Week Ending 17th February 2017
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 3 United States United Kingdom Eurozone 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 17th February 2017
MACRO REVIEW United States Inflation is on the rise as the Consumer Price Index (CPI), published on Wednesday, shows a larger than anticipated increase of 0.6% in January. Steaming from higher gasoline prices the increase was the largest seasonally adjusted all-items increase since February 2013. As seen in the chart below, the onemonth percentage change of CPI in January dwarfs all predecessors. The rising inflation indicates that the economy is gaining momentum, steady hiring rates coupled with the slight rise in wage growth has provided a solid start to the first quarter. With household purchases accounting for roughly 70% of the economy, analysts project a rise in investment due to the high levels of business optimism. With inflation and employment levels beginning to match the expectations set by the Chair of the Board of Governors of the Federal Reserve, Janet Yellen, she told the Senate Banking Committee on Tuesday that “further adjustments of the federal fund rate would likely be appropriate”. She then went on to say her focus is to increase interest rates to keep the economy in balance. Policy makers expect to reach their target years’ end rate of 1.4%, which was set on December 14th of last year. Incidentally, Yellen’s comments have boosted the U.S dollar as the Bloomberg Dollar Index gaining 0.29% on Tuesday and then rose again by 0.21% on Wednesday.
In other news, a report from the Federal Reserve Bank of New York shows that total household debt increased by $266 billion in the 3rd quarter of last year, taking total household debt to $12.58 trillion. Interestingly, the figure is 0.21% shy from equalling the record high of $12.68 trillion set in 2008. Though there is a key difference between the debt of 2008 and the rising household debt of today, the key here is fewer delinquencies. By the year ending of 2008, 8.5% of debts were delinquent, compared to the 4.8% of today. It is also important to add that though mortgage balances make up the bulk of household debt, there was a significant rise in the levels of student and auto debt in today’s debt than that of 2008. Student loan debt in the fourth quarter of last year was a total of $1.31 trillion while auto loans climbed to a record high. So, no need to panic. Disun Holloway
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NEFS Market Wrap-Up
United Kingdom While last week’s news was notably better than news in all previous updates has been, the fragility of the UK economy was still noted, and just in the last week, we have seen its manifestation. Last week’s growth revisions have been coined “the last hurrah” before things take a turn for the worse – in particular, via inflationary pressures. This has sparked suggestion of new approaches to the problems Brexit poses. As we saw last week, the ONS reported that the UK economy grew at 0.7% in the fourth quarter, 0.1% quicker than initial estimations. It has always been in the balance, however, whether inflation will catch up with high street consumers. Last week’s retail figures seemed to stabilise a lot of the uncertainty: spending over the last week has decreased markedly, most probably as a result of the fall in sterling. January’s inflation was at 1.8%, a 30month high, and the volume bought in the retail industry is estimated to have increased by 1.5% compared with January 2016, which is the lowest growth since November 2013. While retail sales fell, import sales are also taking their toll on consumers – most likely now more than before because of the J-curve effect. There has been a 16% weakening of the pound, which although difficult to quantify, is certain to have an effect either soon or in the more medium term.
increased (see graph). Alas, some commentary also plays the inflation scare mongering as exactly that: scare mongering, noting that consumption is often put on the back burner around this time of year, as the January sales die out and people get back onto normal consumption paths. As such, as it seems to have always been, it is very difficult to make strong predictions on whether opposing forces will produce satisfactory growth, or whether one will begin to outweigh the other, and take our economy either up or down. To make predictions, I would say that as the year progresses, the economy will begin to prosper. We often forget the possibility of interest rate rises, and the effects of the Chancellor’s budget should soon emerge. On a more progressive note, there have been calls to use Brexit as a sort of rejuvenation period, much like a long spa weekend…. Arguably, there is now opportunity to change completely our regulatory settings, and to modernise our tax system. Of course these ideas are in their germination, but it is only with innovation that we can make Brexit a success. Thomas Dooner
Every cloud however, and the currency inflation has been a pull to the UK for tourists, and as we noted earlier in the year, manufacturing rose to a 30-month high in December. Indeed, export profits have also
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Week Ending 17th February 2017
Eurozone In France this week, a series of disappointing economic forecasts has left the presidential electoral campaign in great turmoil, with the first round of elections looming quickly in April. Recent forecasts from the European Commission show the French Government has repeatedly failed to stick to Eurozone budgetary rules and is now set to breach the 3% deficit limit by 2018. This is spurring yet further radical promises by the three leading candidates, Marine le Pen, Benoît Hamon and François Fillon. They all believe, much like the voters, that revolutionary change is needed to bring the debt problem under control. This includes drastic policies such as pulling France out of the Euro and placing most of France’s public debt in a new currency. Yet instead of rewriting the system, what the French economy really needs are more reformist policies, such as those proposed by the candidate Emmanuel Macron. This includes reforming the labour market, in order to harness the strength of French demographics and productivity. The worsening debt situation in Greece is also a major cause for worry. This is especially true for France and Holland, both of whom face impending elections in
the coming months, and whose diplomats fear the current economic situation could become the sour focus of their election campaigns. French and Dutch citizens have already expressed great divide over the future of the Euro, as well as a great disdain towards the prospect of financing further Greek aid. As such, this makes the current proposal from the IMF extremely unpopular, which is for Greece to receive additional aid to the value of €7bn. As a result, Europe’s finance ministers are racing to make an agreement before next week’s deadline, to ensure discussions are not prolonged into the election season. Yet it is not all doom and gloom in the Eurozone’s southern states. Whilst the future of the Greek economy seems unstable, both Italy and Spain showed signs of resilience in the final quarter of 2016 (see below). Whilst Italy’s growth was lower than expected, its economy still grew by 0.2%. Spain’s growth rate hit 0.7%, hence pushing up overall growth in Spain to a commendable 3.6%. This is excellent news for Spain and Italy, which are both continuing to make steady improvements following the recession. Charlotte Alder
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NEFS Market Wrap-Up
Japan Following a weekend rendezvous between Japan’s Prime Minister Abe and the US President – in which a show of friendship between the leaders mitigated some concern about the assertion by the US that Japan is purposefully depreciating its currency – investors turned their attention last Monday to the disappointing economic growth data for the fourth quarter. Gross domestic product rose just 0.2% quarter-on-quarter (seasonally adjusted) in Q4. In a Reuters survey, analysts had tipped growth to match the previous quarter’s 0.3% growth. The underperformance came despite the cheap yen propping up net trade by 0.2%. Exports grew 2.6% q/q, but a revived fervour to import somewhat offset this advance. Flat private consumption and stubborn household spending reiterated the necessity for Japanese homes to lead the revival of the economy. Murashima at Citi in Tokyo cited ‘consumer anxiety about the future, as well as very cautious spending by pensioners’ as principle causes behind the reticence from the economy’s largest sector to spend. While the 2020 Olympic Games are expected to provide a boost to the economy, stagnant wages and a turbulent, uncertain global economy perhaps merits this scepticism. The economy nonetheless grew at an
annualised rate of 1.0% in the last quarter of 2016, well above the 0.5% growth trend estimated by the Bank of Japan (BoJ). Certainly, this last point will be welcomed by a central bank who must answer not only to domestic desires to see growth, but now also faces external criticism of the effects of its monetary policy from the US. President Trump, intimated that Japan plays the currency game and is actively devaluing the yen. The fear is that his administration will work to formally label Japan as a currency manipulator, which would open the route for sanctions. Even if such a statement is withheld, bilateral negotiations will likely include restrictions to prevent currency manipulation, which would consequently constrain the ability of the BoJ to heat up the economy. The BoJ’s loose monetary policy has aided the yen’s depreciation, but the bank maintains that it is targeting inflation, not the trade balance. While currently Japan does not satisfy the US’s official definition of a currency manipulator, it has in the past. Japan last intervened in the currency market after the 2011 earthquake in Tohoku. This issue was not raised at the US-Japan summit last weekend, but it is doubtful President Trump will hold his tongue long. Daniel Blaugher
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Week Ending 17th February 2017
South Korea The South Korean won hit its strongest level against the Euro since 2015 by achieving an intraday high at 1,207 on Wednesday 15th. Moreover, the revised January export rate keeps South Korean exports at 11.2%, however its January import growth increased from 18.6% to 19.7%. This subsequently decreased Korea’s trade balance from $3.2bn to $2.8bn, an overall 12.5% decrease. On another note, the heir of the largest family-run conglomerate, Samsung’s Group’s Jay Y.Lee, was arrested on the 10th of February with charges of bribery and embezzlement. These charges were based on accusation that the heir made payments to a close friend of impeached President Park “in exchange for government support that aided in the chaebol’s succession plan”, as explained in a Bloomberg article. In previous decades, the South Korean people accepted the creation of chaebols as this promoted large and fast growth of the Korean Economy. However, in recent years the South Korean people have begun to question and criticize the consolidation of wealth among a small elite of families, and the subsequent effect these may have on startups and small enterprises. Hence, the impeachment of former President Park Geun-hye due to a scandal based on external influence in government decisions
has called for the end of reforms that facilitate the warm relationship between chaebols and government. The five biggest chaebols make up more than half of the Korean stock market index, and although they helped put South Korea on the path to now being the 5th largest exporter in the world, many argue that they are simply a cultural remembrance from the past. This has allowed Korea’s price-toearnings ratio in the KOSPI index to be smaller than in most other Asian markets, due to what is called “the Korean Discount”. Many argue that this is due to poor governance of chaebol conglomerates that may engage in illegal activity to ensure that the company is passed down to family. This has led to protests of the Korean people over the past couple of months. Lastly, the South Korea people are fighting against allegations made in a media report sent to the Financial Times suggesting currency manipulation by the central bank. South Korean officials have responded by stating that in times of increased volatility in the FX market operations are conducted to smoothen the influx, however they dismiss using these operations to increase competitive advantage. Maria Fernandes Camaño Garcia
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NEFS Market Wrap-Up
Australia & New Zealand This week, we will observe the unique struggle in the Australian labour market, followed by a discussion on the recent retail sales data in New Zealand. Last Thursday, Australia released seasonally adjusted employment data for the January 2017 labour market. Overall unemployment levels fell 0.1%, down to 5.7%. On the surface this appears to be a positive labour market movement, but this number actually depicts a loss of 44,800 full-time workers masked by an increase of 58,340 workers in part-time jobs. Australia is losing labour force production, despite the falling unemployment rate. The data does not specify the number of full-time workers that were forced into part-time work. The nation’s labour force, 12.7 million, makes up more than half the population, 24.1 million. Nevertheless, Australia’s unemployment rate has been resilient since the turn of the century, remaining roughly in a 4.0% – 7.3% range, even during the Global Financial Crisis. January’s employment figures do not deviate much from the trends so, for the time being, there isn’t much of a reason for concern. The January labour force participation rate also fell 0.1%, down to 64.6%.
New Zealand released its quarter-onquarter retail sales data for Q4 2016, which saw a 0.8% increase. Compared to consensus forecasts of a 1.0% increase, retail sales for Q4 underperformed, which suggests that New Zealand’s consumption, as a measure of GDP, is below expert’s forecasts. Retail sales is not only a significant GDP indicator, but it is also considered a pre-inflationary indicator that helps predict interest rate movements. I don’t foresee a reactionary tightening by the Reserve Bank because they just eased rates in September, and inflation is already on the low end of the target range at 1.3%. However, in light of the Q4 2016 retail sales underperformance, perhaps price levels for the New Zealand retail consumer are too high. On Wednesday, the Australian wage price index will be released, which will paint a broader picture of the country’s current labour market struggles. On Tuesday, the global dairy trade price index will be released, which is particularly significant for New Zealand’s economy as it is the world’s largest exporter of dairy. Dan Minicucci
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Week Ending 17th February 2017
Canada In 2017 so far, Trump and uncertain terms of trade with the US have dominated Canadian headlines and worries. However, it is not all doom and gloom. Employment data for January shows that unemployment shrunk back to 6.8% from its level at 6.9% in December. This is just one sign that the Canadian economy is continuing to regain strength after the oil-price crash last year, when the unemployment rate peaked at 7.3% (see below). Data from Statistics Canada, released Friday the 10th, reveals that 48,300 jobs were added in January, contrary to earlier forecasts that there would be job losses numbering around 10,000. These forecasts are likely influenced by the dip in employment from November to December, and the growing uncertainty amid the Trump presidency. However, 32,400 of the new jobs are parttime, a significant majority compared to around 15,800 new full-time workers. Broken down, the growth in employment in the last year is 5.6% for part-time positions, yet a measly 0.1% expansion for full-time employment. Younger workers tend to be setting this trend and in the last year, 69,000 full-time jobs have been lost contrary to an increase of 71,000 part-time positions for those aged 15 to 24. This is a less stable trend in employment than the headline data implies, and may represent a growing difficulty for younger workers to
secure full-time careers in the future, as seems to be a global trend. Economist at PNC Financial, Bill Adams, described it well; “With job growth faster but concentrated in part-time work, total hours worked falling, and employment shifting from the high-wage resources and manufacturing sectors to lower-wage service sectors, Canada’s job market is weaker than the headline numbers suggest”. Although, David Madani, senior Canada economist at Capital Economics, is more optimistic, remarking that the data is “further evidence confirming the recovery in the economy from the oil price shock,” and that “The next big challenge might be Trump’s protectionist threats which, if acted on, would be very negative for Canada’s small open economy.” Another way to view the significant rise in part-time work is by considering the global increase in self-employed workers. Most likely this is in response to fewer full-time opportunities and easy marketing platforms granted by social media, such as YouTube. In 30 years, the self-employed sector has grown 64%, with sole-traders making up 15% of the workforce in 2013. This shows more potential than the figures may imply, as it depicts a younger, more entrepreneurial workforce that are independent and willing to take risks. Jamie Peake
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NEFS Market Wrap-Up
EMERGING MARKETS China
Janus Capital assuaged fears of a debtfuelled crisis in the Chinese economy following concerns about debt-laden banks and deteriorating growth. The world’s 2nd largest economy has seen its debt pile from 150% of GDP in 2007 to approximately 280% in 2016. Yet, George Morris, portfolio manager of global equity fund Janus Capital, claims this is an insignificant predicament – pointing towards the statecapitalist system of China. The stateowned nature of banks/corporations means the Chinese government is in an idiosyncratic situation of ‘lending to itself’, with only 10% of China’s total debt held outside of the mainland. According to Mr Maris, China has the capacity to control its economy in a way many other cannot, so the ‘potential for an external force to create serious financial dislocation in China is almost non-existent’. Although growth is generally forecasted to curtail, latest figures display enduring vigour in many Chinese provinces. Of the 31 province-level regions that released their independent GDP data for the year 2016, 23 reported GDP growth of more than 7 per cent year on year, while Chongqing, Guizhou and Tibet all posted double-digit GDP growth. Last year, 25 provinces joined the “one-trillion-yuan GDP club”. Gross domestic product in six provinces, Guangdong, Jiangsu, Shandong, Zhejiang, Henan, and Sichuan, exceeded 3 trillion-yuan (£312bn), among which Guangdong and Jiangsu topped the 7 trillion-yuan (£729bn) mark for the first time.
Nanjing, capita of the Jiangsu province, and Qingdao, one of the nation’s busiest ports were the latest additions to China’s ‘1-trillion-yuan’ club, making the number of Chinese municiplilaities with substantial economies to 12 (shown below). The two cities are symbolic of a national policy shift towards a services and consumption based economy. Chinese trade data indicated a recovery following a decline in exports in December. Chinese exports grew much faster than expected, leading to the highest monthly trade surplus seen in almost 6 months. Exports jumped 7.9% in January, negating December’s 6.1% decline. This compared with the forecast of 3.1% growth from 11 economists polled by The Wall Street Journal. China’s perennial trade surplus widened to $51.35 billion, despite imports also surging by a sizeable 16.7% in January, compared with 3.1% in December. The veracity of such figures is questionable, however, as seasonal distortions due to the timing of Lunar New Year Holidays are often seen in data at this time of the year. Usman Marghoob
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Week Ending 17th February 2017
India The main economic news emerging from India over the past week concerns two key macroeconomic indicators: the inflation rate and the balance of trade. Consumer prices experienced a 3.17% increase for January, although this rise was below market expectations. Meanwhile, the balance of trade statistics revealed that India’s trade deficit has increased compared to a year ago. Firstly, India’s inflation rate remains at its lowest rate in five years as consumer prices rose by 3.17%. This result was not aligned with market predictions which suggested that prices would increase by 3.22%. The diagram below illustrates the trend for Indian inflation over the past 12 months, showing that January’s rate was below the rate in December where prices rose by 3.41%. The main factor deemed responsible for the lower than expected inflation rate was the slowdown in food prices across India. Annual retail food inflation cooled to 0.53%, a fall from the December rate of 1.37. It would be expected that the record low levels of inflation would act as an incentive for the Reserve Bank of India to persist with an expansionary monetary policy. However, as stated last week, the RBI has decided to retain interest rates at 6.25%. This is largely due to the expectations that the
inflation rates could rise soon due oil prices recovering, which would add to India’s imported inflation. Moreover, inflationary pressures still remain elsewhere, demonstrated by the increase in the core inflation rate, which excludes fuel and food prices, by 5.1%. In other news, India’s trade deficit for January 2017 was recorded at USD 9.84 billion. This represented an improvement compared to the December statistics where the deficit was calculated as being at USD 10.4 billion. Nevertheless, it has been revealed that India’s balance of trade situation has worsened in comparison with January 2016, where the trade deficit stood USD 7.67 billion. Overall though, there are positive signals that India could be ready to reverse this trend in 2017. Exports rose by 4.4% which represented a rise in export driven growth for the fifth month in a row. India’s recent improvement when contesting on the global market can largely be attributed to rise in export volumes for goods such as chemicals and engineering products. However, India continues to be a significant net importer of oil and gas which is becoming increasingly important in enabling India’s transport system to develop. Isher Hehar
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NEFS Market Wrap-Up
Russia & Eastern Europe This past week marks a month since Romanian protests started in 18th January, just days after the government of the Grindeanu Cabinet was sworn into office. Romania, the second poorest member of the EU, has been struggling with the fight against corruption ever since the fall of communism in 1989. Its admission to the EU has been despite the country’s lagging reforms in fighting crime and building an independent judiciary, at the cost of imposed additional monitoring procedures to ensure progress in the matter. In fact, Romania has shown remarkable progress with its national anti-corruption directorate, DNA, which has pursued and indicated thousands of corrupt officials at all levels for the last five years, including two prime ministers. Yet, the Romanian Ministry of Justice quietly passed a bill regarding the pardoning of specific crimes, and the amendment of the Penal Code of Romania. The government’s decree was abandoned last week, after thousands of people marched against the law which was going to publically shield officials from prosecution against the abuse of power, if any financial gain was below a threshold of
about $48,000. Implications of such bill would have abolished any success that the DNA has achieved during the past years. Despite the fact that the government has backed down on the changes, few expect the government to fully abandon its wish to change these aspects of the criminal code. This is regardless of the European Commission’s warnings and the continuing protests of Romanians who vow to take down the government. Nevertheless, Liviu Dragnea, leader of the ruling PSD party, came out with a statement that “the government has no reason to resign, it was legitimately elected. As long as this tense state continues, no one has anything to gain.” However, the failed attempt to change laws has only worked towards intensifying the DNA’s work on tackling corruption levels. In fact, Mr Dragnea himself faces the risk of a trial, in an allegation of abuse of power to put two of his associates on public payroll. One thing has been made certain: the Romanian people are tired of the lack of law obedience, and they do not intend to give up the fight against it anytime soon. Desislava Tartova
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Week Ending 17th February 2017
Latin America This week was somewhat less turbulent than the last, however there were several pieces of important macroeconomic data released for Brazil and other minor Latin American nations. Firstly, the minor economies: on Monday, balance of trade figures for Ecuador for December were released. Exports exceeded imports by a slight margin of $15.1 million. This compares to the recorded deficits both one year ago, and last month, the latter of which was to the tune of over $110 million. Paraguayan inflation for January was up 10bp to 1.6%, whilst Uruguayan industrial production year-on-year figures showed a 5.6% growth, compared to 2.6% for the previous 12-month period. The figures demonstrate stubborn, but nevertheless existent, economic growth in the minor economies of Latin America. Now to Brazil, on Tuesday the latest retail sales were announced. They showed a decrease of 2.1% against last month and 4.9% against this time last year. Both figures were worse than expected from analysts, who had pointed towards decreases of 1.5% and 2.5% respectively.
Economic activity was also below market expectations, with a decrease of 26bp month-on-month for December 2016. The Brazilian current account deficit widened to $5.1bn in January from a deficit of $4.8bn a year ago (see graph). The main causes of the increase are increases the primary income deficit and fall in the secondary income surplus. Despite this, surplus in goods increased to $2.5bn. The negative news was not without an opposite however; FDI figures were up once again at an increase of $11.5bn for January, although the increase was less than last month’s enormous $15bn. Investors still see Brazil as an attractive option. Latin American stocks and currencies took a pounding late this week, as the United States become a more attractive investment option, and investors become more risk-averse after a short-term increase in profit-taking from global equities. The Brazilian IBOVESPA index sunk 60bp whilst the currencies of oilreliant nations Mexico and Columbia sunk due to concern over global over-supply. Alistair Grant
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Africa Currency rigging, a menace to the financial markets, has in recent years become more noticeable in emerging markets. The last three eventful days has seen South Africa’s antitrust investigators uncover a culture of rand rigging and collusion that involve many of the world’s largest banks, with these developments already being described by the governing ANC party as exposing an "ethical crisis in the South African banking sector". JP Morgan, HSBC, Nomura Holdings, to name a few, are among 17 banks accused of participating in price fixing and market allocation in the trading of foreign currency pairs involving the rand since at least 2007, with investigations beginning in 2015. The effect on banking stocks have been a fall in those traded in Johannesburg for the first time in six days as they head for their biggest decline in a week. Even banks uninvolved in the investigations have felt the burden of a decline in investors’ banking sector confidence, with Nedbank Group Ltd. falling 0.7%, whilst FirstRand Ltd. declined 0.4%. South Africa’s
Competition Commission said it had recommended fines amounting to around 10% of the banks' South African annual revenues to the country's Competition Tribunal, the maximum fine available. Nonetheless, the opposition, Economic Freedom Fighters, are calling for the banks to have their operating licences immediately revoked. Cooperation in the investigation by banks such as Citigroup and Barclays Africa, about 50% owned by Barclays, have meant that they have escaped prosecution. Barclays Africa released a statement on Wednesday admitting to their cooperation meant. This comes at a bad time for the South African banking industry, which is already struggling with customer confidence, and battling governmental pressure, as they had been accused of not lending to black borrowers. We will see in coming weeks how this effects the strength of the rand. Mikun Olupona
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Week Ending 17th February 2017
Middle East Two sets of important figures regarding the Israeli economy were released this week. Firstly, on Wednesday, Israel’s January Consumer Price Index (CPI) figure rose to 0.1%, a noteworthy change as it is the first annual CPI rise since 2014. The graph below shows the fluctuations that Israel’s inflation rate has gone through over the past few years, always remaining negative until this week. A 0.2% fall in December prices, particularly the price of food and fuel, explains the CPI rise. Excluding these two factors, core inflation remains low since the Israeli currency, the shekel, is strong with 1 shekel costing 0.27 US dollars, making exporting expensive. The inflation rate is still well below the Bank of Israel’s target of between 1 and 3% and the bank is not expected to change its current base interest rate of 0.1% soon. Orl Greenfeld, chief economist at Psagot Investment House Limited in Tel Aviv, predicted that by the end of 2017, the CPI figure would reach 0.8%, saying that instead of increasing the interest rate, there may be a “move from nominal bonds into inflation linked bonds.” The low inflationary environment is expected to remain as such due to various factors including rising domestic wages counterbalanced by the effects of the stubbornly strong shekel.
The second piece of macroeconomic data came on Thursday when the Central Bureau of Statistics published data showing that Israel’s economy grew by 6.2% in the fourth quarter of 2016, resulting in a somewhat unexpected revision of Israel’s 2016 growth from 3.8% to 4%. The two main contributing factors to this high unexpected growth were exports and consumer spending which rose in Q4 by 11.2% and 3.5% respectively. Combined with the inflation news, economists from the Bank of Israel are reported to expect a 0.15% rise in the interest rate which currently remains at 0.1%, and a further 0.25% rise by the end of 2018. Further good news came for Israel in the 2017 Central Banking awards where the Bank of Israel was awarded ‘Reserve Manager of the Year’ for its improvement of government bond yields following the global financial crisis. The bank’s careful diversification strategy has led to “notable gains” with foreign reserves tripling since 2008, consequently providing the bank with the funds to make greater investment decisions. Nikou Asgari
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South East Asia This week we are assessing Malaysian GDP figures for the fourth quarter of 2016, alongside balance of trade data for Indonesia and Singapore. Malaysia appears to have survived 2016 largely unscathed after it posted its strongest year-on-year GDP figures since the fourth quarter of 2015. The Malaysian statistics authority announced on Thursday that the economy expanded 4.5% in the fourth quarter of 2016, beating analysts’ expectations and the previous quarter’s increase of 4.3%. This expansion was largely driven by continued growth in the services sector, alongside a 4.9% increase in private investment. On an annual basis, real GDP expanded 4.2% in 2016. Whilst below the 4.5% figure recorded in 2015, market conditions were harsh for the country, as it bore the brunt of emerging market volatility in the latter half of last year. Indeed, the country suffered from a weak ringgit, rapidly declining commodity prices, domestic political crises and flagging international confidence. Within this context, many analysts view Thursday’s data as evidence of the country’s robustness. Certain aspects of the economy are already showing signs of improvement, with investor sentiment towards the ringgit recovering. Moreover,
Malaysian competitiveness remains strong. Indeed, vice-president of the AffinHwang Investment Bank points to the “recovery in exports and consumer spending, which means despite all the challenges in the global economy, Malaysia seems to maintain its competitiveness in exports.” In other news, Indonesia and Singapore published mixed balance of trade data for January of 2017. On Thursday Indonesia recorded its largest trade surplus in over three years, as exports increased far more than imports. Year-on-year exports jumped 27.71% to $13.38bn, beating both the previous month and the market consensus of 21.7%. The best performing exports were non-oil and gas exports, which rose 30% on a yearly basis. By contrast, Singapore posted a trade surplus of just SGD 3.29bn on Friday – the smallest surplus since October 2014. This was SGD 2.51bn smaller than the previous year’s surplus, and was largely caused by a 21% surge in total imports. Thailand is releasing GDP figures for Q4 of 2016 next Thursday. Malaysia and Singapore are also posting CPI inflation data for January of 2016 on Wednesday and Thursday respectively. Daniel Pettman
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EQUITIES Financials On Thursday, the world’s fifth-largest packaged food and beverage company had their biggest one-day fall since May 2016. Kraft Heinz – creators of Velveeta to Cheese, Oscar Mayer meats, WeightWatchers and amongst their less known products, Heinz Ketchup – saw shares drop by 4.2% to $87.28. The leaders in the food industry can look at a 3.7% drop in sales as the crux of the drop in share value, which last year rose by 26%. This surely is not what the venerable Warren Buffet had in mind when he masterminded a $100bn deal to form the company alongside Brazil’s 3G Capital in 2015. Revenues from overseas have perhaps been adversely affected by an appreciating US dollar – in the wake of Trump’s tax relief plans – evidenced by the fact sales in Europe fell by 13.3% to $600m year on year, as opposed to 3.1% and 2.4% drops in the US and Canada respectively. In fact, Ken Goldman, an analyst at JP Morgan revealed that they were one of the ‘better stories in food’, suggesting the food and beverage industry are experiencing ubiquitous problems.
Kraft are combating the drop in revenue by embarking upon a drive to cut costs, pledging to save $1.7 billion by 2018. Kraft’s second largest shareholder is notorious for increasing returns by callously cutting costs, normally in the form of heavy and swift job losses. This lends credence to the fact that Unilever – multinational household’s goods and food group – veraciously rebuffed a proposed £155 billion takeover move by Kraft. However, this author thinks this deal is not the latest du jour. A deal that would form a super hybrid, selling goods to a third of planet Earth, is not something that will be stopped by what some have termed a ‘pothole in the road’. Trade Unions have denounced the takeover as entropic, arguing this would result in almost 9,000 jobs being lost all for the sakes of a ‘quick buck’. Whilst it does seem an opportunist move, particularly in the wake of stock market gains by US firms since the Trump’s election, the old adage rings true: costs are like fingernails, they always need to be cut. Vincent Egunlae
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NEFS Market Wrap-Up
Technology Two weeks ago, Apple shares jumped to $125 after news of a strong last quarter of 2016. This momentum seems to have continued as Apple shares hit a record high on Monday, closing at $133.29. The increase is attributed to the increased optimism that the next iPhone will cause a resurgence in sales as more iPhone users allows Apple to sell more software and subscription services such as Apple Music and iCloud. Analysts are expecting further gains in Apple shares in the coming year as they are predicting a 12-month target price of $142.58. Yahoo shares climbed by more than 2% on Wednesday following reports of a potential renegotiated deal with Verizon Communications. Verizon’s deal to acquire Yahoo in July 2016 was postponed following the revelation of two major data breaches that affected more than 1 billion Yahoo users. The two companies are now reported to be close to a new deal which would reduce the initially agreed price of $4.8 billion by as much as $300 million. TripAdvisor, the online travel review site, saw its share price fall by as much as 11% on Wednesday as they reported last
quarter earnings which missed analyst expectations. The company has been trying to diversify its business model from an advertising driven reviews site to a platform which also allows users to book hotels. Chief Financial Officer, Ernst Teunissen said that: “As expected, our significant investments in these growth initiatives dampened full year 2016 financial results. However, we believe we turned a corner in the fourth quarter.” Lenova, the world’s largest PC manufacturer, has reported on Thursday that their net income fell by a massive 67% in the last quarter of 2016, well below analyst expectations. The area of business that was worst hit was the mobile division which sold just 15 million phones, recording revenues of $2.2 billion which represents a year-on-year drop of 23%. The Chinese company warned that the market still remains challenging and uncertainty persists due to macroeconomic uncertainty and rising component prices. Following the news, Lenovo saw its share price fall by 6.7%, their biggest fall since May, which is shown in the price chart below. Bunyamin Bardak
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Week Ending 17th February 2017
Oil & Gas The oil and gas sector stock prices were largely driven by trends on the supply side of oil during the week, while changes in US dollar exchange rates also played a key role, as a strong dollar typically puts pressure on the dollar-denominated international oil prices. The NYSE Energy index closed at 11,043.52 on Thursday, down 1.39% since the end of the previous week. US oil inventory climbed to record levels and shale oil producers have been riding on climbing oil prices to bring more production back on. A quick look at the news confirms the increase of swing supplies at the current oil price level of around 55 dollars. EOG Resources (NYSE: EOG), a large cap with substantial shale energy exposure, stayed above 100 dollars during the week and closed at 100.17 dollars on Thursday. The hawkish comment from Fed chair Janet Yellen sent the greenback rebounding early last week but becoming weaker later, putting pressure on oil prices and providing them with support, respectively. This partly offset the pressure from increase in oil supplies.
However, even at the current international oil prices, international oil giants like British Petroleum (BP: LSE) are struggling to break even. Its stock prices fell 0.19% to close at 447.55 pounds on Friday, down 2.85% from a week earlier. Royal Dutch Shell (RDSA: LSE) closed 1.21% lower at 2,097.31 pounds on Friday, losing 3.19% during the week. Total (FP: EPA) closed 0.79% lower at 47.44 euros on Friday, slightly lower than a week earlier. Exxon Mobil (XOM) closed 1.03% lower at 82.3 dollars on Thursday, slightly lower the 82.52 dollars at the end of the previous week. Chevron (CVX) closed 1.68% lower at 110.68 dollars on Thursday, down 2.1% from the closing price of the previous week. The supply conditions, including the enforcement of the OPEC agreement on oil output cut, are expected to continue to dominate the outlook for oil and gas stocks. The global economic outlook may provide support, while a strong dollar may put pressure on oil prices if the economic indicators prompted the Fed to hike interest rates at a fast pace. Michael Chen
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NEFS Market Wrap-Up
COMMODITIES Energy This week saw a decline in comparison to the recent success of global oil prices. Brent Crude, the global oil benchmark, was poised for its first daily drop in four days and its biggest one-day decline in nearly a month despite a deep production cut by Opec. Brent crude slid 2.1 per cent to $55.53 a barrel on Monday (as demonstrated on the graph below), while West Texas Intermediate, the US oil standard, was down 1.8 per cent to $52.89 and if it were to hold on to those losses, it would also be on track for its worst daily performance since January 18. The sell-off came despite OPEC’s monthly report released earlier in the day that showed the cartel lowered output by 1.1m barrels per day in January as part of a six-month deal to bolster prices. However, some analysts have warned that cuts agreed upon by OPEC and other non-members like Russia at the end of last year could be offset by a ramp up in US production as oil prices stabilise. Elsewhere, the stockpiles of US crude climbed more than expected, rising for the sixth week straight, even as OPEC’s
oil output cuts have beaten expectations. Toward the end of last week, inventories of US crude rose by 9.5 million barrels according to data from the Energy Information Administration which exceeded economists’ forecasts of a 3.5-millionbarrel increase. Natural gas fell to new lows after storage levels failed to shrink as quickly as analysts expected, a bearish signal that the market may be oversupplied in the months to come. The problem for gas is that winter weather has been too warm to spur significant heating demand, analysts have said. About half of U.S. homes burn natural gas for heat, making winter weather the market’s primary driver for demand and prices. Total storage fell to 2.4 trillion cubic feet, or 3.7% above the five-year average, despite new export terminals and gas-fired power plants that many expected to burn up a long-standing glut. William Bunnis
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Week Ending 17th February 2017
CURRENCIES
Major Currencies The sterling starts to garner interest once again as data injects some downward pressure, the political situation of Europe is getting heated, whilst the dollar is getting a bit cold.
would be “unwise” for policymakers to wait “too long to remove” its accommodative monetary policy. This has all led to a slight bullishness to the dollar, up £0.7997 to close at £0.8046 at pixel time.
Latest figures from the ECB show that the Eurozone’s current account surplus is 3.4% of GDP in 2016, up 0.3 percentage points on prior year. Germany contributed with a record surplus, but this all goes to further fuel the critics that state the bloc’s largest economy is exploiting exchange rates. In France, unemployment is down 10% at the end of last year, which shows promising signs to the sluggish second largest economy in the bloc. Brussels is still at loggerheads with the IMF and missing the deadline for a Greek debt deal seems likely. Aside from this news the euro is performing bullishly up slightly this week to £0.8568 on Friday.
Unlike the prior week, the pound is of great interest now. Long awaited is the strangely well performing consumer retail finally faltering. A 0.2% fall in the UK’s monthly retail sales at the start of the year has sent the pound down on Friday morning, amid concern that rising inflation may finally be putting a brake on the consumer-driven growth, against expectations of a 1% increase. Sterling fell to 1.2418 against the dollar after the news, a tumble from 1.2488 and is down 0.6% on the day. This adds to the fall earlier this week as wage growth was also lower than expected- down from 2.7% to 2.6% as it was expected to hold steady.
Rate hikes further loom in the US, the consumer price index was 2.5% higher in January than the same month in 2016, up from a 2.1% rate in December. This further signals inflationary pressure in the US, as prices picked up quickest in nearly 5 years. Investors are now poised for a more hawkish Fed under the Trump administration, after comments from chair Janet Yellen yesterday. She warned it
Next week, we await further political turmoil in the Euro area and see how the market reacts to the January minutes release by the ECB. We will see how the evidence of a heating economy in the US will affect current inflationary pressures and in the UK, analysts finally see their predictions materialising. Robert Tse
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NEFS Market Wrap-Up
Minor Currencies This week we look at the how the Japanese yen, the Australian dollar and the New Zealand dollar have been responding to some political and economic activity. The Japanese yen strengthened against the dollar, with the dollar falling to ¥112.86, compared with ¥113.25 late Thursday in New York. “Softer yields and weaker equity markets are often associated with a stronger yen,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. Also, a rebound in exports towards the end of the year helped Japan’s GDP grow by 1% in 2016. The Australian dollar came under renewed selling pressure in overnight trade, undermined by strength in USD, fuelled by higher US bond yields. “The reflationary fiscal policies expected to be announced by the Trump administration in the next few weeks are supporting the lift in USD,” said Elias Haddad, senior currency strategist at the Commonwealth Bank in Sydney. This is illustrated below. The New Zealand dollar was hit early Friday due to two economic data misses and the reported views of its central bank.
The NZD was hit by an underwhelming performance from the country’s Performance of Manufacturing index for January, which is similar to the Purchasing Managers Index released elsewhere. A number above 50 indicates expansion in the sector, while anything below that means a contraction. January’s came in at 51.6, but that was well below the 54.2 chalked up in December. The Christmas holiday break and bad weather conditions may have affected manufacturing performance. NZD/USD was at 0.72155 in the aftermath, below 0.72244 before the index was released. Along with speculation towards Trump’s tax policies, investors may have been positioning for US Federal Reserve chair Janet Yellen’s semi-annual monetary testimony before the US Senate Banking Committee later in the session. Yellen will likely reiterate her upbeat assessment of the US economic outlook which will further underpin USD. Therefore it is likely that most minor currencies will fall against the US Dollar in the short-term. Angelo Perera
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About the Research Division We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly The Research Division wasmarket formedwrap-ups. in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS For any queries, please contact Josh Martin at jmartin@nefs.org.uk. Weekly Market Wrap-Up. Sincerely Yours, 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 Josh Martin, Director of the Nottingham Economics & Finance Society Research Division 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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