Bloomberg had predicted that prices would remain flat. A continued advance in producer prices will likely foretell sustained inflation in the economy. The Bank of Japan announced on Wednesday that its holdings of Japanese government bonds have topped 40% of the outstanding debt as of the end of January. The central bank has been buying aggressively in the bond market as part of its quantitative easing efforts to keep interest rates low, prevent the bond yield curve from steepening, encourage inflation, and ultimately attempt to revitalise the economy. Particularly, the bank has had to increase its bond market operations in response to rising returns on long rates, which have picked up largely from the US President’s fiscal stimulus promises. This commitment to keep rates down played out in a dramatic, if not confusing and miscommunicated, fashion in the first week of February, and bond buyers remain wary of the bank deviating from its statements. Daniel Blaugher
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Week Ending 10th February 2017
South Korea South Korea’s Hanjin Shipping was declared bankrupt by Seoul Central District Court since liquidation would be more valuable to creditors than rehabilitating. With a debt of $3.1billion, Hanjin has become one of the greatest victims of excess capacity damaging the international shipping industry because of supply overtaking demand, as global trade has slowed down since the 2008 crisis. Additionally, only 200 of the 1,300 company employees will continue working for rival Hyundai Merchant Marine Co (HMM). To protect companies within the industry, such as HMM, the South Korean government has created a 1 trillion won shipping fund, since analysts only predict a recovery in 2018. Apart from Hanjin’s bankruptcy having set fear in its previous competitors and promises to keep freight rates afloat, the risks of a trade war threaten the recovery of the industry. A trade war threat is largely posed by the continued antitrade sentiment of the United States. In a statement given by minister Joo Hyung-hwan on Tuesday, he announced that South Korea will push back against protectionism, furthermore announcing a new committee that will draft measures to help the auto industry. It is the Korean government’s desire to explain to President Trump the US’s
misunderstanding on the effectiveness of the FTA by pointing out growth of U.S vehicle exports to Korea and job creation due to Korean companies’ investments. According to a report by Hyundai Research Institute, if tariffs are restored to pre-FTA levels on Korean goods, this would lead to a $13bn loss for Korea in exports and 127,000 job loss until 2020. Furthermore, as hosts of the 2018 Winter Olympics in Pyeongchang, preparations for the games has been dwindling as the country struggles with huge economic, social and diplomatic tensions. Although some argue that the games will be a chance to highlight Korea’s economic rise from hardship (as it did post the Korean War of 1950-53), others question the need to host a costly event and spend taxpayer’s money that could be used otherwise during an economic struggle. The cost of hosting the games is estimated to be $12.4 billion, which includes the construction of new competition venues, roads and high-speed rail lines linking the International Airport to Pyeongchang. However, the government hopes that this will be the gateway to turning Korea into the new hub for winter sports, and it will provide growth for the Gangwon province. Maria Fernandes Camaño Garcia
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NEFS Market Wrap-Up
Australia & New Zealand This week we will analyse both New Zealand’s and Australia’s interest rate decision. Updates on the controversial Australian housing market will also be discussed. Last Wednesday, the Reserve Bank of New Zealand (RBNZ) announced the Official Cash Rate (OCR) will remain unchanged at 1.75%. The previous decision to decrease the OCR from 2.0% to 1.75% reflects the RBNZ’s aim to stimulate the economy and reduce the exchange rate. Amid improving global inflation and commodity prices, New Zealand’s domestic economy also has a positive outlook “…supported by ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity”, according to the RBNZ. The nation’s ‘stronger than desirable’ currency, 0.72 Kiwi/USD, will continue to be monitored due the long-term threat of exchange rate risk in the tradable sector. Australia also released their interest rate decision last Wednesday, which remains unchanged at 1.5% (see below). The Reserve Bank of Australia discusses that their low-level interest rates and depreciating Australian dollar, 0.76 AUS/USD, is supporting the country’s growth as it transitions away from the mining investment boom era. The mining investment boom in Australia lasted over ten years and protected the nation’s economy from the devastating effects of the Global Financial Crisis.
The low interest rates in Australia are also providing support for the nation’s housing demand. Data for December-month’s end was released last Friday. Despite heightened lending standards from banks, loan approvals have been on the rise in Australia, increasing by 0.4%. New home sales also rose 0.2%. Those anxiously awaiting an Australian housing market crash will have to continue to sweat this one out. This coming week, New Zealand and Australia will release more important economic data. Year-on-year retail sales in New Zealand, reported on Thursday, are forecasted to increase 5.44%, which will provide strong insight to the country’s consumption levels. Australia releases labour market data on Thursday, such as, unemployment and participation rates. For most of 2016, the increases to Australian employment levels were almost entirely attributed to increases in part time worker employment. Upcoming data releases will distinguish between full-time and part-time employment figures. Dan Minicucci
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Week Ending 10th February 2017
Canada Canada’s balance of trade for December 2016 was revealed as a surplus of C$0.92bn, in data released on Tuesday, which represents a fall from the revised figure for November at C$1.01bn previously C$0.53bn (see below). Nonetheless, a maintained surplus is a positive change from the deficit that lasted the former months of 2016, and December’s dip could be a delayed reaction to the US presidential election in November. Census data released on Wednesday, by Statistics Canada, reveals that the national population surpassed 35 million people in 2016, at a time when Canada is looking to protect a global economic standing that is likely to diminish over the course of the century. A report by PwC found that Canada’s economy was likely to drop out of the Global Top 20 by 2050 – from 17th largest currently, to a predicted 22nd. Indeed, the Trudeau government’s Advisory Council for Economic Growth recommended setting a population target of 100 million by the end of the 21st century. Reaching 35 million already may be promising for those that see this target as beneficial to Canada’s wellbeing - after all, a larger population does help to increase output and GDP growth. Yet large populations create problems of their own, particularly with healthcare and other public services. Many others have suggested that
a focus on maintaining Canada’s high standard of living and protecting the environment may be more beneficial in the long-run. The current trade surplus will certainly help the Canadian government to mitigate issues arising from an increasing population, or from the uncertain state of the global economy. The same government advisory council has recommended looking to trade as the way forward for Canada in today’s environment – taking proper advantage of a wealth of natural resources, a stable political climate and a skilled labour force that make it an attractive trading partner for developed economies. It is quite likely that the UK will seek a trade agreement once it leaves the EU, for example. There is worry that commitment to trade will lead to job losses as other countries are found to have cheaper labour, yet chair of the council, Dominic Barton, argues that “technology has played more of a role than trade” for unemployment. His Advisory Council even have proposals for a “FutureSkills Lab” to help “upskill and reskill” workers so that they can adapt and find work in the case of an increasingly automated economy. “We’re a small trading nation. We have to take more control of our own destiny,” he observed. Jamie Peake
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NEFS Market Wrap-Up
EMERGING MARKETS
Russia & Eastern Europe While the neighbouring European Central Bank is still spending €80bn a month on bonds to stimulate the Eurozone economies and increase inflation, Eastern European countries have been already discussing the possibility of monetary tightening. This is consistent with forward markets, which predict the increase of interest rates in Hungary, Romania and Poland in the next 12 months. Along with the Czech Republic, in the past few years these Eastern European countries have been helped greatly by low oil prices. Particularly, they contributed towards positive terms of trade and low inflation, and boosted consumer demand. However, the recent increase in prices of oil has induced a sharp increase in inflation. In Poland, the Czech Republic and Hungary, inflation has risen from -1% in 2014 to 1.5%, according to Arko Sen, emerging market strategist at Bank of America Merrill Lynch. He further says that the inflation trend is “with ample room to rise” further. Apart from core inflation, whose increase has been attributed to the increase in oil prices, the Consumer Price Index (CPI) which excludes energy and food prices has also picked up, although more modestly.
This effect appears to follow from wage pressures. “The Central and Eastern Europe labour market is strong and much tighter than the Eurozone, laying the ground for more sustainable inflation processes,” said Mr Sen, underlying the increasingly large problem with labour shortages across Poland, the Czech Republic and Hungary. The figure below illustrates this comparing the countries to Germany, with the most severe labour constraint seen in Hungary. In fact, 70% of companies in Hungary report labour shortages which constrain their businesses. The fall in the unemployment rate across the economies has been attributed to the deeper penetration of foreign companies who are searching for cheap labour. Lower unemployment has put pressure on the wage to increase. In Hungary for example, it has already led to 15-25% increase in the minimum wage, which affects as much as a quarter of the working population. Mr Sen anticipates private sector wage growth of 8% in Hungary, and 5% in the Czech Republic and Poland. With these rates, the wage growth is effectively outpacing productivity growth. Desislava Tartova
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China With recent pessimism about stagnant growth in the East Asian behemoth, a recent report by consultancy PwC forecasts China to become a hegemon, dominating the global economy by 2050 with a GDP (PPP) of $58.5 trillion (overtaking the USA). More topical concerns involve a weakening yuan and diminishing foreign exchange reserves, which had fallen to just under $3 trillion in January for the first time in five years. Nonetheless, the rate of decline was at its slowest pace in seven months, as recent restrictions on capital controls and foreign exchanges reduced capital outflows. Reserves peaked at $3.9 trillion in June 2014, and the Chinese central bank has since audaciously sold USD to curb yuan depreciation. On Wednesday, China’s central bank (PBoC) declined to inject liquidity into the banking system for the fourth consecutive day. PBoC discreetly raised interest rates in recent days, tightening liquidity, effectuating a transition in policy focus towards mitigating the risk from surging corporate debt. The PBoC lifted interest rates on multiple key monetary policy tools used to alter the money supply. Yields on open market operations, providing shortterm loans to commercial loans, rose for the first time since 2013. Analysts believe rate rises are intended to deflate asset bubbles, particularly in the bond market,
where high levels of borrowing in the interbank market has pushed up bond market leverage. The bond market has experienced a significant rally in recent months (shown below). With much ambivalence towards the Trump administrations’ policy approach towards China, with fears he could trigger a destructive trade war between the world’s two largest economies, leading US-China experts have, in fact, lauded Trump’s approach to trade with China, alluding to an inordinately unbalanced relationship which requires affirmative action. A report compiled by leading academics and former US officials argues that China’s increasingly protectionist outlook requires a more stringent approach to trade policy. Figures released on Tuesday show the sizeable US trade deficit with China narrowed to $350bn in 2016, although it remains representative of approximately 50% of the US’s global trade deficit. Orville Schell, a China expert at the Asia Society, claimed ‘the relationship in many realms is grievously out of balance, and nowhere is this more evident than in trade and investment’. It is hoped the report quells the Presidents concerns about China’s ‘currency manipulation’, and instead scrutinize existing Chinese trade deals for a more mutually beneficial outcome. Usman Marghoob
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NEFS Market Wrap-Up
India The Reserve Bank of India (RBI) took the unexpected decision to leave its benchmark repurchase interest rate at 6.25% despite speculation from several economists that the rate would be cut by 25 basis points. In other news, the Indian government’s annual budget promoted rural spending and focused on allowing more of India’s population to escape poverty.
that the RBI is keen to avoid a repeat of these issues. Governor, Urjit Patel, has cited several reasons which could lead to the inflation rate rising in India including the recovery of oil prices globally which could lead to an increase in imported inflation. Therefore, it appears that the decision to keep interest rates fixed could represent an end to the RBI’s expansionary monetary policy.
Firstly, many senior economists were surprised by the RBI’s decision to keep its key repo rate at 6.25%. The diagram below illustrates the bank’s trend for India’s interest rates across the past year. A clear majority of economists on the Bloomberg Survey predicted that the downward trend for interest rates would continue in order to restore demand following the slowdown caused by the demonetisation programme. However, RBI spokesmen have suggested that keeping inflation rates aligned with bank expectations remains the primary objective, as suggested by an RBI statement which stated that ‘The committee decided to change the stance from accommodative to neutral while keeping the policy rate on hold to assess how the transitory effects of demonetisation on inflation and the output gap play out.’ High inflation rates have been a major issue for India’s growth prospects in previous years and it appears
Furthermore, the annual budget from the Indian government placed great focus on helping those in rural communities and those in poverty. Finance Minister Arun Jaitley promised to assist agricultural communities who had been most severely harmed by the demonetisation programme. Rural and faming spending is expected to increase by 24% as more funds are allocated towards improving infrastructure such as irrigation and roads in villages. Mr Jaitley plans to double farming incomes within five years as well as offering farmers much greater access to credit. However, there was disappointment from business owners as corporation tax remained at 30% and was not cut to 25%. Analysts have expressed their concerns that this could be detrimental for domestic business investment and act as a deterrent for foreign firms looking to invest into India. Isher Hehar
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Week Ending 10th February 2017
Latin America Latin American markets have been lively over the past seven days, with Brazil announcing FDI figures and Mexico revealing updated interest rates. Alongside regional data, Angela Merkel announced her intentions for an EU-Latam trade deal ahead of the G-20 Summit. The Brazilian economy, despite being in deep recession, continues to show promise in the eyes of investors; foreign direct investment (FDI) for December 2016 was valued at $15.4bn, a record high for one month. The figure brought the total for 2016 up to $78.9bn, up 6% on 2015. But Brazil’s economy contracted for the second year running in 2016, and a survey of economists by the FT predicts the economy will contract by a further 3.5% this year. One reason that FDI continues to remain strong in such as poor performing economy is because “it is such a big economy that companies cannot afford to be outside it” according to David Beker, an economist at Merrill Lynch. The replacement of left-leaning Dilma Rousseff with the market-friendly Michel Temer has also helped to persuade investors that the current down-turn is cyclical rather than structural. The optimist outlook of investors was highlighted by Hanno Kirner, executive director of strategy of Jaguar Land Rover, who announced more investment in a new £240m production line it opened in Rio de Janeiro last year. Kirner insisted that “Brazil is a strong economy, and once it shakes off its
troubles it will go back to having an economic rally again. It has got resources, a young dynamic population, it has everything in the long term”. The Bank of Mexico hiked the nation’s baseline interest rate by 50bp on Thursday, in line with market expectations. It was the fourth straight increase, bringing borrowing costs to their highest levels since April 2009. The change comes amidst attempts to curb rapidly increasing inflation and stabilise the peso. The inflation rate for January 2017 was also released on Thursday, and showed prices rose by 1.7%, the highest amount in 18 years. Recent increases in the price level have been attributed to the government’s decision to increase fuel prices by 20% at the end of 2015. Finally, German Chancellor Angela Merkel outlined her intent to expand the existing Latin American free trade agreement to include the EU, after a meeting with Uruguay’s president Tabare Vazquez on Tuesday. The announcement echoes the pledge made by President Michel Temer of Brazil and Argentine counterpart, Mauricio Macri, to reduce trade barriers and expand ‘Mercosur’ – a trade agreement currently including Brazil, Argentina, Uruguay and Paraguay. Alistair Grant
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NEFS Market Wrap-Up
Africa Egypt, one of Africa’s most disappointing economies has been given a strong vote of confidence this Tuesday, for a report by management consultancy PricewaterhouseCoopers has declared that the minnow economies of “Pakistan and Egypt could overtake Italy and Canada,” by the year 2030. Though this appears to be a stark contrast to the nation’s current fortunes, there is indeed a method to this ‘madness’. Optimism surrounding emerging economies has waned hugely in the last few years, none more so than in regards to the northern African states, particularly those ravaged by Islamic militancy alongside widespread rebellions. Egypt, in particular, held its own so called ‘Arab uprising’, with the effect being not only simply democratic, but also economic. These three contrasting pieces of data tell the story of the implications of the rebellion: Egypt achieved an economic growth rate of 4% in 2016 compared to 5.3% in 2010; inflation amounted to 24.4% in 2016 compared 13.6% in 2010; the unemployment rate reached 12.8% in 2016 compared to 9% in 2010. Consequently, such a daring prediction by PwC has been taken lightly by investors, and hasn’t yet led to any upward economic or market movements.
Instead of an actual trend expectation based on current economic data, the report instead focused on fundamental drivers of growth, such as demographics and productivity, which in turn are driven by technological progress and diffused through international trade and investment. As a result, PWC warned that “For all these countries, therefore, our projections should be seen as indicating the potential for growth, rather than a guarantee that this potential will be realised,”. Whilst emerging countries such as Egypt may benefit from strong population growth, their progress will depend on being able to generate enough jobs for young people in their countries. While some emerging economies will likely stumble, and fail to realize their potential, the overall future potential of emerging economies is unlikely to be interrupted thanks to their surging, young populations, and massive infrastructure requirements and scope for development, unlike most saturated and aging developed economies. Therefore, there is yet hope for Egypt’s revival. Mikun Olupona
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Week Ending 10th February 2017
Middle East Focus Economics Consensus’ latest forecast reported this week that the Middle East and North Africa’s aggregate GDP increased by 2.7% in 2016, a 0.1% increase in the value from 2015. Qatar had the highest forecast growth rate for 2017, at 3.3%, followed by Kuwait (2.6%) and the United Arab Emirates (2.5%). For Qatar, the report noted that in 2016 the country had both its good and bad moments with economic growth falling low due to the effects of the fall in oil prices on the country whose GDP depends 60% upon the export of oil and gas. However, 2017 is hoped to be a more benevolent year for Qatar as world oil prices become more stable. The country also has major infrastructure projects, primarily the 2022 World Cup. Qatar’s large financial reserves, estimated at over $36 billion, are expected to help ensure that the government’s spending on such projects continues and thus maintain growth at relatively high levels in the years leading up to the World Cup. The continued public sector spending ahead of the World Cup is expected to be the main driver behind Focus Economics’ forecast of 3.3% economic growth for 2017,
with an additional 0.3% rise expected for 2018. Furthermore, Qatar’s inflation rate is also predicted to rise by an average of 2.7% in 2017 and 3.1% in 2018. The graph below shows the fluctuations of Qatar’s inflation rate over the past five years. This major public project, alongside an expanding population, is boosting domestic demand, something which Qatar’s government are keen to see. Qatar’s Vision 2030 development plan aims to create a sustainable economy for current and future generations through economic diversification, focusing on growth in nonoil sectors. One such stream of diversification is online shopping which Qatari entrepreneurs have invested millions in, especially more recently as the internet penetration reaches an estimated 80% in the country. Additionally, the building of Lusail Smart City in Qatar, an area of 38 square kilometres and a target population of 450,000 is bound to attract both domestic and foreign investment as Qatar employs various technologies to improve both residents’ living standards and the business environment. Nikou Asgari
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NEFS Market Wrap-Up
South East Asia This week we assess inflation figures for the Philippines, alongside fourth quarter GDP data for Indonesia. On Tuesday, the Philippines posted its highest inflation rate for over two years, as year-on-year consumer price growth increased to 2.7% for January of 2017 (see chart below). This was marginally higher than the 2.6% increase recorded in December, as costs rose for housing, utilities and transport. This continues the trend set by Indonesia and Vietnam last week, as both countries listed the same drivers of price growth. Despite this record price inflation, the Philippines Central Bank (BSP) announced on Thursday that it is holding interest rates constant at 3%. Indeed, both core and monthly inflation stayed constant at 2.5% and 0.3% respectively, and the yearly figure of 2.7% lies well within the 2-4% inflation target for 2017. Nonetheless, the central bank has since revised its inflation forecasts for the year from 3.3% to 3.5%, and most analysts are expecting the central bank to raise rates by the end of the year. Eugenia Victorino, an economist at ANZ, states “we still expect the BSP to raise its interest rate corridor by the third quarter.�
In other news, Indonesia failed to meet its growth target for 2016 after fourth quarter growth came in below market expectations. The Indonesian statistics authority announced on Monday that fourth quarter GDP grew 4.94% year-on-year, significantly below the 7.1% required to meet the 5.3% government target for the year. This was largely due to the continued presence of a chronic budget deficit, which has forced the government to implement tighter austerity measures. Indeed, government expenditure declined 4.05% in the fourth quarter on a yearly basis, compared to a decline of just 2.95% in Q3 of 2016. There are hopes that the situation will improve in the first few months of 2017, as the recent upsurge in commodity prices should boost tax revenues. In the meantime, President Widodo has reduced the annual growth target for 2017 to 5.1% to avoid disappointing investors. Indonesia and Singapore are releasing balance of trade data next Wednesday and Friday respectively. Malaysia is also publishing GDP figures for the fourth quarter of 2016 on Thursday. Daniel Pettman
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EQUITIES Financials Some good news for Europe as this week stocks rose for a third straight week. The Stoxx Europe SXXP rose 0.8%, closing at 366.79, which is its highest level since January 26th. This has come at a time when investors are absorbing political risk across Europe suggesting that at the moment, the stock markets have not been affected. In fact, it appears that equity markets across Europe, in spite of the oscillating environment of the past year, are ‘not too far from where they started the year’ according to chief market analyst at CMC markets Michael Hewson. To take an acute look, the U.K is also experiencing an incremental boost to its stocks. On Thursday, the FTSE 100 closed at 7229.50, a rise of 0.6% from the last trading session. This is in part due to a prominent oil company – BP PLC – closing the market at a three-week high, gaining 0.6% after their board of mining heavyweights BHP Billiton approved a behemoth investment of $2.2 billion for a share of a BP-led deep-water project situated in the Gulf of Mexico. It appears that investors have returned to the market even in the face of the recent landslide vote in the House of Commons, approving
Prime Minister Theresa’s motion to initiate the process for Britain to finally extricate itself from the European Union. This is significant for the market bearing in mind that an amendment guaranteeing the EU citizens residency in the E.U post-Brexit was rejected. However, there remains a cadre of investors who have replaced their fears over the future of Europe in the possibility of a ‘Frexit’. Far-right candidate Marine Le Pen has been gaining traction in recent weeks and the notion of France leaving the Eurozone is swiftly becoming an imminent reality. Last weekend her keynote speech in the presidential campaign featured an almost draconian speech on immigration and globalization. Financial markets have taken heed of this and begun to position themselves. According to data from Factset, the spread between French and German bonds is the highest it has been since 2012, suggesting traders are becoming anxious. The markets, Europe and the rest of the world awaits the verdict of the French people. Vincent Egunlae
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NEFS Market Wrap-Up
Technology Fitbit, known for its fitness tracking products, saw its share price fall by as much as 2.2% on Tuesday as the company faces deeper criminal investigation for theft of trade secrets and intellectual property of its rival Jawbone. The two companies have been battling legal cases since May 2015 when it was alleged that Fitbit hired five Jawbone employees who brought with them more than 350,000 confidential files including detailed breakdowns of the company’s costs and profit margins. A hearing is set for February 15 where Fitbit will be hoping for the dismissal of the case. The major story of the week for technology comes from social media giant, Twitter, who announced quarterly revenues on Thursday. The company reported an increase in sales of 1% in the fourth quarter to $717 million which missed analyst’s estimates of $740 million. The past year has been a time of heated political debates in the US, with Twitter sitting at the centre stage of daily media reports, and frequent blasts from US President Donald Trump. However, despite this, the company has
failed to persuade advertisers to spend more money with them. Twitter’s advertising revenues, which are vital for the monetisation of the social network site, came in at $638 million which is a decrease from the previous year. As seen from the chart below, Twitter’s share price fell by as much as 10% to $16.77 on Thursday which was the most since October 2016. Final news this week came from Nvidia, known for designing graphics processing units (GPUs) for the gaming market. The computing technology company, which was the best performing stock on the S&P 500 last year, reported on Thursday that they reached a new record for full year revenue growth – the company called the results “a great finish to a record year.” Nevertheless, the company’s shares traded lower following the news as they projected a slight drop in sales for the upcoming quarter, which potentially suggests to investors that they may have reached a plateau for now. Bunyamin Bardak
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Oil & Gas The sentiment remained buoyant on oil and gas stocks, with investments in the Permian Basin of West Texas making news headlines. However, concerns were voiced over potential risks building up and the United States oil inventory climbing to near record levels (below). Parsley Energy Inc (NYSE: PE), an independent oil and gas company, announced early during the week an acquisition of assets in the oil rich Permian Basin for about $2.8 billion from Double Eagle Energy Permian LLC, its second deal in the basin in less than a month. Stocks of the company, which went public in 2014, fell by as much as 10% as analysts said it might have paid too much for the deal, but they recovered part of losses later to close 0.14% higher at $31.2 on Thursday as investors digested the news. The company is seen as a potential target of acquisition by oil giants with no exposure to the Permian Basin. The energy industry overall has poured more than $28 billion into land acquisitions in the Permian Basin last year, more than triple what they spent in 2015. It is estimated that the producers in the basin are profitable at the current crude price of slightly above $50.
While the stock prices of industry giants saw support from oil prices, their recent Q4 results have generally missed expectations. These include Exxon Mobil, BP, Chevron and Royal Dutch Shell. Exxon Mobil (XOM) closed 0.45% higher at $81.84 on Thursday, but it lost 2.03% since the end of the previous week. Chevron (CVX) bounced back to $112.26 on Thursday, though it was slightly lower than the closing price of $113.57 of the previous week. In Europe, Royal Dutch Shell (RDSA: LSE) closed 1.12% higher at 2,166.5 pounds on Friday. British Petroleum (BP: LSE) gained 0.43% to close at 460.68 pounds on Friday, though it lost 3.74% over the week. Total (FP: EPA) rose 1.05% on Friday to close at 47.92 euros, slightly higher than its closing price of 47.15 euros a week earlier. The share prices of oil and gas stocks, like international oil prices, may continue to find support from the OPEC production cut, but an alarm has been sounded after recent gains, citing potential downsides from factors such as quick ramp-up in US shale oil and gas production and possible increase in production by Iran and nonOPEC producers. Michael Chen
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NEFS Market Wrap-Up
COMMODITIES Energy 2016 closed with high hopes for oil prices thanks to the cartel, OPEC, restricting output by 1.2 million barrels per day to roughly 32.5 million per day. Combining this with other major non-OPEC members such as Russia agreeing to also lower production, (by 600,000 barrels per day) led to large gains for Brent crude as well as US crude towards the end of the year. Many analysts stated that this price increase was conditional on the OPEC countries staying to the cut in production and this week it has been announced that they have been successful in keeping to this promised output. The limits adopted by the oil cartel in January have been “one of the deepest in the history of OPEC output cut initiatives”, the International Energy Agency said on Friday. Brent crude, the international benchmark, jumped more than $1 a barrel after the IEA announced its finding, rising to $56.73 (gains being demonstrated on the diagram below). OPEC has a poor record of meeting targets and does not apply penalties to members who break limits, leading some analysts to question whether the November pact, the cartel’s first production cut in eight years, would be enforced. However, the 92% compliance, according to an OPEC calculation seems to have proved the
analysts to be wrong. Furthermore, producers from outside the cartel, such as Russia, Kazakhstan and Oman, also contributed to output curbs as part of the first joint supply agreement since 2001. Natural gas prices edged higher this week, after government data indicated that natural gas supplies are tight even though mild temperatures have limited demand for the fuel. As I reported last week, warmerthan-average temperatures have weighed on natural gas recently, driving prices down to the lowest level in more than two months this week. Natural gas is used to heat U.S. homes and tends to get a boost when cold weather drives up demand for heating. The prospect of sharply cold weather is becoming more remote as spring approaches, disappointing natural gas companies. Working natural gas supplies are nearly 2% above the five-year average, and forecasts calling for mild weather in the coming weeks, are limiting natural gas’s rise. Futures for March delivery rose 1.5 cents, 0.48%, at $3.141 a million British thermal units on the New York Mercantile Exchange. Will Bunnis
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Week Ending 10th February 2017
CURRENCIES
Major Currencies Upcoming elections begin to scare the euro, a March rate hike from the Fed invigorates, albeit temporarily, the dollar and the pound is gleefully looking a bit boring. The dollar closed flat for the week at around 0.7993 against the pound, with a fruitful midweek gain peaking past 0.808 which reversed in a day. Fed voter and president of the Philadelphia Fed, Patrick Harker said “March should be considered as a potential for another 25-basis point increase” to US interest rates”, and the market duly agreed as greenback surged on Tuesday with the trade-weighted dollar index gaining 0.82% to 100.69 – its highest level since January 30. It quickly reversed, which may indicate the hap hazard nature of the dollar, attributable to the confusion created by Trump’s ineptness but also the pounds gain around a similar time. In the sterling space, the pound proposes a somewhat interesting proposition as the post Brexit trade of shorting the sterling seems to slowly die. It rallies enough to annoy the short-positioned traders, yet it does not rally enough to tempt investors into the currency. The addition of a resurgent dollar cannot even take the sterling out of its limbo position. This is not seen as bullish sentiment to the pound, but
more a lessening of bearish sentiments. Aside from the midweek reversed spike, the pound has flat lined just below the $1.25 mark. The Eurozone is opposite to that of the UK and it faces elections in the Netherlands and France, with politicians, again driving the currency, garnering support for antiEuro sentiments from Italy, France and the Netherlands. In France, far-right candidate Le Pen, promises an unoriginally coined “Frexit” should she win in May and Italian party, Five Star Movement proposes a similar sentiment. Topped with some nostalgic Greek debt problems, the IMF refuses to give Greece aid to avoid bankruptcy unless EU authorities grant more debt relief. The euro closed down at 0.852 to the pound this week amid these anxieties and EU-IMF tensions, reversing the small gain following Draghi’s comments on the ECB’s “rock solid commitment” to QE. This has been quite a political week, with next week bringing us closer to a Fed rate hike, we expect the market to further price this in and drive the dollar slightly, barring any further Trump-based issues. And the pound can quietly bask in boredom. Robert Tse
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NEFS Market Wrap-Up
Minor Currencies This week we look at some market moving events in Asia and the effect of the news on the currencies of the respective countries. Asian currencies fell on Friday as the dollar gained a lift after President Donald Trump vowed to announce a "phenomenal" tax plan, renewing hopes for the possibility of pro-growth US fiscal policies. Losses for regional currencies were tempered by better-than-expected Chinese January trade data that pointed to an encouraging start for the world's secondlargest economy and bodes well for others in Asia. “The Chinese trade data came against a backdrop of positive risk sentiment and gains in regional equities”, said a trader for a Malaysian bank in Kuala Lumpur. The South Korean won fell 0.4% to 1,150.03 per dollar, after slipping to 1,154.5 at one point, the won's weakest level since Feb. 1. A near-term focus for the won is Friday's summit between Trump and Japanese Prime Minister Shinzo Abe, which could have a significant influence on Japan's yen, sending ripples to other Asian currencies such as the won.
Most other Asian currencies also retreated, with the Malaysian ringgit slipping 0.2% against the USD. The dollar gained a boost after Trump promised a tax plan in a White House meeting with airline executives on Thursday, while citing the need to a lower tax burden on businesses. The White House said Trump plans to announce the ‘most ambitious tax reform plan since the Reagan era’ in the next few weeks. “The comments by Trump provided a catalyst for the dollar's rise and led to a pullback in Asian currencies”, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo. China's yuan weakened against the dollar on Friday, with news the Trump administration is stepping up efforts to improve US-China relations. Trump agreed to honour the United States' "One China" policy during a phone call with Chinese President Xi Jinping, the White House said on Thursday. Angelo Perera
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Week Ending 10th February 2017
About Research Division We would the appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. The Research Divisionplease was formed in Josh earlyMartin 2011 and is a part of the Nottingham Economics and For any queries, contact at jmartin@nefs.org.uk. Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teams of analysts closely monitoring particular Sincerely Yours,markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. Josh Martin, Director of the Nottingham Economics & Finance Society Research Division The goal of the division is both the development of the analysts’ writing skills and market knowledge, 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. For any queries, please contact Homairah Ginwalla at hginwalla@nefs.org.uk. Sincerely Yours, Homairah Ginwalla, Director of the Nottingham Economics & Finance Society Research Division
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