Week Ending 18th February 2018
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Macro Review 3 United Kingdom United States & Canada Europe Japan & South Korea Australia & New Zealand
Emerging Markets 8 Middle East Africa China Latin America Russia & Eastern Europe
Equity and Deals 13
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 17
Energy Currencies EUR, USD, GBP 18 AUD, JPY, Other Asian
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Week Ending 18th February 2018
MACRO REVIEW United Kingdom HM Revenue & Customs (HMRC) has written to over 500 firms over the last three months in its latest effort to “stamp out illegal unpaid internships” – something which some of our readers may be happy to hear. The details of this endeavour were contained in the government’s response to the Taylor Review, a review of working practices that flagged up the issue of unpaid internships. Such practices are considered exploitative and damaging to social mobility, hence the push by the government to ensure workers are receiving the National Minimum Wage. It looks as though income has been a key topic of the week, with the Royal Society of Arts (RSA) proposing that the government implement new taxes on tech firms in order to provide every UK citizen under the age of 55 with some form of Universal Basic Income (UBI). The think tank also suggested that this capital could be raised through wealth taxes or borrowing from financial markets, as compensation for the unemployment that may come as a result of industry automisation. The Bank of England estimates that as many as 15 million jobs could be at risk by the rise of robots in industry. This has caused major concerns regarding labour
mobility and whether workers are willing/able to upskill, particularly given that it is believed that we are approaching/have achieved the natural rate of unemployment. The idea of implementing some form of UBI is also a controversial one, dredging up issues of incentive, productivity and funding, though not so controversial that it is considered impractical. Finland is currently running a trial by paying 2000 unemployed young people €560 (£497) per month and observing any implications. The Scottish government has four of its local authorities testing the idea, the Labour party hopes to carry out some tests of its own, and the concept is backed by notable influencers including Stephen Hawking and Mark Zuckerberg. Although proponents of UBI tend to have more left-wing loyalties, neoliberals from the right have argued that UBI could encourage entrepreneurship and potentially replace state benefits. The need for a reform to the tax system is clear, especially when we consider that almost half of UK citizens have less than £1000 saved and a third are at risk of a financial shock, such as automisation. Implications on incentives, however, will have to wait. Amelia Hacon
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NEFS Market Wrap-Up
United States President Trump officially released his infrastructure plan on the 12th of February as part of his campaign promises. He wants to use $200bn in federal funding to encourage $1.5tn in improvements over the next 10 years. 70% of the total funding is expected to come from the private sector. But the plan has been widely criticised as ‘misleading’ and ‘wishful thinking’, as finding this amount of funding will be very difficult. If the government chose to borrow, it would just increase the national debt even further. Furthermore, private entities will only invest in projects that yield them healthy returns, which might not benefit the public at all. On the other hand, some optimists say his plan will empower decision-making at the state and local level, as they know best how to improve their communities. Trump has asked the congressional Democrats to negotiate a deal on the plan, stating he is open to changes. It is possible that the government would raise taxes on gasoline to gather funding, as Trump has suggested a $0.25 increase in gas tax. The yield of 10-year Treasury bonds has reached a four-year high of 2.91%. What really makes the market nervous however is that whilst headline retail sales contracted by 0.3% in January, CPI was at 1.8% (higher than its expected 1.7%). This
combination of decreasing demand yet increasing inflation could be very troublesome. However other indicators point to continued momentum in the economy, with markets also believing that spending will recover in the long term. Nevertheless the persistent growth and inflation rates make the Fed hawkish, hence causing the market to brace for 3 or even 4 rate hikes this year. The stock market recovered this week after last week’s turmoil, with the Dow Jones Industrial Average closing at 25,200 on the 15th of February, up 4.1% from last Friday’s 24,200. The deadly Florida school shooting has not only resulted in louder voices for gun control, but has also increased the price of gun stocks - Sturm, Ruger & Co. and American Outdoor Brands, two of the largest firearm manufacturers in the US, were up 2.8% and 4.5% respectively on the day that the shooting took place. The main reason for this rally is that people usually stockpile firearms after mass shooting amid fear of tougher gun controls. Yet with the Republicans being in charge of office and the NRA (National Rifle Association) spending millions of dollars on political lobbying every year, implementing much tougher gun control laws is highly unlikely for the foreseeable future.
Ang Gao
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Week Ending 18th February 2018
Europe European stocks have partially recovered this week from the major equities sell off last week. The pan-European STOXX 600 is up 3%, its largest weekly gain since January 2016. The FTSE 100 and the German DAX are both up 0.8%, and the Italian FTSE MIB is up 1.3%. This partial recovery is largely due to various positive data releases over the course of the week. On Wednesday 14th data released for 2017 Q4 illustrated that the European Union economies had grown on average by 2.5%, up 0.6% on the previous quarter. This is the fastest rate of growth since 2007 and exceeded many expectations, thus helping to rally European markets from their significant downturn last week. On Friday 16th, ECB board member Benoit Coeure announced that the ECB would not raise rates until it had completes its quantitative easing programme later this year. This is significant as it will most likely limit any rise in European bond yields in the short term, adding stability to the market and a possible decoupling from US rates. The US Fed is expected to raise rates three times before the ECB completes its QE programme. Consequently, this decoupling will prevent European bond yields from increasing in line with the US yields, which will rise as a result of the rate hikes.
According to a poll of 80 economists by Reuters, an EU rate hike is unlikely to occur immediately after the end of the QE programme. The poll suggested that EU inflation is unlikely to reach the ECB’s 2% target until 2020 and subsequently the ECB is unlikely to raise rates until inflation is nearing at least 2%. On the 9th February, Michael Barnier, the EU’s chief negotiator, claimed that a transition period for Brexit is not a certainty. This follows a tough week of negotiations with the EU, which prompted Barnier to claim that he was “surprised by these disagreements and if they persist, a transition is not a given.” This is unlikely to occur however as it would be damaging to both parties. A recent poll held by the Funke Group of newspapers in Germany suggests that 66% of SPD members want a coalition with Merkel’s CDU-CSU. This is despite reports that thousands of new members have joined the SPD in recent weeks in an attempt to vote against the proposed coalition, with only 30% asked favouring a new election.
Nicholas Gladwin
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NEFS Market Wrap-Up
Japan & South Korea Haruhiko Kuroda is set to be reappointed as Governor of the Bank of Japan and sustain what is deemed to be the "world's most aggressive" programme of monetary easing, which was launched by him in April 2013 (see figure below). Mr Kuroda's stimulative policies, which include a vast amount of asset purchases (circa ¥50tn per year), express Japan's resolution to escape from deflation. Yet whilst the Bank of Japan's monetary easing signify continued active support to the economic growth of Japan, Mr Kuroda's job however will be to carefully execute a smooth exit from asset purchases and a gradual reduction of the stimulus in order to not crucially harm the economy. Following eight consecutive quarters of economic growth (the longest streak of growth in Japan in the last 28 years), rise in consumption has been provoked, both in terms of private consumption and business investment. However Japan's Prime Minister, Shinzo Abe, is committed to fighting that sluggish wage growth that is holding down inflation and influencing consumption negatively. “Japanese households are still reluctant to use their newfound purchasing power", stated Jesper Koll, head of the investment firm WisdomTree Japan, regarding the Japanese consumers who are saving additional money for retirement rather than spending it.
This week the yen rose to ¥106.5, a peak in the last fifteen months, hence raising concerns about the possible negative effects of the currency's appreciation. After five years during which a weak yen produced a rise in exports, a stronger currency could therefore damage the sales of large Japanese manufacturers and corporations. Tokyo stocks rallied, with a 1.1% increase in the Topix index. However most Asian markets were closed on holiday for the Lunar New Year, including China, Singapore, Hong Kong and South Korea. Hong Nam-ki, South Korean's Minister of the Office for Government Policy Coordination, clarified his position on cryptocurrency exchanges, after the ministry's last proposal to ban digital-asset exchanges fuelled chaos. South Korean policymakers will monitor global impressions on cryptocurrency exchanges whilst providing transparency about trading activities in the country. Despite a ban still being viewed as a possibility, Nam-Ki suggested the development of a new cryptocurrency tax, which will aim to make digital assets more secure and avoid hackers' attacks. The attempted renewal of dialogue between North Korea and South Korea has also been at the centre of the global spotlight, after the start of the Winter Olympics. Giovanni Cafaro
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Week Ending 18th February 2018
Australia & New Zealand Last week there was positive news for the Australian economy as an in-depth report, released by National Australia Bank’s (NAB) Business Confidence survey, indicated that wage pressures and economic growth may start to accelerate. The report found that firms had found it increasingly difficult to find workers to hire over the last 6 months, to such a degree that it was acting as a constraint on output. This is also an indicator of the future decreasing unemployment rate, which has been the case in Australia for the past 3 decades. The unemployment rate tends to follow the same trajectory as firms reporting labour as a constraint on output (see graph below). It can therefore be inferred that unemployment is likely to continue falling, hence signalling a healthier economy for the start of 2018. Potentially even more optimistic news is the improving relationship between NAB’s Business Conditions Index and the annual growth in final demand in Australian GDP, excluding mining investment. The improving level of business confidence is a very robust indicator of GDP growth. Given that the index is up by +6 points to +19 points, it suggests GDP growth is likely to pick up in 2018 too. In the preGlobal Financial Crisis era, it would be reasonable to suggest that this would indicate a rise in workers’ wages. However, since the crisis, wage growth has been subdued at best in the global economy, so this may take a while to happen.
threats since the aftermath of the Global Financial Crisis. Other risk factors included cyberattacks, data theft and failure to adapt to climate change. This all suggests that the rate of technological progress can cause negative externalities as well as obvious positive ones. The two reports above are somewhat contrasting, but equally telling. The first report by NAB suggests that economic indicators are crucial in making forecasts about future variables that indicate the health of an economy, such as unemployment and growth. However the second report, by the World Economic Forum, suggests that economists need to broaden their horizon when assessing the health of an economy, and take into account exogenous factors such as Geopolitical and technological risk.
Deevya Patel
Meanwhile, news from the World Economic Forum’s Global Risks Report for 2018 has put natural catastrophe and extreme weather at the top of the list of risks to the New Zealand economy. There has been an observable shift away from economic concerns to environmental 7
NEFS Market Wrap-Up
EMERGING MARKETS
Middle East This week the Central Bank of Egypt (CBE) began its endeavour to ease monetary policy. The move comes after the CBE finally managed to reduce inflation rates, which in January 2018 stood at 17.1%. The Egyptian economy has been suffering from high inflation, which averaged 29.6% in 2017 and peaked at 33% in July 2017. Inflation spiked when the CBE decided to let its currency float in November 2016. This decision was made primarily to stabilise the Egyptian economy, which had been curtailed by a shortage of dollars. The subsequent high inflation rates forced the CBE to raise its overnight lending rates by 700 basis points to combat the effects of the inflation. This move ended up generating huge demand for Egypt’s domestic debt and helped attract approximately $20 billion into local currency debt. However it disadvantaged business owners as it led to higher borrowing costs. The easing of monetary policy comes in the form of a 1% cut, both to overnight deposit rates and overnight lending rates. The rate cut signals that policymakers are shifting their attention to promoting economic growth. This is only the beginning of a series of moves to ease monetary policy as analysts expect inflation to keep falling, which would give the CBE more room to further lower rates.
Meanwhile tensions are rising in Jordan as an economic crisis threatens its political stability. Last month the government implemented a tax rise of between 50%100% on key food staples in a bid to decrease its $700 million budget deficit. This was the tipping point that led to Jordanian citizens demanding the resignation of the government and the dissolution of parliament. Jordan's debt has now reached $40bn and its debt-toGDP ratio has reached a record 95%, up from 71% in 2011. The economic crunch that squeezes the country will be particularly acute this year, after Jordan's Gulf Cooperation Council (GCC) allies - Saudi Arabia, UAE, and Kuwait did not renew a five-year financial assistance programme with $3.6bn with Amman, which had ended in 2017. The United States is now the only donor that has committed itself to supporting Jordan. This week they signed a five-year $6.375 billion deal to increase American aid to Jordan by 27%, as well as increase the duration of aid from 3 years to 5 years. However, even with the increased flow of US aid that has funded budgets and projects since the 1950s, it remains to be seen if Jordan's economy will stabilise. Changu Maundeni
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Week Ending 18th February 2018
Africa On Thursday, 15th of February, Cyril Ramaphosa was sworn in as the new President of South Africa, a day after Jacob Zuma’s resignation. The change caused an immediate appreciation in the rand and is likely to cause a surge in foreign investment. Analysts at Goldman Sachs deem South Africa as the “big emerging market story” of 2018 and predict growth of 2% this year. Ramaphosa is expected to bring considerable change to the country, in particular to rid it of the present systematic corruption. The president’s anti-corruption rhetoric however will not suffice, as the current economic crisis in South Africa requires immediate action. Since 2009, growth rates averaged at 1.6% a year during Zuma’s presidency. High unemployment still persists however as the country weakly recovered from its second recession in the space of 10 years. Though Statistics South Africa reported on Tuesday 13th February that the figure decreased from a 14-year high to 26.7% (see graph below), the actual unemployment rate is expected to be over 30%. As a result, welfare payments remain high as a “third of the population…receive monthly grants to keep them out of poverty” (according to the Financial Times). Moreover, it has been revealed that large parts of the state have been sold to the highest bidders in the private sector over the past 9 years. These factors, together with wide-spread
inequality and the soaring national debt, have prevented South Africa from economic development, confining the country to a “middle-income trap”. Michael Power advised South Africa to “take a leaf out of China’s book” on Friday 16th in an article in the Financial Times. He writes that all previous attempts have not considered the structure of the country’s economy: “a first-world economy in the major cities surrounded by…a developing [largely disconnected] world hinterland.” Power proposes a shift in focus in development from the core to the periphery, which will ultimately benefit both. South Africa’s growth since 1994 has also been based on import-rich, consumption-led growth. Instead a key change would be mirroring Deng Xiaoping’s strategy after 1979, which was based on production-led growth by directing efforts towards exports. Additionally, setting the rand such that the South African US dollar wage costs are competitive could strengthen three of the country’s promising sectors: mining, agriculture and tourism. The change in leadership that happened this week will play a crucial role in enabling South Africa to take the necessary steps towards sustainable economic growth and development. Felicia Bogdana Cornelia Ababii
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NEFS Market Wrap-Up
China Despite attempts to move away from an export-led growth model, China’s economic growth is still largely dependent on trading. However, the move towards an integrated global economy over the past half-century has taken considerable knocks over the past two years – with many large economies opting for protectionist policies to fuel economic growth. In January, France’s Economic Minister described China’s actions as “looting” and consequently enforced policies protecting the nation’s 1000 largest firms from the economic giant. China’s expansion is thus causing tension with some economically crucial allies. This week the Pentagon released their annual defence budget for the fiscal year of 2019, which highlighted the growing protectionist stance of the world’s largest economy against China’s ever-growing economy. The proposal spoke of China’s “predatory economics” to manipulate trading conditions to their advantage. Disputes over the South and East China Seas have further worsened international tensions. Additionally, on Monday, the US department of Commerce launched an investigation into specific imports from China, South Korea, India, Canada and Greece. Though most economists would argue in favour of open markets and free trade to optimise economic growth both globally and domestically, the Financial Times in fact produced a column supporting Trump’s wave of protectionism – the most
evident protectionism being the recent anti-dumping measures imposed on washing machines and solar panels which largely affected the Chinese. The article argued that, with economic winners and losers being inevitable, America had every right to protect itself from losing as a result of China’s economic expansion. However on Tuesday China fought back, through China’s Ministry of Commerce asking the US to relax this sudden spike in restrictive trade policies. One of China’s largest and most prosperous industries are steel products, yet by the end of January, more than 50% of the US’s restrictive policies (222 in total) were focused on limiting steel product imports. China went as far as to say that the US itself was guilty of dumping goods (in particular styrene) onto Chinese markets, hence undercutting prices and causing serious losses to domestic firms. This trade war could descend into the breaking up of the global economy into many isolationist nations and potentially global economic turmoil. This will be a growing source of division in the world’s economy and must be approached carefully. For China, having good global ties will be crucial for export demand, FDI and acquiring access to markets for expanding domestic businesses.
Laura Leng
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Week Ending 18th February 2018
Latin America This week, growth strategy in Latin America: diplomatic relationships with China take an important tangible step, paving the way for much-needed innovation and investment. Building on last week’s look at the growing diplomatic relationships between Latin America and China, the 14th of February saw the announcement of new partnerships between the two regions. These plan to aid the construction of roads, hospitals and trains, as well as encourage the development of renewable and fossil energy sources. Such strong deals however could well see America being economically harmed, particularly in light of what could have been achieved if President Trump had embraced a more welcoming Chinese-American dialogue. Bolivian president Evo Morales has praised Chinese investments for not imposing extra conditions, like those of the International Monetary Fund, whose terms would have Latin America “[submitting] to privatisation policies and [losing] national heritage”, in the words of Morales. It was a meeting between Morales and Chinese President Xi Jinping that gave rise to the planning of a bi-oceanic train spanning Latin America from the Atlantic coast to the Pacific coast, to potentially significantly reduce trade transport time. An incredibly big ask, but economically (and of course scientifically) ground-breaking. Chinese investments build a strong foundation for growth in the Latin American region. Colonial rule has found the region developing a dependency on low valueadded export industries trading natural resources. However such markets are volatile and dangerous to economic stability (for example, Venezuela’s oil
exports are collapsing). They are also finite and cannot be wholly relied upon into the distant future. Even after seeing progression in the region’s political climate, it is still confronted by the fact that the conditions for development are deeply intertwined with the need to overcome reliance on these primary-product industries. Investment paves the way for innovation in Latin America, a key element to spurring growth. Recently, developments have occurred in start-up industries, those that bring booming economic performance and growth. Over the last five years, Latin America has been home to a significant number of home-grown unicorns businesses that accrue initial public offerings of over $1 billion. Mexico launched an independent government policy centre, the National Institute of Entrepreneurship, which has invested as much as $658 million in start-ups. Similarly, the Chilean government founded an independent organisation, Start-Up Chile, which aims to encourage innovation. Both of these organisations maintain relaxed regulation. In the same vein, Argentina passed an ‘Entrepreneurs Law’, aimed at relaxing the bureaucratic burdens on business establishments and helping startups gain access to capital. Movements towards an innovationencouraging environment are paramount to a strong growth strategy, especially when trying to reduce reliance on raw material/primary product industries.
Matthew Chapman
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NEFS Market Wrap-Up
Russia & Eastern Europe Eurostat announced on Wednesday 14th February that GDP in Romania had risen by 0.6% in Q4 2017 and by 7% over the whole of 2017 (see graph below). This marks the highest growth in Romania for several years. However many economists are concerned that the high levels of growth come with certain risks for the Romanian Economy. The figures released on Wednesday prove Romania to be the strongest country in Europe in terms of growth for 2017. Since joining the European Union at the start of 2007, the country has now been a member for 10 years. As an ex-communist country, it has since undergone many encouraging economic, social and political changes. As such, the recent growth figures should be a positive sign of further improvement for the nation. However there are worries that the country is heading for a bust due to unsustainable means of growth. The growth in Romania stems from wage rises in the public sector and loosened fiscal policy implemented by the recently elected left-wing Social Democratic Party. Following the release of the figures, the Romanian MP Florin Citu posted on Facebook that he thinks ‘inflation, trade deficit, budget deficit, public debt, the percentage of fiscal income used for unproductive expenses, the percentage of GDP spent on investments’ have all gotten
worse. The Romanian Central Bank has also released figures noting how Romania’s external debt has grown to €6.5 billion, which is a staggering 85% higher than it was in 2016. Inflation was also reported to be 4.3% in January (its highest level in 4 years) and is expected to continue to rise in 2018. All of these figures are very worrying. Whilst the country has grown rapidly, it has done so by getting deeper into debt without investing in infrastructure. One area that desperately requires investment is the transport network, so that Romania can continue to trade with its EU partners. Romania only has 340 miles of motorway and a deteriorating rail network. Similarly, a study released on Monday reported that Romanians’ trust in their economy fell considerably in 2017 due to political instability. Romanians are as pessimistic as both the Italians and the Greeks. The rest of 2018 is set to bring more uncertainty and risk for Romania.
Abigail Grierson
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EQUITY AND DEALS
Week Ending 18th February 2018
Financials Worldwide stock markets have performed rather well this week, easing the fear of volatility that came with the events of last week’s sell-off. Indices such as the FTSE 100, Europe's Stoxx 600, and Tokyo’s Topix have all increased by more than 0.5% this week, with Topix showing the quickest recovery at 1.1%. This is a great recovery sign for Japan, seeing as its 7% decline recently had left many worried about whether or not it actually could recover. This trade pattern is likely due to the Cboe Vix, Wall Street’s Volatility Index, staying under it’s long-term average of 20. The Dollar Index, on the other hand, has been on a downward trajectory since the sell-off, resulting in a 0.8% total drop so far. The lowest point this week for the dollar index was 88.287, much further below its three-year low of 88.44. The Yen however has gotten 0.4% stronger, at 105.71 Yen per Dollar, which may lead it to be the currency’s best week in two years. This Increase in the Yen was likely due to the re-nomination of the Bank of Japan’s Governor, Haruhiko Kuroda, making him the first person to win a second term since 1961.
oil prices, went from gains of above 1% to dropping almost 2%, before settling back at around its starting level. As the dollar decreased in value, gold increased by 0.4% to $1,359.01 per ounce, the highest level in three weeks. Finally, the S&P 500 rose 1.2% this week to 2,731. This leaves it 7.8% up from last Friday’s collapse due to the sell-off. Tech stocks have helped the Nasdaq index rise an impressive 1.6%, while the Dow Jones Industrial Average recovered by 1.2%. Overall, it has been a very productive week for most worldwide stock markets. Most proficient swing-traders will already have invested in Oil and FTSE 100 futures, as futures and dollar exchange seem to be the most profitable options as mid-to-long term investments. Mario Pucinelli Filho
On the Commodity side of things, oil had a very volatile session on Thursday. Brent crude oil, the international benchmark for
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NEFS Market Wrap-Up
Technology & Health This week has seen the release of Capgemini’s annual report. Additionally, the technology sector could be one step closer to its largest ever acquisition after Broadcom Ltd and Qualcomm Inc met on Wednesday to discuss a revised bid. The health industry has also seen news of acquisitions, with Walgreens Boots Alliance Inc approaching AmerisourceBergen Corp. Capgemini, the French IT services group, released its full-year results for 2017 on Thursday. The company beat expectations with revenue rising by 4%. The growth was predominantly driven by increased demand for digital and cloud services, which saw revenues up 24% year on year. In 2017 Q4, the services accounted for around 40% of total revenues, demonstrating the company’s “digital transformation” agenda. Despite strong performances in all regions, Capgemini failed to see revenue growth in the UK and Ireland. Paul Hermelin, Chief Executive, stated that this reflects “a market that looks pretty soft with the consequences of Brexit” and found that clients began to delay investment at the end of the year. Capgemini expects revenue growth of 6 to 7% in 2018. On Wednesday, Qualcomm announced it met with Broadcom to discuss the revised $121bn bid that was submitted last week. The board had already rejected the proposal, stating that the offer undervalues the company. Neither party said what happened in the meeting, however it has been reported that Qualcomm counterparts listened but did
not engage. The outcome of the meeting will determine whether Qualcomm has decided to enter negotiations or will continue to rally shareholders. Qualcomm shareholders are scheduled to meet on March 6th, where Broadcom will seek the election of six members to Qualcomm’s board of directors. Walgreens Boots, the largest US drugstore operator, is in talks with AmerisourceBergen, a pharmaceuticals distributor, regarding an acquisition. Walgreen Boots already owns 26% of AmerisourceBergen and has a close relationship with the company. Amerisource’s shares jumped up as much as 14% following the announcement from the Wall Street Journal. Over the past few months, healthcare companies have been responding to many important changes within the industry. These include changes in the US Affordable Care Act and potential competition from Amazon’s entrance into healthcare. Drugstore rival CVS Health Corp announced its plan to acquire the health insurer Aetna Inc for $69bn in December. Recent acquisitions in the health industry show the shift towards vertical consolidation, of combining with supply chain members.
Jessica Murray
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Week Ending 18th February 2018
Oil, Gas & Industry This week will be focusing on the Italian multinational oil and gas company Eni, and one of the world’s largest nickel producers Norilsk Nickel. Eni’s oil and gas projects have resulted in a record level of production during the past year, which has increased the group’s 2017 Q4 profits by 55% (from €1.3bn to €2bn this year). Eni has been the most successful explorer in recent years among the leading oil and gas groups, with four of their new discoveries coming on stream in 2017. Eni has been able to deliver these new projects despite a 40% fall in capital expenditure on upstream development since the fall in oil prices during 2014. Cuts have been made across the industry over the past few years. These lower costs, coupled with increasing oil prices and higher production levels, have resulted in Eni generating 50% more in cash compared to last year. However Eni has recently been surrounded by allegations of bribery in relation to the $1.3bn acquisition of one of Nigeria’s largest untapped oilfields. Current CEO, Mr Descalzi, and several other current and former executives, are due to stand trial for alleged corruption in Milan during March.
One of Russia’s most valuable companies, Norilsk Nickel, lost more than $2.5bn in market capitalisation this week. This was due to investors fearing the threat of a power struggle over the control of the company, which may lead to a legal battle between three of the country’s most powerful oligarchs: Vladamir Potanin, Oleg Deripaska and Roman Abramovich. In 2012 a deal was brokered by the Kremlin following a disagreement between Potanin and Deripaska. This resulted in Abramovich being made a minority stakeholder and peacemaker, with Potanin conversely holding 30.4% and Deripaska holding 27.8%. Potanin is now looking to purchase Abramovich’s 6% stake, with Deripaska referring the matter to a London court in order to seek an injunction that could block the deal. Shares in Norilsk closed 8.3% down on Friday, having fallen by as much as 11.4% in the afternoon. Since 2012 the share price has doubled, however investors are now spooked by the battle for control and the distraction it could create for the company.
Abdul Akhtar
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NEFS Market Wrap-Up
Deals On Wednesday, Bristol-Myers Squibb and Nektar Therapeutics announced a record partnership deal worth up to $3.6 billion for the rights to an experimental cancer medicine, codenamed NKTR-214. The pharmaceutical group Bristol-Myers Squibb will pay an upfront payment of $1.85bn, in exchange for 35% of global profits from Nektar’s cancer medicine and a stake in the company valued at $850m. The deal is the largest fee in biotech history. “We are excited to bring our leading capabilities and expertise in developing cancer therapies together with Nektar’s innovative science” said Giovanni Caforio, Chairman and CEO of BristolMyers Squibb. Meanwhile, Qualcomm has reaffirmed its rejection of Broadcom’s latest offer to buy the company for $82 per share, following discussions on Friday. “The board remains unanimously of the view that this proposal materially undervalues Qualcomm and has an unacceptably high level of risk, and therefore is not in the best interests of Qualcomm stockholders,” Qualcomm said in a letter to Broadcom Friday. The fate of the deal now rests on the shoulders of the shareholders, who are scheduled to vote on March 6th. If they elect a majority of Broadcom’s nominees to the board, the deal could still go ahead. Exchange traded funds issuer Global X is being acquired by large South Korean asset manager, Mirae Asset Global
Investments. Mirae will take full control of Global X, who have $30 billion in assets under management. The deal includes the stake purchased by JP Morgan Chase in 2016. Theresa May was put under more pressure to block Melrose’s hostile takeover approach of GKN this week. Anne Stevens, the new CEO of GKN, stated: “They absolutely would destroy this company and I just feel so passionately [that] I don't want to give them a chance.” With the intention of fending off the approach, GKN has promised to return £2.5bn in cash to shareholders over the next three years. The strategy includes boosting cash generation in its aerospace and automotive divisions, and selling its US aerostructures business. The company also announced “Project Boost”, a twoyear plan to “significantly” improve financial performance. In other news, Xerox has been sued by Deason, its third largest shareholder, for allegedly failing shareholders by approving a deal that undervalues the company. The tank-maker, General Dynamics, has also acquired a U.S. government IT contractor CRSA for $9.6 billion. Finally, Danish telecoms operator TDC accepted a $6 billion takeover bid from Macquarie consortium.
Edward Turner
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Week Ending 18th February 2018
COMMODITIES
Energy As the cost of energy rises in the UK, over four million households are expected to be impacted. With energy bills rising an estimated £57 a year, vulnerable customers will be hit the most, and would therefore be better off being put on tariffs that are poor value for money. Chapman reported a further increase in energy bills due to Brexit. As a large proportion of the UK’s energy comes from Europe and following Brexit the UK will be trading outside of the EU’s Internal Energy Market, this means that consumers will be obliged to pay more for their energy usage. Suppliers of energy could also be at risk, particularly during extreme weather conditions. Due to the increase of quakes occurring within Holland, which is continuing to cause great damage to houses and infrastructure, residents are now blaming the government and two of Holland’s biggest energy companies, who they believe are the cause of this catastrophe. As such, residents are now demanding a halt to Groningen gas production, which is believed to be the primary cause. If Groningen gas production continues, pressure falls in the porous sandstone deep underground and along the natural fault lines could lead to further tension and shocks. With much at risk here, the Dutch citizens impacted by these quakes are
hence demanding a far greater response from the government than they had done previously. The US’s largest state in terms of the size of its economy, California, is now turning to renewable energy to help tackle the droughts, floods and fires that are becoming increasingly worse as the environment continues to deteriorate (see graph below). A 2017 study by Lazard revealed that, in the US, the cost of using coal is between $60 - $143 per megawatt hour, whereas the cost of using solar power is only $43.
Sarren Sidhu
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NEFS Market Wrap-Up
CURRENCIES
Major Currencies The US dollar has continued to strengthen despite rising bond yields, contrary to intuition. Uncertainty and inflationary expectations have pushed up yields on 10-year US treasuries to 2.9%, whilst the gap between US and German 10-year yields has widened by 2.15 percentage points. Normally, the currency will appreciate as investors chase higher yields. Instead, the dollar index fell 0.4% to a low of 88.253 on Friday, its lowest level since December 2014. The euro rose to a three-year high against the dollar during the week, with the price of the dollar falling to €0.79. Two explanations underlie the dollar’s depreciation. Firstly, China has stepped back its purchases of US securities since January to avoid weakening the renminbi, and this has pushed yields up. While China may stand to gain from stronger terms of trade, it is hoping to avoid a repeat of the market selloff that began in August 2015, which was partially triggered by the devaluation of the renminbi. China’s ample foreign reserves allow it to have significant sway in the forex markets. A second reason for the weakening dollar is that many investors expect higher inflation than is currently priced into bond yields. Furthermore, there is doubt whether the Federal Reserve will begin tightening in line with market expectations, especially with the appointment of a new
bank governor. While the market has priced in three rate rises in 2018, the inflation picture remains unclear. Andrew Milligan at Aberdeen Standard Investments also noted: “inflation data at this time of year can be impacted by seasonal factors such as weather.” According to Alan Ruskin at Deutsch Bank, there likely won’t be a significant asset allocation into the US bonds market to boost the currency until the 10-year yield rises above 3%. The ballooning US budget deficit has also thrown an additional element of uncertainty into the mix. The yen hit a three-year high against a basket of currencies. The yen was boosted after the Japanese economy recorded its longest period of growth since 2000. The Japanese Financial Services Agency announced last week that it would consider a proposal to tighten the leverage cap on forex trading. Traders can use borrowed money to capture larger gains. The proposal would increase the margin deposit required for trading by 150%, which will make the market more resilient but decrease the potential returns on trades. However, the yen reacted only mildly to this news. Daniel Blaugher
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Week Ending 18th February 2018
Minor Currencies Investors appeared to have finally brushed aside inflation jitters to focus on growth in the global economy and a stronger-thanexpected corporate earnings season, viewing the recent sell-off as an opportunity to buy more stocks at lower prices. The US S&P 500 and the Nasdaq Composite were up roughly 4.8% and 5.9% respectively this week, capping off their best week since 2nd December 2011. The Dow Jones Industrial Average also gained 4.7%, its biggest gain since the week of the 2016 US Presidential Election. Minor Currencies like AUD and CAD also hopped onto the bandwagon and finally posted gains this week. The Australian Dollar staged a recovery this week as AUD/USD finally found support at $0.78 after two tumultuous weeks in the global markets. The Australian dollar rallied as much as 2.4% against the Greenback, as it closely tracked the price recovery in commodity prices and shares of mining companies. But AUD/USD topped out at $0.7988 after the Reserve Bank of Australia’s (RBA) governor, Dr Rob Lowe, expressed concern about a strong AUD given the current weakness in the USD. RBA also hinted to investors that it is more likely than ever to move away from its dovish monetary policy, mirroring recent hawkish comments from major central banks like the US Federal Reserve and the Bank of England. While Dr Lowe does not see the need for any adjustments to the monetary policy in the near term, he signaled that
interest rates in Australia would eventually climb up from the current historic low of 1.5%. The influential RBNZ Survey of expectations released on Wednesday showed inflation expectations at 2.11% in two years’ time, up from 2.02% in November 2017. While the RBNZ is not in a hurry to raise interest rates over these survey results, it is likely to keep a close watch on inflation figures in the coming months. This week the USD/CAD reversed sharply from weekly highs of $1.2650 and fell as much 1.5%. This was due to the Canadian Dollar strengthening on the back of higher oil prices, where both Brent and WTI had registered gains of 5.5% and 6.4%. However the Bank of Canada’s Deputy Governor, Lawrence Schembri, gave a more somber speech at the Manitoba Association for Business Economists on Thursday, saying that low interest rates have encouraged households to take on debt, meaning there is now less room among the G7 economies to increase borrowings and stimulate demand. Looking ahead, investors will be holding their breath when they read the first FOMC minutes released by the US Fed under the new Chairman, Jerome Powell.
Mingli Yong
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NEFS Market Wrap-Up
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, 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 Charlotte Alder at calder@nefs.org.uk. Sincerely Yours, Charlotte Alder, Director of the Nottingham Economics & Finance Society Research Division
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