Week Ending 18th March 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 Africa China Latin America Russia & Eastern Europe South Asia Middle East
Equity and Deals 14
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 18 Energy
Currencies 19
EUR, USD, GBP AUD, JPY, Other Asian
2
Week Ending 18th March 2018
MACRO REVIEW United Kingdom Phillip Hammond made his Spring statement on Tuesday 11th March, where he announced that the UK is set for slower economic growth for the next five years as Brexit comes to fruition. He announced a downward revision of the budget deficit in the 2017/2018 fiscal year, from the £49.9billion estimated in November to the current figure of £45.2billion. Hammond also cited figures from The Office for Budget Responsibility, which illustrated an upward revision for 2018 economic growth of 1.5%, up from the 1.4% predicted in November. Despite this upwards revision, Phillip Hammond predicted that growth rates would continue to fall for the next five years, highlighting his concerns over the impact of Brexit. The National Institute of Economic and Social Research estimated on Friday 9th that UK economic growth fell to 0.3% for the three months to February. This is a reduction in economic growth from the 0.4% growth experienced in the final three months in 2017. The NIESR claimed that this slowdown was largely due to the poor weather conditions and that these effects will lag into the next three months as well. The Financial Conduct Authority announced on Thursday 15th that consumer credit risk is increasing and will continue to increase in the near future. The main cause of this is a large increase in car-finance default rates. The Bank of
England had previously estimated that car-finance loans had increased by an average of 20% per year since 2012 and accounts for approximately 3% of all loans. The rising number of defaults highlights a potential problem for lenders in the future as the market continues to grow and consumers with lower credit ratings are granted loans. The Bank of England’s Prudential Regulation Authority has, however, claimed that firms are taking necessary precautions but have not completely factored in structural changes when calculating their exposure to risk. On March 12th CBI President, Paul Drechsler, claimed that renationalisation of major industries would cause overall damage to the UK economy. Drechsler stated that privatisation allows for cheaper and more efficient services whilst also encouraging greater infrastructure investment, with 45% being provided by the private sector last year. This was a direct rebuttal to Labour’s claims that renationalising key industries would be beneficial and would bear no cost to the taxpayer. Drechsler suggested that these claims were driven by ideology rather than economics.
Nicholas Gladwin
3
NEFS Market Wrap-Up
United States Jerome Powell has taken over as the Chair of the Federal Reserve (Fed) from Janet Yellen. Powell was said to be the favourite to take over and it has been speculated that he has plans to turn attention to shrinking balance sheets, somewhat side-lining the tentative raising interest rates. With this in mind, his succession to the position is likely to provide continuity in monetary policy by keeping financial instruments in line with the US’s continuous nine-year growth. The Senate approved his bid to chair the Fed with a result of 84-13, signalling his bipartisan appeal between Republicans & Democrats. It also signifies strong faith in his ability to settle tensions raised by the Fed’s aggressive response to the financial crisis. Powell will now make the decision regarding how far he should facilitate a push by the Trump administration to roll back regulations that were implemented in the heat of the 2008/09 crisis. This week, the Senate passed a bill which exempts banks with less than $250bn in assets from strict oversight under the Dodd-Frank Act of 2010 – legislation implemented to avoid a repeat of 08’s financial meltdown. The Act was controversial and faced opposition from small to mid-sized firms, which claimed that the regulation was “overly complex” and inhibited growth. Though the Senate vote is not definitive, it has been considered one of the President’s most significant victories to date in his campaign to repeal the Act.
While small and medium sized banks have been preoccupied with Dodd-Frank, Wall Street banks are at “an inflection point”. This judgement comes following a report from Morgan Stanley stating that it is time for banks to shift their focus towards corporate business as opposed to the more traditional investor clientele they have been more focused on. Cost pressures on asset managers are intensifying and their client revenue growth is forecast to slow to a compound annual growth rate (CAGR) of 2%. Corporate client revenues however are forecasted to grow at CAGR 5% in the short term, hence the concept of ‘inflection’. Looking forward, readers should keep an eye on US inflation, as policy makers have their sights set on raising the interest rate again towards the end of the year depending on Q1 performance. Soft figures could ceteris paribus postpone the third interest rate rise of the year, and changes in market conditions - both external (Dodd-Frank) and internal (inflection point) - have the potential to seep into real inflation as the year progresses.
Amelia Hacon
4
Week Ending 18th March 2018
Europe The European Union (EU) sent a clear message in response to Donald Trump’s recently announced tariffs on steel and aluminium, after France’s Minister of the Economy, Bruno Le Maire, told CNBC that the European Union should unite in response to the tariffs. The EU reacted angrily to Trump’s announcement last week, with the European Commission announcing that it would raise import duties on U.S. bourbon, peanut butter, cranberries and orange juice. These counter-measures could be the first signs of a brewing trade war. Nevertheless the EU, alongside the UK and Japan, hope to secure exemptions from the tariffs (see graph below). Of the EU nations, Germany is set to lose out the most if a trade war is to emerge with the US. According to economist Paul Krugman, Germany is “enemy number 1” to the US in the eyes of Donald Trump, given that Germany is responsible for €50 billion of the USA’s €245 billion trade deficit, hence causing Mr Trump to believe that Germany is swindling the US. Even German CEOs, who usually refrain from making political comments, have iterated how devastating a trade war would be. Frank Appel, CEO of Deutsche Post, stated that consumers and businesses would be very badly affected. Ultimately Germany’s fate lies with the EU, as the union negotiates all trade policy regarding member states.
Despite the fears of a trade war, European shares are trading higher in response to Mario Draghi’s speech on Wednesday, in which he stated that the European Central Banks’ bond buying programme would continue to be supported. The EUROSTOXX 60 was trading 0.37% higher and the EUROSTOXX 50 was up 0.32%. The promise of continued liquidity injections once again proves that, even though growth in the area is strong, Europe is still not quite out of the post financial crisis era of unconventional monetary policy. There was also a positive earnings release across the region this week. German sportswear maker, Adidas, announced that net profits are set to rise 22-24% annually until 2020, which caused the share price to surge almost 10%.
Deevya Patel
5
NEFS Market Wrap-Up
Japan & South Korea Opposition parties in the Japanese diet have accused Prime Minister Shinzo Abe of leading a cover-up after it emerged that significant alterations were made to documents related to the questionable sale of land to the private school operator, Moritomo Gakuen. A worker in the Finance Ministry was found dead last week with a suicide note stating that he was forced to rewrite the documents. The head of the Tax Agency, Nobuhisa Sagawa, resigned last week over the controversy, and will testify before lawmakers. If this investigation links the document rewrites to Abe's office, it will damage confidence in the Prime Minister. According to the leader of the Democratic Party, Kohei Otsuka, "Even what we know now is ample reason for Finance Minister Taro Aso to resign." After a parliamentary boycott was resolved last Thursday, the upper house budgetary committee agreed to deliberate on the scandal in its meeting on the 19th of March. The outcomes of this investigation could prove chaotic to the Japanese economy. Whist the growth levels attained by the economy have been mixed, Abe has attempted to stimulate the economy through a package of policies called Abenomics, which includes stimulus spending, monetary easing and structural reforms. However this scandal could compromise key reforms, including an income tax reform bill that will be voted on this month.
The Bank of Japan's operation could be disrupted by the scandal, as two nominations to fill deputy seats at the Bank require approval from the Diet. These votes will likely be delayed. There is even the possibility that the top three positions in the bank will remain empty, as the current governor Haruhiko Kuroda must be reappointed by the 8th of April. This could render the central bank unresponsive in the event of a crisis. The revised Trans-Pacific Partnership, which was signed two weeks ago by its eleven members, is already looking for additional countries to join the free-trade bloc. Candidate members include South Korea and the UK. South Korea would benefit from joining the partnership, as it would buffer the impact of a rising tide of protectionism on the economy. South Korea’s finance minister said that the country would announce its decision on the matter by June. Current members within the Trans-Pacific Partnership make up 13.5% of the world’s economy, however it lost its biggest trading partner when the US withdrew from the deal in 2017. The US however has been invited to re-join the initiative.
Daniel Blaugher
6
Week Ending 18th March 2018
Australia & New Zealand Following the speech last month by the former Prime Minister, Tony Abbott, which called for a cut in immigration, this week we will focus on Australia’s continuing Immigration debate and the possible impact reduced immigration could have on the country. Abbott was the leader of the Liberal Party and Prime Minister from September 2013 to September 2015. In February he made a speech in Sydney making clear his view on Australian immigration and how he believes it should be cut from 190,000 to 110,000 immigrants per annum (see graph below), in order to improve “stagnant wages, unaffordable housing and clogged infrastructure”. This week the debate continues with the controversy regarding Visas for white South African Farmers. When Abbott made his speech last month, one of his main concerns was that the current level of immigration is negatively affecting house prices and rent. In the last 30 years, the population of Australia has risen by 50%, with a large proportion of this increase due to immigration. Most immigrants in Australia move to the larger cities such as Sydney, Melbourne and Perth, resulting in 86% of immigrants living in major cities in 2011, compared with just 65% of the Australian-born population. Australians have a right to be concerned about the impact on housing, with house prices having rocketed by 50% on average across the nation over the last 5 years.
This included house prices rising by 70% in Sydney. However immigration is not solely to blame for the price rise. Other contributing factors included a fall in interest rates, rising incomes and a shortage of new houses being built. Another of Abbott’s primary concerns was the negative impact of immigration on Australian infrastructure, with particular emphasis on the impact it has had on traffic jams, schools and hospitals. Yet last month a report was released by Infrastructure Australia, which stated that the potential benefits brought about by an increase in the population would be “immense”. The Australian Government has consequently been called upon to drive infrastructure development in order to accommodate for future population growth. Australia however must not forget that the nation’s success is largely built upon immigration, with half of Australians having being born overseas or have at least one parent who was. Immigration not only increases the rate of economic growth by boosting demand, consumption and employment, but it also creates a more diverse society. Australia needs to keep up with a growing population and reject plans to restrict this growth, if it is to remain the successful and innovative nation that it is. Abigail Grierson
7
NEFS Market Wrap-Up
EMERGING MARKETS
Africa This week President Trump proposed a $105.4 million cut in American aid to Tunisia, which could have very significant negative consequences for the newly democratizing country. Tunisia has been struggling greatly in recent years, a fact that is evident due to its persistently low economic growth that appears to be constrained at the 2% level (see graph below). The political elite have failed to boost the economy, whilst regional economic disparities and widespread joblessness threaten to erode the credibility of democratic governance. Consequently Tunisia announced this week that it was extending its state of emergency, which has been in place since November 2015. The state of emergency, which was implemented after a terrorist attack targeting tourists in 2015, has greatly weakened the profitability of the Tunisian tourism sector. Tourism in Tunisia accounts for 1/6th of GDP and employs 200 000 people, but after the 2015 attack tourism revenues fell by 35%. As of late 2016 tourism figures seemed to be improving, but it will be interesting to see how this new extension affects growth.
and agreements focusing on economic, cultural and educational matters. Spain also announced a $30.8 million line of credit for small and medium-sized businesses in Tunisia. This will go some way to alleviate any negative effects that may arise from the potential American aid cuts, as Spain is Tunisia’s fifth largest exporter. 67 Spanish companies currently operate in Tunisia, collectively creating $1.3 billion in investment and more than 6000 jobs. Tensions continue to rise in Morocco over high unemployment. Despite impressive economic development since the 2000s, which has led to poverty levels falling and GDP per capita increasing by 70%, unemployment remains high. This is particularly in the north where youth unemployment has been recorded at 40%. Changu Maundeni
In more encouraging news, Spain and Tunisia have recently pledged to strengthen economic and military ties. The two countries signed eight memorandums 8
Week Ending 18th March 2018
China Trade tensions between the US and China continue to grow this week, after a spokeswoman reported that Trump wants China to reduce their trade imbalance by $100bn. The US reported a trade deficit of $566bn in 2017, of which a record $375bn was held with China. At present, it is unclear how the US would like China to accomplish this goal, however it could come from a range of policies including increased imports of US goods or changes to China’s industrial policies. The US has taken a protectionist approach to try and reduce their deficit, with Trump implementing tariffs on steel and aluminium imports only last week. Although the effects of such tariffs are minimal in China, the impacts of an international trade war could be detrimental. Worldwide reciprocity of tariffs due to action from the US could lead to more localised trade for China. Additionally, this week, sources revealed that tariffs associated with the US’s intellectual property investigation on China could come “in the very near future”. The Trump Administration is looking to impose tariffs on $60bn worth of Chinese electronics and telecoms imports. The aim is to stop China from implementing policies that force US companies to reveal technological secrets in exchange for operation in the country. China has already made a lot of progress in reducing external surpluses over the past decade, as shown in the graph below, however the US’s deficit with China has remained constant. Analysts believe that China is unlikely to discourage exports as it is an important source of employment and growth in the country. A more probable approach would be to
increase its imports, although the effect of this would be limited. However the Chinese Foreign Ministry spokesman, Lu Kang, expressed his confidence that “China and the United States can use friendly consultations to resolve [their] disputes”. In other news, the abolition of the two-term limit in China was approved earlier this week. Out of almost 3000 delegates within China’s National People’s Congress, only two voted against and three abstained. The previous two-term limit was introduced by Deng Xiaoping in 1982, which aimed to avoid the problems associated with one man rule, as experienced with dictator Mao Zedong. Although the economy may see benefits in the form of policy consistency, the amendment has fuelled concerns that it has paved the way for another dictatorship. Jessica Murray
9
NEFS Market Wrap-Up
Latin America This week we review the key points from the discussions that took place during The World Economic Forum (WEF) on Latin America 2018 between 13th-15th March, as well as an assessment of Mexico’s trade diversification. A major issue discussed during the 13th World Economic Forum this week was the way in which the fourth industrial revolution could fill the current technological and innovative development gaps in Latin America. Block chain could promote greater transparency, whilst the robotization of production could address the lag in labour productivity levels that is currently plaguing the region. A barrier to joining the industrial revolution however is Latin America’s informal economy, which accounts for 55% of the working population. Solutions for this problem suggested at the WEF included simplifying labour regulations and providing protection for employees, hence increasing productivity and reducing income inequality in the worlds’ most unequal region. Reducing bureaucracy also arose as a solution for promoting the rise of “unicorns”, in particular tech start-ups. This would create jobs and “lead to sustained growth during the next decades.” Given that almost 80% of the region’s population will head to the polls this year, the presidential elections of 2018 were unsurprisingly another important focus of the WEF. Problems such as corruption scandals and the rise of candidates with extreme views have caused a drop in the endorsement of democracy, as well as an increased distrust amongst voters in Latin America. Just on Thursday, the opposition filed a second request to impeach the current Peruvian president after
accusations surfaced regarding ties to Brazil’s Odebrecht corruption scandal. Uncertainty in the political landscape and the rise of populist candidates may hamper the necessary policies for economic and technological transformation in the region. In addition, this week the Mexican state of Oaxaca restored plans for a $1.2billion wind farm – the largest in Latin America in terms of size and investment – after protests and insufficient financing delayed the project for 6 years. The state’s governor, Alejandro Murat, spoke at the WEF this week, emphasising Oaxaca’s potential of becoming a “logistics hub” and a “gateway zone for investors from Asia, Europe, Africa and the Americas” due to its strategic location. Projects like this are part of Mexico’s effort to diversify its trade partners in order to not rely too heavily on NAFTA – a factor now frequently considered due to the possibility of a breakdown in the accord. Paulo Carreño, who governs the country’s agency that promotes direct investment, identified the “silver lining” of Trump’s protectionist measures at the WEF, stating that US President’s actions had “helped [them] do [their] job of pushing businesses and the private sector to look for other markets.”
Felicia Bogdana Cornelia Ababii 10
Week Ending 18th March 2018
Russia & Eastern Europe This week the political climate between Russia and the Western Hemisphere took a turn for the worst. As has been widely reported, on Sunday 4th March, former Russian spy Sergei Skripal and his daughter were found by emergency services in “an extremely serious condition” in Salisbury. Later it was found that a nerve agent of Russian origin had poisoned them. Since then, Theresa May has explained that the conclusion drawn by the British government is that Russia was “culpable” for the attempted murder of the pair, and so have expelled 23 Russian diplomats. Leaders from Germany, France and the USA have joined Great Britain in issuing a statement explaining that “the only plausible explanation” of the attacks was Russian involvement. The implications of this could be tremendous for the Russian economy. In an article from the Independent on Tuesday, a Government Minister spoke of the potential for “economic war”. This could come in a variety of different forms, such as trade embargoes, sanctions and restrictions on Russian-owned assets in the United Kingdom. The Criminal Finances Act enables the British government to investigate Russian ownedassets and property in the UK. The government also has the right to seize assets if they are found to be illegitimately purchased, as well as money in banks should it be found to be of “suspicious origin”.
With the greatest powers in the Western Hemisphere united in their condemnation of Russia, this has the potential to be catastrophic for Russia’s economy. Russia World Bank statistics show that exports of goods and services account for roughly 25.7% of GDP, hence sanctions and quotas could be extremely harmful, especially considering that Germany is one of Russia’s top export destinations. We have already seen the damage inflicted by sanctions on Moscow from the Ukraine Crisis. This lead to a two-year recession, which the nation had only crept out of last year. Indeed the Russian economy is still showing encouraging signs, with the Ministry of Economic Development estimating just this week that GDP growth in January had increased to 2% from the previous year (up from 1.4% in December). Despite these positive signs, the Russian economy is still fragile and recovering. It must therefore look at ways to subdue the effects of an economic war with the UK, as well as other Western powers like the USA and Germany.
Laura Leng
11
NEFS Market Wrap-Up
South Asia This week India and various other Southeast Asian countries suffered from the current lack of demand for gold. India also increased its influence in Southeast Asia due to the increasing doubts regarding US and Chinese politics. For the second week in a row, gold dealers in India offered a discount of up to $3 per ounce of gold over domestic prices (which includes a 10% import tax). Since March 9th, domestic gold prices in India have held at around 30,329 rupees per 10 grams (see graph below). This was after the price of gold fell to 30,210 rupees, the lowest amount since 1st March. This shortage of demand for gold in India is particularly concerning given that Sunday is the Gudi Padwa, a popular festival held in the country during which buying gold is considered auspicious. Managesh Devi, a jeweler from Maharashtra, stated that gold bookings this year “are just 30 % of the normal (level).
biggest reasons for this diversification away from the US and China is the increasingly unreliable nature of the US’s treatment of many ASEAN countries. For example, President Trump’s recent tariffs on foreign aluminium and steel imports have unnerved many of America’s trading partners. Finally, India’s rise in Southeast Asia can be attributed to the apprehension regarding China’s recent ambitions to increase economic and political dominance over many of the countries that surround the nation. This apprehension has allowed the Indian Prime Minister, Narendra Modi, to enhance India’s ties with many Southeast Asian economies under the “Act East” policy.
Premiums for gold in Singapore fluctuated between 60 and 80 cents per ounce over the benchmark rate, hence showing great volatility when compared to the rather constant 80 cents per ounce seen last week. As gold prices have not yet fallen enough to encourage investors to buy it at its “cheapest” possible price, the commodity’s value is likely to remain relatively low. In other news, various Southeast Asian countries, including Vietnam and Singapore, are seeking to diversify their trade partnerships beyond the US and China. Many ASEAN countries are thus seeking partnerships with India and Australia, which will be discussed this weekend at a special summit regarding possible economic alliances. One of the
Mario Pucinelli Filho
12
Week Ending 18th March 2018
Middle East This week, we look at progress being made to develop various nations in the Middle East and the impact this could have on future global markets. Several reports have been published this week, referring to Saudi Arabia as the most animated emerging market at the moment. CNN Money stated that confidence in the nation has massively rebounded following the nation’s recent corruption crackdown, which recovered $107bn as a result. Investors are consequently now flocking to Saudi Arabia, with the nation seeing net investment inflows of $110 million between the start of the 2018 and March 2018, according to EPFR Global. The Saudi stock market, the Tadawul, has also gained more than 7% in value during the same period, hence greatly outpacing many other indexes. The major pinnacles of Saudi Arabian development include its Vision 2030, which will attempt to cure the nation of its oil dependency, and the IPO of Saudi Aramco, the oil behemoth. Whilst a date for the IPO has not yet been declared, it should generate billions for the government to invest in other sectors. Morgan Stanley has also been quick to notice the potential, with Sammy Kayello, the CEO of Morgan Stanley Middle East and North Africa, stating: “Strong underlying fundamentals, supported by the government’s efforts to diversify the economy, will translate into increased investments activity in the kingdom”.
Goldman Sachs is also doubling its investment banking staff in Saudi Arabia, in the hope that sweeping economic reforms will draw even more investors into the region. The bank’s expansion into Saudi Arabia is excellent news for the Crown Prince Mohammed bin Salman, who has been trying to secure his grip on power without alienating international investors, so that he might transform the economy into a financial powerhouse. In other news, Kuwait has announced its plans to divide its stock market into three market segments from April 2018, in a bid to boost liquidity for investors. This is in response to Kuwait’s intentions to reform its stock markets, which have suffered from low liquidity and delistings in the past. The three market segments will be known as the premier market, the main market and the auction market. Finally, in order to revive its reputation as the Middle East’s top banking and business centre, Bahrain recently inaugurated Bahrain FinTech Bay, a hub of offices designed for financial and technological services. Following various religious protests across the country and the plunge of oil prices in 2014, Bahrain was plagued with falling state revenues, a deteriorating credit rating and soaring debts. It is now hoped however that, as the political and social scene has calmed down, Bahrain will be able to attract business back into the nation so that it may once again compete effectively with its rivals in the Middle East. Jeremy Whiskard
13
EQUITY AND DEALS NEFS Market Wrap-Up
Financials Markets suffered from a period of fluctuation this week following several prominiant accouncements from the US. The White House appointed the conservative commentator Larry Kudlow as the Director of the National Economic Council, thus replacing the free trade proponent, Gary Cohn. Kudlow then advised selling gold and buying the dollar instead, hence causing three days of losses for the US Dollar which it is now finally recovering from. The aluminium and steel tariffs are still causing a headache over in America, with Julien-Pierre Nouen, Chief Economic Strategist at Lazard Frères Gestion, stating: "Exporters have been a bit weak and you can see there are some worries about whether other countries will retaliate... but you really have to stick to the economic outlook and in fact we think the economic outlook remains very good." Whilst the prospect of a stronger dollar may weaken US exports, the US economy could benefit overall from the additional fiscal stimulus, potentially leading to process of robust economic expansion. Nevertheless, rumours of an additional US tariff aimed at China could generate further market agitation next week.
After Wall Street closed at a loss, with the S&P 500 down -0.6% and the Dow Jones down -1%, most bourses in Asia moved up off lows, with the Hong Kong’s Hang Seng index recovering from an intraday loss and closing at +0.3%% overall. As a consequence, the main indexes in Europe saw a slight increase, with the Europewide Stoxx 600 rising by 0.1%, Frankfurt’s Xetra Dax 30 jumping by 0.3% and London’s FTSE 100 moving up by 0.1%. It is noteworthy to claim that big tech stocks like Apple (AAP.O), Alphabet (GOOGL.O) and Facebook (FB.O) have significantly contributed to growth indexes during the past year. As such, technology confirms its status as the best-performing sector so far in 2018. During 2017, the S&P technology index (.SPLRCT) jumped by nearly 37% compared to the 19.4% increase in the S&P 500’s index. Other relevant reports include Citi raising Hikma Pharmaceuticals to "buy" after the results proved better than expected. Goldman Sachs also downgraded Imperial Brands to "neutral" due to low expectations about its future performance, and JPMorgan restarted the coverage of Tesco with “overweight”. Giovanni Cafaro
14
Week Ending 18th March 2018
Technology & Health This week saw the technology sector of the S&P 500 shed more than 1%, the sector’s biggest drop since March 1st, after a deal between two chip manufacturers Broadcom and Qualcomm was blocked by President Donald Trump. The two tech giants are part of the ‘semiconductor’ S&P 500 subsector, which is led by firms including Intel and Nvidia. It has led the technology sector over the past year, rising almost 45% over the period. Semiconductor stocks fell 3% from their 52-week high, with analysts crediting the tumble to President Trump’s ban of the $142bn-to-be Broadcom-Qualcomm merger. President Trump cited national security fears over Chinese leadership in the development of 5G technologies as the reason for blocking the merger. While good reason for the block came from the fact that the merger would have afforded incredible monopoly power to the involved firms, some commentators reasoned that the block came simply as a result of Trump’s negative rhetoric toward Chinese trade. This week, Google and Facebook acted to police their platforms. Google announced a ban on cryptocurrency advertising. While advertising forms a strong 85% of Alphabet’s (Google’s parent company) revenue, it said that adverts for cryptocurrencies, ICOs (akin to IPOs but far less regulated), wallets and exchanges
would be blocked from June to prevent scamming. Facebook banned far-right political group, ‘Britain First’, in line with the Mayor of London Sadiq Khan’s comments that social media platforms would not police themselves and promote healthy political commentary without pressure from the public and government. As a viral technology, cryptocurrency performance and general sentiment seems to be weakening. But the ‘distributed ledger technology’ that underpins most cryptocurrencies – the Blockchain – could be revolutionising sectors outside of finance. The Blockchain technology provides an encrypted record of transactions completed on the network to the transaction stakeholders. This week DHL and Accenture piloted a tracking system that utilises the Blockchain network, to track pharmaceutical products from manufacture to their prescription, in a move which could potentially clamp down on the trade of counterfeit medicines. Echoing Mark Carney and Bill Gates’ sentiments from previous weeks that cryptocurrencies are being used in fraudulent and immoral ways (mostly through the purchasing of illegal drugs), this move could open the floor to institutional bodies that wish to police the supply chains of illegal goods intertwined with Blockchain networks.
Matthew Chapman
15
NEFS Market Wrap-Up
Oil, Gas & Industry Glencore Plc has just agreed to sell to GEM Co., a Chinese chemical firm, a third of their cobalt production over the next three years as China seeks to secure supplies of this important metal used in batteries for electric vehicles (EV). The CEO of Glencore, Ivan Glasenberg, defended this decision stating: “Electric vehicles will be disruptive to the world.” The giant Anglo-Swiss commodity producer will sell 52,800 tons of cobalt hydroxide to GEM between 2018 and 2020. According to reports, GEM and its subsidiaries will purchase 13,800 tons of cobalt hydroxide from Glencore in 2018, then 18,000 tons in 2019 and 21,000 tons in 2020. In 2011, China identified EVs as one the seven “strategic emerging industries” and has thus been revving up its EV industry since (see graph below). Generous state subsidies are one of the reasons why China is currently world’s leading EV industry in terms of production and sales. Whilst it is no surprise that China clamours for cleaner air, experts have cautioned that China’s EV industry will tank when its government finally applies the brake on the hefty subsidies. Meanwhile, global automakers like BMW AG, General Motors and Volkswagen AG are going full steam ahead in grabbing a slice of the world’s largest EV market. Closer to home, vast swathes of the South Downs National park, the Surrey Hills and the High Weald could be at risk from a new oil rush in England. Companies like UK Oil and Gas Investments (UKOG), Cuadrilla and Angus Energy are bringing forward projects that could see thousands of wells being drilled in this region in the coming decades. These companies are
primarily exploring for a specific geological feature called the Kimmeridge, which is a hybrid of limestone and shale oil reservoir. The Kimmeridge is seen as a close analogue to the massive Bakken oil formation in North Dakota, US, thus indicating good future potential in terms of oil production. However the UK imposed a ban on fracking on depths less than 1000m. Companies have consequently been exploring other ways to boost oil production, such as the use of hydrochloric acid to dissolve limestones found in the Kimmeridge. Whilst UKOG, a leading player in search of Kimmeridge oil, plans to use hydrochloric acid to boost oil flow and extract over 1 billion barrels of oil, the UK Environment Agency has started regulating the quantities of hydrochloric acid used after fears arose that groundwater sources could be affected by the overuse of acid.
Mingli Yong
16
Week Ending 18th March 2018
Deals This week we will be focusing on the US Department of Justice’s (DoJ) court challenge to AT&T’s plan to buy Time Warner, as well as Japan Tobacco’s acquisition of Donskoy Tabak. On Monday, the DoJ faces off with AT&T over its $85.4bn acquisition of Time Warner, with the federal court in Washington taking stage to one of the biggest antitrust showdowns. The importance of this is not only important to AT&T and Time Warner, but also to future media consolidations, such as Disney’s $66bn bid for 21st Century Fox. This is the first time the DoJ is court challenging a vertical merger, which occurs between companies operating in different parts of the production and distribution chain, in around 40 years. For this reason it will be closely watched by others to calculate the Trump administration’s approach to antitrust enforcement. It has come at a time when President Trump has also recently blocked Broadcom’s $142bn takeover of Qualcomm due to national security grounds (see graph below).
insurer, and the $67bn takeover of pharmacy benefits manager Express Scripts by Cigna. Japan Tobacco has acquired Donskoy Tabak, Russia’s fourth largest cigarette manufacturer, for $1.6bn. This has been done to strengthen Japan Tobacco’s position in the Russian cigarette market, which is the third largest cigarette market in the world. Japan Tobacco believes that the transaction will consequently increase the company’s market share to around 40%. Last year Japan Tobacco spent around $2bn on acquisitions in the Southeast Asia region, in a bid to boost its presence in emerging markets and diversify itself away from its home market of Japan, where sales are shrinking.
Abdul Akhtar
AT&T are looking to combine its internet, television and wireless services with Time Warner’s programmes, such as Game of Thrones, NBA basketball games and Warner Brothers films. However the US government oppose the deal as they believe it will raise prices for consumers. The importance of the case goes beyond the media and tech sectors, with a former senior Federal Trade Commission official saying that the trial will determine the future of several pending mega deals. These deals include the retailer CVS’s $69bn acquisition of Aetna, a health 17
NEFS Market Wrap-Up
COMMODITIES
Energy Following the alleged Kremlin-involved assassination attempt on former Russian spy Sergei Skripal on British soil earlier this month, the UK-Russia relationship has drastically deteriorated. The Prime Minister, Theresa May, has consequently introduced a list of sanctions to impose, including plans to cut Russian gas imports and seek alternatives to Russian gas. Approximately 57% of the UK’s gas consumption is imported, of which half originates from Russia. The UK imported a total of 16.36bn cubic metres of natural gas from Russia last year, worth $2.85bn. However following Storm Emma, the UK’s gas reserve is now at a 7-year low. This has consequently put the UK in a temporarily very vulnerable position, whilst tensions with Russia tighten. Meanwhile Gazprom, the Russian monopolistic gas supplier to Europe, is currently having a dispute with Ukraine, as Russia reportedly transported less gas to Ukraine through the pipelines than the agreed amount. The Stockholm Chamber of Commerce has consequently ordered Gazprom to pay $2.56bn in compensation to the Ukrainian energy company Naftogaz. Gazprom however has refused to do so, stating it now has plans to appeal the verdict and shut off supply to Ukraine. This turmoil could greatly affect other countries such as Bulgaria, Romania and
Greece, as their supplies depend on the Ukrainian pipelines. However this is only a temporary problem as Nord Stream 2, an under-sea natural gas pipeline that is due to be completed in 2019, will bypass Ukraine and transport gas directly from Russia to Germany. Currently 40% of Europe’s gas consumption comes from Russia, hence it is hoped that this new project might make the supply more stable. But Latvia, Lithuania and Poland are sceptical, as they all signed a letter criticising Moscow for using Gazpromowned Nord Stream 2 to deepen Europe’s dependence on Russia gas. This week E.ON SE, a German multinational electric utility service provider, has finalised a deal to acquire a 76.8% stake from Innogy SE for €22bn. Share prices of Innogy and E.ON soared by 17% and 5% respectively after the market opened on March 12th. This merger will continue the commitment of transforming Germany’s energy industry from fossil fuels and nuclear energy to the renewable energy as advocated by Angle Merkel. E.ON is Germany’s biggest investor on clean energy, with €10bn invested in wind, solar and storage, whilst RWE (Innogy SE’s parent company) is the country’s largest power producer.
Ang Gao 18
Week Ending 18th March 2018
s.
CURRENCIES
Major Currencies The U.S. Dollar posted overall weekly gains, to hence continue the longest weekly winning streak in 5 months. After looking like it was going to be a loss for the week and on the back of a 9-day low, on Thursday the Dollar climbed in the wake of stronger-than-expected economic data. February data for industrial production and capacity utilization, as well as March data for consumer sentiment, all exceeded expectations and reversed the downward trend of the buck to put it back into positive territory.
The Euro EUR/USD, at $1.2285, posted a weekly loss of 0.2%, hence continuing the indecisive nature of the currency’s movements this year. Weak inflation continues to be a problem for the Euro, with the latest downward shift being yet another move further away from the central bank’s target. According to the latest readings from Eurostat, year-onyear inflation for the Eurozone dipped to 1.1% in February, down from 1.3% in January and below an earlier estimate that put the rate at 1.2%.
The initial dip of the buck was largely due to the uncertainty surrounding the stability of the Trump administration. Causes for concern included the Secretary of State, Rex Tillerson, being fired by Trump, as well as chief White House economic adviser Gary Cohn choosing to resign in protest of Trump’s proposed tariffs on aluminium and steel.
The rebound of the Dollar across the board on Friday meant a fall in Sterling GBP/USD for the day. However the pair still posted gains of 0.7% for the week. This comes with an improvement in the hopes of investors, that a transition deal with the EU will be struck at a summit next week. Yet whilst this week we remain relatively neutral regarding the pound, next week we could see slightly more turbulence. There will be market moving data announcements on inflation, jobs and wages, as well as a monetary policy announcement from the Bank of England. To top it off, the EU Council will meet on Thursday and Friday to discuss the latest EU/UK transition period.
Traders thus looked towards the Yen for safety after reports emerged that President Donald Trump was planning to replace McMaster. “The yen, which tends to benefit at times of uncertainty, was on the rise on the back of U.S. political developments,” said Marios Hadjikyriacos, a investment analyst at foreign-exchange broker XM. As a result, the greenback fell 0.7% against the yen.
Edward Turner
19
NEFS Market Wrap-Up
Minor Currencies Switzerland’s central bank announced during their quarterly rates announcement that they would keep their foreign currency policy on hold, whilst they monitor the value of the franc and the Swiss housing market. However following the recent appreciation of the franc due to the weakness of the US dollar, the central bank said they would “remain active in the foreign exchange market as necessary”. After Norway’s central bank announced that they may potentially raise rates earlier than expected, the Norwegian Krone reached its highest point this year. Norway’s central bank explained that their key policy rate would be held at 0.5% for the time being however, being cautious, the central bank also stated: “it will soon be appropriate to raise the key policy rate”. The central bank commented that “overall, the changes in the outlook and the balance of risks imply a somewhat earlier interest rate increase than in the December 2017 monetary policy report”. After the central bank’s announcement, the Euro plummeted by 0.7% against the Norwegian Krone to NKr9.49 per Euro.
Since President Donald Trump announced the radical steel and aluminium tariffs he plans to impose, the Mexican peso this week reached its strongest position against the US dollar (see graph below) in just under two weeks following Presidents Trump’s willingness to allow for exceptions. President Trump mentioned that “real friends” may be exempt from his tariffs, suggesting Mexico and Canada will benefit the most from such an exemption if it were to be implemented. The news strengthened the Mexican peso to 18.618 per US dollar, a rise of over 1% since the tariffs were announced. The Canadian dollar has also strengthened since the tariffs were introduced by roughly 0.1%, up to C$1.2896 per US dollar. It was also announced that all countries will be invited to discuss and negotiate exemption from the imposed tariffs. Sarren Sidhu
20
Week Ending 18th March 2018
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
The
Sponsors:
This Publication has been prepared solely for informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, product, service or investment. The opinions expressed in this Publication do not constitute investment advice and independent advice should be sought where appropriate. Whilst reasonable effort has been made to ensure the accuracy of the information contained in this Publication, this cannot be guaranteed and neither NEFS nor any other related entity shall have any liability to any person or entity which relies on the information contained in this Publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at the user’s risk.
21