Week Ending 17th March 2016
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 3 Eurozone United Kingdom United States Japan South Korea Australia & New Zealand Canada
Emerging Markets 10 China India Russia and Eastern Europe Latin America Africa Middle East South East Asia
Equities 18 Financials Technology Oil & Gas
Commodities 21 Energy
Currencies EUR, USD, GBP 23
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Week Ending 17th March 2016
MACRO REVIEW Eurozone Data released for the Balance of Trade in January shows the Eurozone slipped into a deficit of €600m as exports fell from their December level by 0.4% to €163.9bn, and imports leapt by 4.1% to €164.5bn (see below). This rut has cast doubt over other indicators that otherwise show the Eurozone economy to be picking up healthily. This deficit could prove short lived – the dollar will likely strengthen against the Euro in weeks to come after the US Federal Reserve announced a rate rise from 0.75% to 1% this week – contrasting starkly to the ECB’s 0%. This capitalised on Governor Yellen’s comments that “We currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continues to come in about as we expect.” A strengthened dollar could offset the fall in Eurozone exports. Though the Fed’s announcement is only likely to intensify existing pressure from German hawks on the ECB to raise rates even a little.
restoring confidence in investors who, no longer gripped by the uncertainty of a populist surge, rallied to Dutch bonds. The bond rally has since dissipated and investors are selling Eurozone debt in anticipation of the French presidential elections in April and May. Dutch and German bond yields have since climbed 3 basis points (0.03%), whilst French government bonds are the worst performing, having climbed 4bp’s (when bond prices fall, yields climb). This is unsurprising given that far-right, anti-EU, anti-immigration, Marine Le Pen is leading the polls – just ahead of centre-left Emmanuel Macron. Her lead is no doubt aided by the scandal of centre-right and establishment politician Francois Fillon, and inspired by the clear shift to the right of Dutch politics. This will be the second major election in Europe this year, with the German federal elections to take place in September under similar, though not as great, populist pressure. Jamie Peake
Meanwhile, Eurozone bonds rallied in response to the result of the Dutch presidential election on Tuesday, the 14th. The incumbent centre-right VVD party retained a winning majority under Mark Rutte, yet lost 25% of their seats, ceding ground to Geert Wilders’ populist PVV party who increased their share by 30%. Nonetheless, Mr Rutte is in position to lead a centre-right and pro-EU coalition, 3
NEFS Market Wrap-Up
United Kingdom Brexit has made repeated headlines this week for the UK economy, with the most notable being the Bank of England’s decision to keep interest rates at their record low of 0.25%. As such, the Monetary Policy Committee (MPC) was split 8-1 as its members decided that the aforementioned interest rate was appropriate to support a post-Brexit economy. This includes reduced consumption, due to slower pay growth and rising inflation (see below). Last week confirmed that the current inflation rate of 1.8% was the country’s highest inflation rate in two years, with Forbes further stating that inflation could likely remain above the bank’s 2% target for the next 3 years. Despite this however, the MPC has maintained that it is happy to let inflation rise above the bank’s target, as it allows the economy to support growth and jobs. On Monday Nicola Sturgeon, the First Minister of Scotland and leader of the Scottish National Party, confirmed that she will request to hold a second referendum over Scottish Independence. This is in response to the 62% of Scots who voted to remain in the Brexit referendum, and therefore hope that independence will allow them to remain in the EU. Sturgeon wants the vote to be held sometime between 2017 and 2018. Theresa May however has
said she will block any attempt for Scotland to hold a referendum, stating that such a move will only be allowed after Brexit negotiations have come to an end. The north of England has responded to calls for Scottish Independence following Brexit by stating that the north too would like its own regional assembly. The call comes from a leading northern think-tank, the Institute for Public Policy and Research (IPPR), which explains that the proposed regional government would be formed by representatives from the north’s 19 combined authorities and councils. It has been proposed so that the North can control its £300billion economy and act with its own voice, with some areas of the North having voted a very decisive 70% in favour of Brexit. Yet despite all this confusion and division over Brexit, Toyota has signalled a vote of confidence in post-Brexit Britain by confirming a £240million investment into its Toyota plant in Derby, which currently employs 3,400 people. The government will provide a further £21.3million for the plant, in training, research and environmental innovation. Charlotte Alder
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Week Ending 17th March 2016
United States This week marked the third time the Fed have increased short-term lending since the Great Recession of 2008. The rate was raised 0.25 basis points on Wednesday which brought the Fed's target for shortterm interest rates to a range of 0.75% and 1.00%. Also, the President on Thursday releasied the proposed 2018 blueprint budget. Though the proposed changes to the budget won't add to next year's projected $487 billion deficit, it will not reduce it either. By raising the short-term interest rates, the Fed is suggesting that the U.S economy is running smoothly. The Fed placed the interest rate at 0% in December 2008 to save the collapsed housing market. The purpose was to stimulate the economy by raising the liquidity level within the banking system by effectively removing the cost of borrowing for both commercial and investment banks. However, fastforwarding nine years later, the U.S economy has recovered with an unemployment rate of 4.7% in addition to over seventy consecutive months of job creation. To summarize in the words of the Head Chair of the Fed Board of Governors, Janet Yellen, “the simple message is the economy is doing well… We have
confidence in the robustness of the economy and its resilience to shocks". That being said, it is important to remember that by raising the short-term interest rate, the cost of borrowing for both consumers and business will rise. "The cost of borrowing is going to continue to increase and variable rate debt like credit cards are most susceptible,” says Bankrate.com's chief financial analyst, Greg McBride. Additionally, if the Fed increase short-term interest rates at a rate which outpaces the growth of the economy, that could potentially halt stock market's unprecedented growth as the raised cost of borrowing could offset corporate spending plans. However, with the President’s plan to increase spending on infrastructure and major reductions in both corporate and income taxes, such an event is unlikely. What is occurring is the gradual shift in economic policy as the U.S switches from monetary to fiscal policy to stimulate economic growth. Finally, the 2018 blueprint budget dubbed “America First” can be summarized below.
Disun Holloway
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NEFS Market Wrap-Up
Japan The Bank of Japan (BoJ) decided last week to maintain its intensive monetary policy at the same levels, despite strengthening domestic indicators and movements toward tightening abroad. The bank will hold short-term interest rates at -0.1%. 10-year Japanese government bonds will be capped at 0% yields, and the BoJ will continue to increase its bond holdings by ¥80 trillion throughout the year. The bank made no indication that it would raise policy rates in future meetings. BoJ Governor Kuroda may be holding his breath, as it appears that the desired economic outcomes of the radical monetary easing are on the cusp of manifesting. Inflation returned to positive territory in January. The tight labour market is starting to exert pressure on wages, although it may not be until next year that this dynamic fully plays out. Most major firms look set to raise wages in the shunto spring wage negotiations, but a Nikkei survey found that only 11.1% of leading Japanese companies will exceed base wage increases from last year. These larger companies can deal with labour shortages by reassigning its employees, but smaller firms do not have the resources to cope in this manner. According to Katahiro Yasukouchi, a deputy chairman of an association of Japanese industrial unions, “Small and medium-size companies… aim
to keep staff by raising pay.” Nonetheless, wage growth looks doubtful to exceed the 2% overall growth accomplished in the 2016 negotiations. Rising prices will prompt stronger wage growth, and increased income will feed into a virtuous cycle of consumption. The US central bank raised it rate last week, meaning the interest rate spread widened between the US and Japan. This is positive for Japanese growth since investors will increasingly look to US assets, appreciating the dollar against the yen and adding strength to the export-led growth already booming via the depreciated yen. After the Federal Reserve rate increase, the yen was trading above ¥113. Meanwhile, Toshiba is continuing to grapple with its ¥712 billion write down, and it is weighing a sale of half of its memory chip business. The Japanese government is considering using state finance to intervene in the sale in order to keep the technology in Japan. The government sees the technology as pertaining to issues of national security, but this announcement also reflects a concern about technology and talent increasingly flowing out of the country. Daniel Blaugher
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Week Ending 17th March 2016
South Korea This week South Korea released economic data on import/export prices and unemployment. Also, updates on the Kosdaq stock exchange may position the South Korean exchange to become a more desirable trading platform. On Monday of last week, South Korea released import and export price index data for the month of February. Import prices decreased from 84.98 to 83.12 on the index, and export prices fell as well from 87.37 to 85.96. Import price movements can be a helpful in understanding future changes to inflation because some foreign purchased goods are used as production inputs or are consumed. Consider this, the recent January inflation high at 2% corresponded with January import price highs, and subsequent decreases in February inflation to 1.9% corresponded with the decrease in February import prices. Import and export prices are also heavily impacted by the exchange rate. The won to USD exchange rate is currently 0.00087. Last Tuesday seasonally adjusted unemployment data reported an increase from 3.6% to 4.0% for the month of February. Consensus forecasts predicted a slight increase at 3.7%, however, underestimated the magnitude.
pushing to increase its listing of foreign companies in hopes of enhancing global interest in platform. Similar to the Nasdaq but representing a mere $167.24bn in market capitalization, the Kosdaq focuses on growth companies such as, biopharmaceuticals, cosmetics and IT companies with high upside potential. Recent rule changes and the introduction of derivative products on its index have bolstered interest in trading through Kosdaq. Over the medium to long term, the Kosdaq is seeking to reduce its proportion retail investors from 90% to 60% while increasing its proportion of institutional investor from 10% to 20%. Next week South Korea releases GDP growth rate data for Q4 2016. Consensus forecasts have year-on-year growth decreasing from 2.6% to 2.3%. The growth rate retreat is underpinned by weaker construction investment and private consumption. According to CNBC “Construction investment fell by a seasonally adjusted 1.7% during the October-December period after a 3.5% jump three months earlier, while private consumption expanded just 0.2%, slumping from a 0.5% rise in the September quarter.� Dan Minicucci
In other news, the tech-heavy South Korean exchange, known as Kosdaq, is
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NEFS Market Wrap-Up
Australia & New Zealand The Australian unemployment rate has seen an increase in February to 5.9%, the highest rate in over a year. Nonetheless, the labour market saw an increase of 27100 in full-time employment while there has been a simultaneous 8.7% rise in parttime jobs compared to previous years. The mixed signals of the labor market promote doubts over the rate of unemployment and whether job-seekers may give up the hunt for full time employment in the future. However, the Reserve Bank of Australia predicts a 3% growth of the labour market by the end of the year. Moreover, the rise in unemployment took a toll on the Australian dollar, causing it to fall below US 0.77. Australian states’ economic pattern is divided. The north and west are experiencing turmoil due to the end of the mining investment boom, resulting in housing prices fall and businesses to bust. Hence, Australians are migrating to the east where housing prices are booming and further property construction has surged. Western Australia hit 6.9% unemployment rate in November 2016, the highest in 15 years. However, the state saw a fall from 6.4% to 6% from January to February 2017, meanwhile the national unemployment rate saw an increase from 5.7% to 5.9% in the same time period.
WA’s Chamber of Commerce and Industry chief economist, Risk Newnham, stated that other economic indicators show a “transition from a business investmentdriven economy to an export-driven economy”. It is believed that internal migration is the factor containing unemployment in WA and Queensland. Furthermore, an Australian consumer sentiment survey, conducted by the Melbourne Institute and Westpac Bank, found consumer sentiment hiked 2.3% in February and again 0.1% in March. The hike was a result of worries over personal or family finances being offset by optimism over the long-run outlook of the Australian economy. Lastly, on March 16th, National Australia Bank became the first of the country’s biggest lenders to raise mortgage rates. The escalation of the rate was implemented after regulators were desperate to cool the sharp increase in property prices since 2010. However, an increase in owner occupier rates are surprising due to the relatively weak consumer spending. The risk of the hike lies on weakening the economy to a point in which the central bank may need to consider cutting the record low rate of 1.5%.
Maria Fernandes Camaño Garcia
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Canada The RBC released its ‘Quarterly Economic Update’ last week, a comprehensive analysis of key drivers of growth, with relatively sanguine forecasts for GDP growth of 2.0% and 2.1% for the years 2017 and 2018, respectively. The economy displayed robust employment figures, housing construction and a rebound in energy investment, although consumer spending will remain the key progenitor for growth over the duration of the year (shown below). Whilst ‘economic conditions, including a pickup in US Business investment’ are likely to enhance export growth, Craig Wright, chief economist at RBC remained wary of ‘protectionist trade policies’ and their ‘potential to hurt Canada’s small, open economy’. Although federal spending on infrastructure projects will provide a significant boost in 2017, adding almost half-a-percentage point to the growth rate, a slowdown in real estate activity is likely to mostly negate this. The prospects for provincial economies are also optimistic, with the Eastern Maritime provinces likely to experience modest growth, with more vigorous expansion to come in central provinces. Ontario is poised to outstrip all other provinces for the first time since 2000, with a GDP growth rate of 2.5%.
question the expediency of such growth. According to Generation Squeeze, an organization that advocates on behalf of Canadians aged under 50, the report claims British Columbia is Canada’s ‘worst performing economy’ for younger generations, evinced by lower earnings, rising levels of debt and increasing difficulty of purchasing a home. Whilst British Columbia has expanded by an average of 2.5% annually since the 1980’s, earnings have declined at the fastest level compared to other provinces. Median full time earnings were down by over $8400 for 2534 year olds in 2015 from 1980, although median earnings for this age group diminished by just over $4000 across Canada. This is in stark contrast with the average cost of a home in British Columbia, which has climbed by almost $475,000 from 1976 to 2016, faster than any other province. The following week will see the finance minister Bill Morneau release the federal budget on March 22, indicating the size of the deficit as the Liberal government embarks on infrastructural investment to reinvigorate the economy. Usman Marghoob
Although British Colombia has seen high provincial growth rates, a recent University of British Columbia corroborated claims housing costs have significantly outpaced average income. Millennials in British Colombia are the most ‘squeezed’ economically compared to their provincial counterparts across Canada, bringing into
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NEFS Market Wrap-Up
EMERGING MARKETS China
Data released this week by China’s National Bureau of Statistics shows that the country’s economy is steadily heading in a positive direction, particularly due to boosts in investment. The release of data from January and February 2017 showed that fixed asset investment grew by 8.9% compared to the same time last year while the value of new homes sold rose by 23% to $132 billion. Private investment grew by 6.7%, a more than doubling on last year’s figure, strongly suggesting that firms are optimistic about China’s investment prospects despite trade tension between it and the USA. The graph below shows the fluctuations in China’s fixed asset investment over the past 12 months and how 2017 is so far set to be more stable than the latter half of last year. Li Wei, a member of China’s State Council and Director of the Development Research Center, said that these positive economic indicators suggest that the country’s growth slowdown had moved from “an L shaped” pattern to “horizontal shaped”. This thought was echoed by JZ Securities’ Chief Economist who noted that growth has “reached a turning point in the L shaped trajectory.”
A spokesperson for the National Bureau of Statistics said that the Chinese government’s improved implementation of its Public-Private Partnership projects which encourage injections of private capital into traditionally state-financed sectors, is a large reason for the doubling of private investment. These figures come in addition to the 6.3% industrial output growth and 4% export growth in the first two months of this year compared to last year. In effect, these factors all suggest that China’s economy is not yet headed for the dramatic slowdown or ‘hard landing’ that many economists predicted. In a media conference, the Chinese Premier, Li Keqiang, addressed this concern by stating that “our economic performance in the past several years ... should suffice to put a full stop to such prophesies of a hard landing." However, some echo the fears of Capital Economics’ China reporter Julian EvansPritchard: that Chinese economic growth is still heavily dependent on rapid investment and that this will be difficult to sustain in 2017 considering the government’s “less supportive” “fiscal and monetary stance”. Nikou Asgari
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India As expected, the inflation rate for India increased at a greater rate than previously. Consumer prices for February rose by 3.65%, a marked recovery from the record low figures of 3.17% noted for January (shown below). Moreover, the inflation statistics for February exceeded market expectations where organisations like Capital Economics predicted that the inflation rate would be 3.58%. The diagram below demonstrates the trend for Indian inflation over the past year. The increased inflation for February can largely be attributed to the rises in the prices of food and beverages. Food inflation rose by 2.1% which is a significant increase compared to the January rise of just 0.53%. By dissecting the make-up of the food inflation, it can be illustrated that the individual food items of sugar, fruits and vegetables all appear more expensive for consumers. In addition, the prices of cereals have risen with economists suggesting that this could be linked to the drought conditions and reduction in supply provided by the southern states. Besides rises in food prices, fuel costs increased by 3.9% during February. However, the consensus from Indian economists has been that India can expect to embrace a period of price stability in the short to medium term, reflective of India’s emergence from the difficulties caused by the demonetisation programme.
Tushar Arora, a senior economist at HDFC bank summarised this view by saying ‘For the next four months, at least until JuneJuly, we don't expect inflation number to go beyond 4 percent.’ In other news, India’s largest vehicle producer and conglomerate, Tata Motors, has agreed a strategic partnership with Volkswagen to help both companies establish greater market shares in India and in other emerging markets. As well as looking to re-establish a greater domestic share, the chief executive of Tata Motors, Guenter Butschek, believes that the partnership will improve Tata’s productive efficiency by utilising more cost-effective methods of production which should in theory encourage greater economies of scale. Moreover, it is hoped that the partnership will allow ideas to be shared to tackle challenges facing both firms including safety, driverless cars, and more sustainable fuel technologies. Tata will be hoping the partnership with VW will be more beneficial than the largely unprosperous deal agreed with Fiat between the 1990s and 2004 which lacked smooth co-ordination between the two companies. Isher Hehar
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NEFS Market Wrap-Up
Russia and Eastern Europe Reports this week imply that the sharp decline in oil prices has not had a significant impact on the Russian ruble. Unlike times past, the currency is showing strong resilience in the face of crude fluctuations. The ruble was losing slightly to the US dollar on Monday, trading just above 59 against the dollar, while gaining a fraction at above 63 against the euro. The Russian currency has come under strong pressure in recent days with Brent crude futures losing 8.1% since March 7th. The ruble dropped just 1.5% against the dollar during the same period, demonstrated in the graph below. Despite OPEC efforts to cap production, oil prices touched the lowest in three months on Monday, pulled down by new rigs added by US drillers. The ruble’s surprising resilience to oil fluctuations is making the market focus on the monetary policy of the Central Bank of Russia (CBR) and high interest rates set by the regulator attract foreign investment and inflows into ruble instruments. The key rate currently stands at 10%, which is far above
annual inflation, which is reportedly nearing the 4% target. Elsewhere, the outlook on Russia’s credit ranking was raised by S&P Global Ratings as the economy shifted into higher gear and the government keeps the budget deficit in check. S&P lifted the outlook to positive from stable, leaving its foreign-currency rating one step short of investment grade at BB+, on par with Indonesia and Bulgaria, according to a statement on Friday. The move puts Russia on the verge of regaining the investment status it lost two years ago when the collapse in oil prices, compounded by international sanctions over its involvement in the war in Ukraine, pushed the world’s biggest energy exporter into recession. Helped by stabilizing oil prices, it has since adjusted by allowing the ruble to trade freely and keeping fiscal and monetary policy tight, reining in inflation from a 13-year high in 2015 to near the central bank’s 4% target. William Bunnis
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Latin America A diverse selection of data and shifting positions on the major economy of the region have made the past seven days particularly noteworthy. Overall, whilst the attitude towards Mexico remains largely positive, investor confidence for the rest of Latin America, especially Brazil, is unstable at best. Long term investor optimism for Brazil took a substantial hit this week. Reported last week was the 3.6% contraction in the Brazilian economy in 2016. Despite consistent GDP contraction and rising unemployment over the past 3 years, investors continued (until this point) to be optimistic in their assessments of the Brazilian economy. This week however, the tide has begun to turn and the bullish outlook amongst investors is cracking. Approximately a year after upgrading the country’s stocks to buy, Credit Suisse is advising its investors to exit the market at current positions; analysts Alexander Redman and Arun Sai argue that real is overvalued, and that equity valuations are too high. Although many investors still remain optimistic, Redman and Sai suggest that planned interest rate cuts by the BCB are already priced into the market and ‘all that’s left is momentum and wishful thinking’. With regards to Latam markets in the short term, the week yielded positive news for
investors as the Fed announced on Wednesday to continue with the planned rate hike, rather than push for the more aggressive policy that some traders and analysts were expecting. The effect of the doveish tone was observed in the Mexican IPC index (MEXBOL), rising 2% over the course of the day. Markets with lower exposure to the US, predictably, felt less of an impact. Namely: the Brazilian Ibovespa and Argentine Merval. In addition to the gains of nation’s stock market, Mexico’s currency (the peso), gained value in response to remarks made by President Trump’s chief trade advisor: Peter Navarro. Navarro, in an interview with Bloomberg, explained that he could foresee a ‘regional manufacturing powerhouse’ which included the US, Canada and Mexico. The remarks dampened fears of US-Mexico trade war, and Mexican exports being subject to high tariffs. Finally, on Thursday the Chilean Central Bank (BCC) cut interest rates by 25bp to 3%, in-line with market expectations. In a statement, the BCC justified the rate cut, highlighting that inflation tumbled to just 2.3% in February, the lowest since 2013. Policymakers underscored that further monetary easing is likely to take place if current fiscal and inflationary trends persist. Alistair Grant
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NEFS Market Wrap-Up
Africa In South Sudan, the world’s newest country, the menus are all printed on the cheapest paper available. This is due to the fact that they have to be updated bi-weekly due to an inflation rate that has risen at a rate comparable to Leicester FC’s ambitions. Last year, inflation rose to 50% - the definition of hyperinflation – and prices have dropped a rather modest amount since. A new unscrupulous policy of raising permit fees for foreigners working in South Sudan by 100fold has been announced at a time when famine has brought the country to its proverbial knees. After the United Nations declared 100,000 people in the country have about as much of an idea where their next meal is coming from as we do - in the aftermath of a three-year old civil war - it doesn’t tax one’s imagination to understand why international humanitarian agencies have denounced South Sudan’s decision as derisory. It would be far from surprising if South Sudan’s new initiative to raise permit fees curtails any optimism for economic growth. The regional director of the International Rescue Committee, Kurt Tjossem, discarded the fee increase as ‘outrageous’ particularly at a time where ‘there isn’t enough funding
going in and the humanitarian situation is getting worse’. The new fees are asynchronous with the government’s commitment to facilitating humanitarian access to the region in what is an increasingly dreadful situation. South Sudan will have the tools to remove themselves from the mire they have unfortunately been found in once the risible President Salva Kiir completes his tenure. Meanwhile, Kenya’s president, Uhuru Kenyatta wants to cut the abnormally sized salaries of legislators and civil servants. Half of the governments annual revenue is spent on public sector salaries, with MP wages amongst the best paid in the world, in a country where violence, poverty and famine are rife. Only 2% of the population receive the benefits of these wages and on Wednesday, Kenyatta proclaimed the nation was ‘fast approaching breaking point’ which was met by an eerie pause, before being met with a round of rapturous applause. Hopefully, Kenyatta is able to push his policies through and next week we’ll have some good news to share. Vincent Egunlae
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Southeast Asia This week we continue to focus on the Philippines, as its president faces the threat of impeachment. We also assess recent balance of trade figures for the Philippines and Singapore. Tensions between the Philippine government and opposition lawmakers have reached new heights this week after a lower house representative filed an impeachment complaint against President Duterte. Congressman Gary Alejano, who filed the motion on Thursday, stated that his actions will provide Filipinos with “a voice to oppose and fight against the abuses and crimes of President Duterte.” He claimed that the president’s anti-drugs policy amounts to a crime against humanity, as it is arguably responsible for the killings of over 8000 drug dealers, users and innocent bystanders. Mr Alejano also accused the president of running a ‘death squad’ and embezzling public funds worth $40m when he was mayor of Davao. Whilst the case against Mr. Duterte is theoretically strong, almost 90% of the House of Representatives is allied with Mr. Duterte. In these circumstances, it is highly unlikely that the impeachment motion will gain the required support for it to pass to the Senate for trial. Congressman Alejano
has himself admitted that he faces an “uphill battle.” Nonetheless, several human rights lawyers have argued that the mere attempt of bringing domestic charges against President Duterte would increase the likelihood of a successful prosecution at the International Criminal Court (ICC). This is because it would demonstrate that all domestic channels of challenging the president’s policies had been exhausted. In other news, the Philippines and Singapore both posted strong balance of trade figures this week. The Philippines’ trade deficit shrunk by $0.33bn year-onyear in January, as exports increased at their fastest rate in three years. Along similar lines, Singapore’s trade surplus widened to SGD 7.8bn in February 2017, as non-oil domestic exports grew at their fastest rate in five years. A rise in demand for electronics was the primary cause for this export growth for both countries, with electronics shipments from the Philippines increasing 10.4% on a yearly basis. Malaysia and Singapore are publishing CPI inflation figures for February next Wednesday and Thursday respectively. Vietnam is releasing inflation data for March on Friday. Daniel Pettman
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NEFS Market Wrap-Up
EQUITIES Financials This week we consider European and American financial activity separately. This is as we look to isolate the effect of news that European Central Bank policymakers have rekindled talk of a possible rate hike, leading to a spike in Eurozone banks to a 15-month high. On the other hand, market movement in the states has been much more scattered. The positivity in EU financial stocks can be seen by the fact the STOXX 600 index, a measure of EU banking data, ended the week with a gain of around 1.2%. This comes largely because of gains in Germany's Commerzbank, up 2%, as well as in France's Societe Generale and Spain's BBVA that both made gains of more than 0.5%. David Hussey, head of European equities at Manulife Asset Management in London has summarised the effect of recent talk of rate increases in a statement that "regulators and central bankers realise that negative interest rates have been a disaster for the economy and they're going to get more positive. If interest starts moving up in Europe I think this trade (bank stocks) has got some legs�. Therefore, it is clear to see that there is
confidence for the future of the European banking sector amongst investors. Next we look to big moves being made across the pond, chiefly at American multinational financial services and asset manager Blackstone Group LP. The company announced on Wednesday that it had raised a $4 billion second mezzanine fund, one of the world's largest mezzanine funds and the biggest one to be raised after the 2008 financial crisis. The mezzanine fund is essentially a hybrid of debt and equity financing without collateral whereby any default allows the lender to convert to an ownership. Though risky, the markets have reacted positively, as Blackstone stocks have risen from last weeks close of $28.94, to trading as high as $30.83 on Friday 17th, an increase of 6.53%. Nonetheless, the overall financials outlook was negative with the S&P 500 index for the financial sector showing a weekly reduction of 0.85%, driven by losses in big banks including Wells Fargo and Bank of America. Mikun Olupona
Blackstone Group LP
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Technology This week we focus on some developments in the driverless car space. Chipmaking giant Intel announced it would purchase Mobileye, an Israeli company that makes sensors and cameras for driverless vehicles. Buying a leader to become a leader is never cheap: Intel will pay $13.3bn for the firm, a 34% premium over Mobileye’s closing price last Friday. The two companies have a history of collaboration, having announced a partnership with BMW last year to put driverless vehicles on the road by 2021. Humans need to be replaced with safer technologies and many companies from Google to General Motors and Intel to NVIDIA intend on making that transition a reality. The market for Advanced Driver Assisted Systems and fully autonomous vehicles is widely expected to explode during the decade. In fact, Intel says the market for vehicle systems and data services for autonomous driving will become a $70 billion opportunity by 2030. While the industry is in its infancy, Mobileye is already realizing good growth and revenue, with $358M in sales in 2016, a 49% increase over the previous year. Nvidia is joining forces with Bosch to bring its forthcoming Drive PX Xavier autonomous driving system to the road in a speedier fashion. In order to accelerate the
roadmap for driverless cars that use the Drive PX Xavier platform, which is designed to power deep learning neural networks used for training and deploying autonomous systems, Nvidia will allow Bosch to sell the technology to car makers along with the German firm’s electronics and sensor hardware. This effectively means automotive companies developing or looking at creating driverless cars will be able to purchase a complete autonomous driving system from one company, therefore avoiding the need to buy technology and hardware from several companies and then work on integrating it all together. Electric-car maker Tesla priced its concurrent stock and convertible note offerings last night, and the total capital raised came in at $1.2 billion. In terms of the common stock offering, it was priced at $262 and Tesla ended up selling 1.33 million shares, compared to the 969,000 it initially planned to sell. Underwriters still have options to purchase another 200,000 shares on top of that if investor demand is there. Tesla will add $1.06 billion to its coffers to help reduce risk ahead of the Model 3 launch, with production commencing in July. Angelo Perera
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NEFS Market Wrap-Up
Oil & Gas The oil and gas stocks ended the week on a positive note as a surprise drawdown in US crude inventory (graph below) eased concerns over the supply glut and more than offset the pressure on oil prices from seemingly surfacing cracks in the producers’ output cut deal. The NYSE Energy Sector Index was at 15,901.69 midday on Friday, up 1.63% from the close of the previous week. Exxon Mobil (XOM), at $82.02 at noon on Friday, gained 0.5% over the week. Chevron (CVX), however, was down 2.35% over the week at $108.01 as analysts said the company’s strategy was based on a projected price that was too high. The market had been concerned over the supply glut as OPEC signaled earlier that it was not happy with US shale oil production ramping up on rebounding prices. However, the research houses said they expected the oil prices to hold stable or even rise, dismissing a latest output increase by Saudi Arabia as offset by a diversion to stockpile. British Petroleum (BP: LSE), subject of a takeover speculation by Exxon Mobil, closed 0.82% higher at 463 pounds on Friday, but it has given up some of its gains since the rumor surfaced during the previous week. Royal Dutch Shell (RDSA:
LSE) gained 0.8% over the week to close at 2,123 pounds, while Total (EPA: FP) gained 0.2% at 47.36 euros. Bullishness aside, the concerns refuse to go over nimble swift upward swings in US shale oil production any time oil prices climb up. The United States is estimated to have the world’s largest oil reserves, with half in shale oil. Shale oil is “pushing OPEC to breaking point,” said Michael McDonald, an analyst with US-based consultancy Morning Investments. US shale players obviously benefited from the oil price recovery. EOG Resources (EOG), a leading shale player, was up 25.31% at $95.81 on Friday, though off its 12-month peak of $109.37. Devon Energy Corporation (DVN) was up 48.76% over the year at $40.75. The market is watching for clues on the sustainability of the production curb. Khalid Al-Falih, Saudi Arabia’s energy minister, told Bloomberg on Thursday that the cut might be sustained beyond May if stockpiles hold above five-year average. “We want to signal to them that we are going to do what it takes to bring the industry back to a healthy situation,” he said. Michael Chen
US oil inventory (thousand barrels) 540000 520000 500000 480000 460000 440000 420000 Mar, Apr, May, Jun, Jul, Aug, Sep, Oct, Nov, Dec, Jan, Feb, 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2017 2017
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Week Ending 17th March 2016
COMMODITIES Energy So far, this year, natural gas has been the worst performing major commodity as you can see from the one year price chart below. Changes in seasonal temperatures and warmer winters have caused weaker demand and there has been no changes this week as the downfall continues. On Thursday, the US Energy Information Administration (EIA) reports showed that there was a storage draw of 53 billion cubic feet (bcf) in the week ending March 10 which was less than analyst expectations for a drop of 56 bcf. The news on the lessthan-expected storage draw added to the losses, as US natural gas futures for April delivery sank by 2.7% to $2.902 per million British thermal units (mmBtu). Without significant demand, inventories could stay near record levels and will continue to pull prices even lower. Meanwhile, oil had a relatively less volatile week. Back in November, OPEC came to an agreement to curb output by 1.2 million barrels per day starting from January 1, and Russia along with 10 other non-OPEC nations agreed to cut half as much. In its monthly Oil Market Report, OPEC reported that there was a rise in global crude stockpiles. Surprisingly, the report also showed that Saudi Arabia, increased its production in February, although, the total output of the group remains below the ceiling set by the agreement. Following on from this news, oil prices slumped to a three-month low, reflecting renewed
complications in OPEC’s effort to clear the global supply glut. On Wednesday, the EIA reports showed that US crude stockpiles unexpectedly declined last week by 237,000 barrels, the first weekly decline since December. Following on from this, oil prices advanced. Brent Crude, the global benchmark, increased by 89 cents to end the session at $51.81 per barrel, whilst US benchmark, West Texas Intermediate (WTI) closed at $46.86, up by $1.14. Also on Wednesday the Federal Reserve raised its benchmark lending rate by 25 basis points, but signalled that they will proceed cautiously moving forward which caused the dollar index to weaken. Carl Larry, principal consultant for Oil Outlooks and Opinions, outlined the impact this will have on the oil markets as follows: “Rates are going up because the economy is getting better. So once refineries start picking back up, we’re going to see a lot better demand and oil prices should be supported.” Bunyamin Bardak
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NEFS Market Wrap-Up
CURRENCIES Major Currencies The currencies have not performed remarkably well this week, aside from maybe the sterling which cautiously climbed a bit higher. Firstly to the cautious sterling, which dipped below the $1.22 mark this week. The ONS released its monthly figures on employment and wage growth, showing that average weekly earnings grew 2.2% in the three months to the end of January, down from 2.6%. The currency had been 0.6% higher against the dollar before the figures were announced as it recouped some of its losses from Tuesday, when it hit an eight-week low on Brexit concerns. But as the peculiarities of the market prevail once again, the presence of outgoing American economist, Kristin Forbes, on the MPC and her vote to raise rates boosted the sterling and reversed losses to close the currency over the $1.23 mark. Regardless, strategists and traders still feel the sterling is complicated and this will only make the currency a bit more interesting in the foreseeable future.
chief investment officer of global fixed income at BlackRock, “Positioning was clearly short,” showed how the rapidity of a rate hike has shaken the markets. The hike itself was a given but the nature of the hike has been distorting markets and sent the dollar to close down at £0.8066. The recurring theme in the euro space is, unless you are Mr Draghi the single bloc currency is extremely beguiling, with a time series this week similar to that of the Alps (shown below). The main focus this week is the ECBs unchanged position in policy rates and plans for QE, even though he has left options for dovish bias still on the table. A single currency driven by a bloc of countries was never going to be boring admittedly. Next week the pound will probably continue to tumble, the dollar will reel in the dovishness and I will not be predicting the euro. Robert Tse
After the (unsurprising) quarter point rate hike last week the dollar has not fared so well. Opinions such as John Brady’s, MD at brokerage shop RJ O’Brien, “It comes off as very dovish… this is going to be a friendly, docile, dovish hiking cycle. At least in the here and now.”, and Rick Rieder’s,
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Week Ending 17th March 2016
About the Research Division We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. The Research Division was formed 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 For any queries, please contact Josh Martin at jmartin@nefs.org.uk. monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. Sincerely Yours, The goal of the division is both the development of the analysts’ writing skills and market Josh Martin, Director of the Nottingham Economics & Finance Society Research Division knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Homairah Ginwalla at hginwalla@nefs.org.uk. Sincerely Yours, Homairah Ginwalla, Director of the Nottingham Economics & Finance Society Research Division
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