Week Ending 25th 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 14
Financials Technology & Health Oil, Gas & Industrials
Commodities 17 Energy
Currencies 18
EUR, USD, GBP AUD, JPY, Other Asian
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Week Ending 25th March 2018
MACRO REVIEW United Kingdom On 20th March the Office for National Statistics (ONS) revealed that inflation, as measured by the Consumer Price Index, fell to 2.7% in February, down from 3% in January. One of the main reasons cited for this was lower petrol and diesel prices, which were down 0.2p per litre and 0.1p per litre respectively. This figure was lower than expectations, with economists from Reuters estimating a fall to 2.8%. st
The ONS also revealed on 21 March that UK wages grew by 2.6% in the three months leading to January; the fastest rate of growth in two and a half years as illustrated by the graph below. With UK employment currently at 75.3%, the Bank of England has highlighted a tightening labour market for a cause of concern that is likely to raise inflation in the future. Despite signals that future inflation is likely to be higher, the Bank of England voted 72 on the 22nd March in favour of keeping interest rates at 0.5%. This has increased expectations of a rate rise to 0.75% in May, especially as Mark Carney had previously stated in February that a rate rise may be required earlier than expectations predicted. The 7-2 vote was a shock for the markets as the markets had priced in a 9-0 vote in favour of keeping rates unchanged.
from the EU have scaled back operations within the UK amid concerns over disruptions to trade as a result of Brexit. Whilst this is likely to be a short term measure whilst the final deal is agreed. However more worryingly the survey also revealed that one in four British firms were struggling to secure contracts with suppliers within the EU. The UK is unable to agree trade deals with countries outside the EU during the transition period. The inability of UK firms to secure these contracts within the EU could cause large disruption to the UK economy. For example, the lack of contracts could cause cost push inflation in the short run as suppliers will have to be sourced within the UK, where they may be less competitive and more expensive than those from the EU. However the long-term benefits of Brexit could mean that firms are able to procure supplies at a more competitive rate than the EU offers. Nicholas Gladwin
A survey released on 20th March by the Chartered Institute of Procurement and Supply revealed that one in seven firms 3
NEFS Market Wrap-Up
United States The US launched a formal complaint against China at the World Trade Organisation this week, accusing its rival of discrimination against US exports, as well as imposing mandatory and adverse terms of technology contracts. This comes after China announced its own set of proposed reactionary tariffs worth $3bn, in response to Trump’s steel and aluminium tariffs. A White House investigation found multiple unfair practices in China seeking to discriminate against US firms, including restrictions on foreign ownership and biased trading terms, as well as conducting and perhaps even supporting cyber attacks. If we consider China’s proposed tariffs, it is not likely that they will have much impact on the US tech industry or on key players such as Facebook, Google and Alphabet, as Beijing has blocked many of these companies doing business in the country anyway. Although the Chinese government has not specifically isolated the technology sector as one of its targets, it is speculated that this would be a target for a potential trade war. Many popular Western companies such as Amazon have a small presence in Chinese markets, while some – such as Netflix – have chosen to stay out altogether, as Government censorship and regulations significantly hamper the tech sector’s ability to grow in China. This ultimately means that any tariffs imposed would have a very small effect.
The EU and six other countries have been granted exemption from the proposed tariffs by the current US administration. This move is likely motivated to calm tensions after Cecilia Malmström, the EU’s trade commissioner, stated she felt that protectionism was being “used as a weapon to threaten and intimidated us [the EU]” – the common reception by EU officials. In other news, Trump has dropped his threats of a $1.3 trillion budget veto, but has vowed: “I will never sign another bill like this again… nobody read it”. The President initially threatened to veto the bill just hours before signing it, due to its lack of full funding for his proposed border wall. Though the concrete prototype would cost approximately $25 billion, the White House has been granted $1.6 billion in funding under specific circumstances, including that the wall must be made of bollards rather than concrete. Despite Trump’s dissatisfactions with the bill, he agreed to sign it due to its large increase in military spending, which is in line with his aspirations to significantly expand US defensive measures.
Amelia Hacon 4
Week Ending 25th March 2018
Europe Following last week’s development in the brewing trade war between the EU and the US, whereby the EU asked for an exemption from Donald Trump’s newly announced tariffs on steel and aluminium, a senior US official has stated that the EU would be temporarily exempt. This comes as Mr Trump has decided to ‘pause’ the import duties whilst discussions take place. The exemption announced thus far suggests that the president is narrowing down the countries it is targeting. In Brexit news this week, the EU has approved new guidelines on trade, security and other issues, so that the next stage of negotiations can get underway. The guidelines will allow the Chief Negotiator Michel Barnier to talk directly to the UK about the future relationship, with the intention of reaching a political agreement by October this year. According to data released by the World Travel & Tourism Council (WTTC), Germany is the largest Travel and Tourism economy in Europe, having contributed €348.1 billion to the economy in 2017. The industry contributes enormously to the overall health of the Germany economy, supporting 6.1 million jobs in 2017, which is more than the automotive manufacturing and banking industries.
However the 2017 German tourism industry growth rate of 1.7% is lower than some of its counterparts, compared to 9.8% in China and 6.2% in the UK. If this is to continue, it is likely that another country will surpass Germany’s prime position as one of the largest travel economy’s in the world. The European Union’s General Data Protection Regulation (GDPR) is due to come in to effect on May 25th. The new regulation requires companies to obtain unambiguous consent from internet users in order to collect their personal data. Personal data consists of credit card numbers, web search results, travel records and even biometric data from wearable fitness monitors. The added technology costs are set to impact firms’ costs significantly, as a Fortune 500 survey suggests firms are now setting aside $500,000 to $1 million, some of which will be intended for hiring new labour. The penalty for non-compliance are severe, consisting of fines of up to €10 million or 2% of annual worldwide revenue – whichever is higher.
Deevya Patel
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NEFS Market Wrap-Up
Japan & South Korea The investigation into the scandal surrounding the involvement of the Japanese Prime Minister, Shinzo Abe, in a heavily discounted land sale to the school group Moritomo Gakuen has reached a critical point. In an interview with lawmakers, the former head of the private school operator confirmed that Mr Abe’s wife had encouraged him to pursue the deal. Mr Abe has said that he would resign if it emerged that he or his wife were complicit in the scandal, but he still denies any involvement. The opposition parties however are still looking for proof. As such this Tuesday they will listen to a testimony from the former tax agency chief, whose division altered several financial documents related to the sale. Mr Abe’s approval rating dropped to 38.7% in a poll last Sunday. If Mr Abe is forced to leave office, it may compromise the positive relationship Japan has with Mr Trump. But this relationship may not be as tight as photographs of the duo suggest. Japan was not included on a list of countries temporarily exempted from the US tariffs on steel and aluminium. South Korea however was among the listed countries. Masahiko Hosokawa, a former trade ministry official, remarked that Mr Trump will likely use the exemption as a tool to push for a bilateral trade agreement with Japan. Japan prefers multilateral deals, hence it fears that a bilateral agreement with the US would pressure Japan to open up its other markets, such as beef, to US imports.
The Japanese markets however were preoccupied with the tariffs on Chinese imports that the US President announced last Thursday. The Nikkei 225, an index of the Tokyo Stock Exchange, fell sharply by 4.51%. Similarly, in South Korea, the Kospi Composite fell 2.2%. South Korea will be hit particularly hard by the tariffs as it is heavily connected to the global supply chains for Chinese exports, according to JP Morgan’s global market strategist, Hannah Anderson. The yen, which is usually seen as a haven currency, firmed 0.4% against the dollar to ¥104.82 on Friday amidst the uncertainty, and touched a 17-month high. The yen has risen since the start of the year (see graph below), boosted by Mr Trump acting on his protectionist pledges. According to Jesper Koll, Head of the Wisdom Tree, since it is the end of the fiscal year Japanese companies will be squeezed as they repatriate their depreciating dollar holdings. Daniel Blaugher
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Week Ending 25th March 2018
Australia & New Zealand This week we look at the future of New Zealand’s Oil and Gas exploration, following Prime Minister Jacinda Ardern’s comments on Monday. After receiving a petition from Greenpeace that called for the end of oil exploration on Monday, she made comments saying she was ‘actively considering’ the move. The petition was signed by 45,000 people, and called for an end to oil exploration, drilling and seismic testing. Ardern made a surprise appearance to accept the petition and make a speech, however asked for more time for the government to introduce the ban. However, since Monday, Ardern has clarified what she really meant by her comments and has now said that she was talking about the current permit process. Ardern told Morning Report that she was referring to how the Government is ‘actively considering’ the block offer, which is actually an annual job for the Government. The annual block offer in New Zealand refers to when explorers compete for the right to search for oil and gas in New Zealand’s waters. New Zealand Petroleum & Minerals says that this method ‘enables efficient allocation of exploration acreage, incorporating the views of industry and stakeholders’. The country has run annual block offers since 2012, which has improved the country’s profile amongst foreign investors and stimulated competition.
The leader of the National Party, Simon Bridges, has said that he agrees that New Zealand needs to transition to a lowercarbon economy and encourage the use of renewables. However, he also said that this should not involve ending oil and gas permits completely. Arden replied to this saying ‘we’re not going to cancel anything that’s been done in the past. This is all about what we do in the future’. The Government has said that the goal is to move to renewable energy by 2035. Since the Rena Oil spill in New Zealand in 2011, where 350 tonnes of oil leaked into the ocean around the Astrolabe Reef, people in New Zealand have become increasingly concerned about the environment and the effects of the oil industry. The Petroleum Exploration and Production Association of New Zealand has come out to say that the proposed ban would be a ‘lose-lose for New Zealand and the global climate’, as it would simply shift production of oil and gas overseas. This would mean New Zealand would miss out on the various economic benefits of being more energy self-sufficient. Instead, New Zealand would have to rely on imported fuel, which in turn would create higher net emissions and higher prices.
Abigail Grierson
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NEFS Market Wrap-Up
EMERGING MARKETS
Africa Africa is on the rise this week, as on Tuesday, 44 African countries signed a free trade agreement. Although all 55 countries were set to sign the African Continental Free Trade Area (ACFTA), there were some holdouts, with the biggest being Nigeria – Africa’s largest economy. Despite this, the United Nations Conference on Trade and Development has maintained that eliminating import taxes between African countries could, over time, boost African GDP by 1%. IntraAfrica trade stands at about 16% of the continent’s total but the United Nations Economic Commission for Africa estimates that the agreement could increase this by half for Africa. Whilst many of the details are still to be agreed upon, the crux of the agreement is that countries will eliminate tariffs on 90% of goods. The AfCFTA has the potential to bring over 1.2bn people together into the same market, with the bloc of 55 nations potentially being the largest in the world by member states. However the agreements will still require ratification by individual governments and will only come into force when ratified by at least 22 countries.
would - if sustained - kick-start the economy as well as provide a stabilisation of fiscal strength. A downgrade to a "junk" rating by Moody's would have seen South Africa removed from Citi bank’s influential World Government Bond Index (WGBI), and could have triggered up to R100 billion in asset sales by foreign investors. Rounding up the good news this week, Ghana is set to be one of the world’s fastest growing economies this year, with a predicted growth rate of between 8.3%8.9%. In January, Ghana’s benchmark stock index achieved the world’s highest rate of growth of 19%. This new growth will mainly be driven by rising oil prices as foreign oil companies expand operations in the African nation. This growth forecast is astonishing since the World Bank predicted that the growth average for the African continent as a whole would be 3.2%. The forecast serves to cement Ghana’s position as one of Africa’s strongest economies.
Changu Maundeni
The struggling South African economy welcomed good news this week, as on Friday, Moody’s revised South Africa’s credit outlook from negative to stable. The credit ratings agency said that the recovery of institutions in the economy 8
Week Ending 25th March 2018
China China and the US are on the brink of a trade war, as Trump’s proposed tariffs edge closer to fruition. China has showed its willingness to retaliate, with plans to levy duties on 128 US products accounting for up to $3bn worth of US imports. The news follows Trump’s official announcement on Thursday of plans to impose a 25% tariff on $60bn worth of Chinese imports. However China’s retaliation is more likely a response to the steel and aluminium tariffs imposed earlier this month. Beijing had previously expressed its desire to not engage in a trade war with the US and has said that it will take legal action under the World Trade Organisation framework. Analysts suggest that the country is using this retaliation as a warning in order to stop a trade war from emerging. Global markets have been reacting negatively to the tensions. Alongside falls in US and Chinese shares, Asian and European share indexes have tumbled. Investors are worried about the possible global impact of a trade war between the two largest economies. Chinese share indexes fell the most in six weeks on Friday, with the Shanghai Composite index and blue-chip CSI300 index down 3.6% and 2.9% respectively. Bond yields have also been negatively affected, however the currency market remained quiet.
Although the impact of a trade war on the two countries and the rest of the world remain to be seen, analysts suggest that we could see a huge impact on global growth. Tensions between the US and China go beyond just trade. Earlier this week, President Xi delivered a nationalistic speech that promoted his plans to peacefully “rejuvenate” China as a world power. However Xi warned against foreign plots, stating: “all acts and tricks to split the motherland are doomed to failure and will be condemned by the people and punished by history”. The warning stems from the nation’s conflict with self-ruled Taiwan, which has increased following suspicions that President Tsai wants to push for formal independence. Taiwan has stated that China has increased military exercises around the island over the past year. Last week, Trump infuriated Beijing by signing legislation that encourages US senior officials to meet with Taiwanese counterparts. The US has supported the one-China policy since the 1970s, which Trump reaffirmed last year. However, a senior US diplomat announced that the US wishes to “bolster Taiwan’s ability to defend its democracy”.
Jessica Murray
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NEFS Market Wrap-Up
Latin America This week, we explore developments in trade agreements, advances towards digitisation and investment initiatives in Latin America. Following Brazil’s appeals for its exemption from the US’s steel and aluminium tariffs, the Brazilian President Temer announced on Wednesday 21st that the US government has temporarily suspended the tariffs for the South American nation, which are to take effect from Friday 23rd. As Brazil is the second largest exporter of steel to the US, concerns were raised about the potential effects such tariffs could have on Brazil’s recovering economy. In the face of Donald Trump’s protectionist measures, the Presidents of Colombia and Brazil have also announced their support for a potential trade agreement between the Mercosur bloc (formed of Argentina, Brazil, Paraguay and Uruguay) and the Pacific Alliance (made up of Colombia, Mexico, Chile and Peru) this week. Additionally, Ecuador took a step towards “tapping the 4th industrial revolution” by signing an agreement with Germany on Wednesday 21st March. Germany is to “share experiences” through this agreement and aid Ecuador’s competitive practices by helping the country “develop a digital economy”. Ecuador’s industries and productivity minister, Eva Garcia, stated that the current focus is advancing the software industry, as the country only invests 1.88% of GDP in technology and R&D.
Brazil’s president also released the “EDigital” strategy this week – a “structure for the implementation of [the Brazilian] digital transformation.” The text says that the purpose of this digitization initiative is “to promote sustainable and inclusive economic and social development, with innovation, increased competitiveness and productivity.” Ecuador and Brazil are not the first countries in the region who have introduced such programmes – Colombia introduced its own multi-year digital roadmap last July. Moreover, this week, the Inter-American Development Bank (IDB) has authorised the launch of a $500m investment guarantee facility to assist private investment through public-private partnerships (PPP) in Argentina. Through this initiative, the IBD will offer partial risk and political risk guarantees to investors that are to take part in these PPP schemes. José Lupo, the bank’s Argentinian representative, stated that the programme “will provide reassurances to investors and allow Argentina to leverage more private resources.” This year, it is anticipated that deals worth $2.4bn will be signed through the programme.
Felicia Bogdana Cornelia Ababii
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Week Ending 25th March 2018
Russia & Eastern Europe On Monday, Moldova’s Ministry of Finance announced that the economy grew by an impressive 4.5% in 2017 – this is compared to the average of 2.5% across Eurozone nations. What is particularly encouraging about Moldova’s growth is that the nation’s debt proportional to GDP has fallen slightly by two percentage points from 2016 to 2017. This could indicate the presence of a strong multiplier effect as GDP growth overtakes public borrowing. Household consumption also expanded 4.2%, which is encouraging as it indicates domestic consumers are confident. This could hopefully soon have a knock-on effect on investment. However the nation still faces some uncertainty in the future. Despite encouraging economic growth, Moldova’s labour productivity fell 4.4% year-on-year in the final month of December 2017. Although this has seemingly not affected the economy in the short-term, this could be very damaging in the long run. A fall in labour productivity may reflect underinvestment in human capital and technology, which would make economic growth very difficult in the long run. Furthermore, should human capital not produce a strong return, potential future investors may be deterred.
This is in stark contrast to Poland, which just this week was named among the three best countries to invest in by U.S. News and World Report. Poland was the only nation in the EU to appear in the top five, even beating the likes of Indonesia and the Philippines. What is particularly encouraging is that this report was based on a survey of 6000 investors, showing the substantial confidence in the Polish economy. Much of this support comes after strong backing by international bodies such as the World Bank and the Organisation for Economic Co-operation and Development (OECD). On Monday the OECD published the most recent “Economic Survey of Poland”. In this report they praised Poland for their strong economic growth of 4.6% in 2017, and forecasted growth to remain at around 4% for 2019. OECD Deputy Security General Mari Kiviniemi spoke of the nation’s “strong position” and the “dynamic job market”. However, respecting that there still remained hurdles to overcome both economically and socially, Kivieniemi explained that Poland had laid a solid groundwork that should now be built upon further, primarily through improving living standards. Laura Leng
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NEFS Market Wrap-Up
South Asia Gold demand was down this week in Asia as a result of high physical gold prices, which made many buyers hold off on purchases. This led India to further its discounts on gold, to its highest point in six-and-a-half months. Due to the high price of gold, retail buyers and jewelers aren't making purchases, causing dealers to increase the discount to $7 per ounce for domestic gold prices. This is a $4 increase from last week's discount. The domestic gold price, as of Friday, was 3,080 rupees per gram, not far from the one-year high of 3,083.9 rupees per gram. Furthermore, many Asian oil and gas producers have begun to revive projects in order to revamp the energy industry after its 2014 slump. Some of the biggest diving companies include India's ONGC and Vietnam's PetroVietnam (see graph below), all of which need to produce even more oil and gas to ensure their respective countries' energy security. With oil prices fluctuating between $60 and $70 per barrel this week, there seems to be a resurge of appetite for producers to spend and importers to lower import bills by investing in oil production.
According to Rystad Energy, about fifty oil and gas fields in Southeast Asia will be approved for development between 2018 and 2020, requiring about $28billion of expenditure. India is making plans to invest in Deepwater oil mining, removing the need to import LNG at $8 per million thermal units from Britain. Furthermore, with PetroVietnam developing a large gas field known as Block B, and Thailand's PTTEP being itself on the hunt for more gas supplies to meet gas demands, South and Southeast Asia are truly becoming power giants in their own right. The biggest threat to investment in Asia are currently tough fiscal regimes, cumbersome bureaucracies, and maturing fields with limited future reserves. This should put pressure on Asian governments to analyze the amount of investment they are getting and how they should improve their fiscal policies to attract more investment. In conclusion, as ONGC’s Director of Offshore, Rajesh Kakkar, put it: “easy oil is gone… what is left is deep-water, high pressure, and high temperature”. Mario Pucinelli Filho
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Week Ending 25th March 2018
Middle East For the last NEFS wrap-up of this year, this week’s focus will be on the long-term expectations of the region’s economy. A poll by PwC Middle East has found that CEOs in the Middle East are optimistic regarding the region’s future. Around 52% of CEOs in the region believe that the economy is set to improve, compared to just 26% of CEOs who expressed the same sentiment last year. A further 81% of CEOs in the region were also confident that their company would grow over the next 12 months. Hani Ashkar, senior partner at PwC Middle East, stated: “The region is rapidly evolving in the wake of shifting global trends. In particular, it has been a landmark year of change for the Gulf’s largest economy, Saudi Arabia.” Yet large portions of the CEOs surveyed also expressed concerns regarding increasing tax burdens, disruptions from changing consumer behaviour, and fears about cyber crime. With the current reforms being seen in the region, Stephen Anderson, the Middle East Clients and Market Leader for PwC, stated: “It is clear from the survey that Middle East CEOs are feeling more pressure and accountability on results”. CEOs in the Middle East nevertheless have great reason to be optimistic. The Middle East’s average GDP is expected to grow to 2.9% in 2018 and to 3.6% in 2019, up from 1.1% in 2017. This growth rate will take the Middle East out from an eightyear low, with the main two contributors to this economic growth expected to be higher oil prices and increased government spending.
In terms of specific countries, Jordan is expected to see its GDP grow by 2.5%, mainly due to increased external demand. Lebanon’s GDP is anticipated to accelerate from an estimated 1.8% in 2017 to 2.7% in 2018. This will be predominantly due to rising public investment, as well as its recovering trade and tourism industries. Finally, Oman is expected to see GDP expand by 3.2% in 2018 and a further 3.6% in 2019, up from 0.6% in 2017. This increase in growth will be mainly facilitated by the increase in oil and gas production, which in turn will drive an increase in exports and government revenue. However it was also reported this week that vast amounts of money has been fleeing the currently struggling Saudi Arabian economy. New research shows that since 2012, the kingdom has seen tens of billions of dollars of capital leave the country each year, with the same pattern anticipated for next year as well. In 2017, it is estimated that $64bn in core capital left Saudi Arabia in Q3 alone. This is very bad news for an economy that is desperately trying to shed its dependence on oil and restructure its economy for a post-oil world. Nevertheless the economic outlook looks positive for the Middle East. Whilst investors will need to remain cautious as the political environment continues to pose a risk to growth, growth rates are rising rapidly and reform is steadily making its way throughout the region. Jeremy Whiskard
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EQUITY
NEFS Market Wrap-Up
Financials Zuckerberg’s response to the data security crisis didn’t complete reassure analysts and investors, despite representing a good first step. Facebook shares dropped by almost 11%, losing nearly $46 billion off its market value this week as policy-makers investigate whether restrictive regulations may be needed to protect users from breach of data privacy. Additionally, the British advertising group ISBA is evaluating a possible withdrawal of ads from Facebook if further investigations show a misuse of user data. Other technology stocks also dropped along with Facebook, as investors became concerned about possible scrutiny of global platforms with a large pool of users worldwide. Concerns about U.S. tariffs on Chinese imports, which are likely to target high-technology industries, are still heavily influencing the markets. As a consequence, the S&P 500 technology index (.SPLRCT), which during the last year performed greatly, dropped by 1.7% (as of March 22nd), with Apple (AAPL.O), Microsoft (MSFT.O), Amazon (AMZN.O) and Alphabet (GOOG) losing between 0.8% and 1.5%.
showed resilience, recovering from the big losses after the tariff announcement and outperforming their U.S. competitors. Overall this week, Europe’s Stoxx 600 index fell by more than 2%, Frankfurt’s Xetra Dax dropped by 2% and the FTSE100 fell by 1.4%. “If you were really worried about trade issues, you wouldn’t necessarily put as much money into EM equities because that will include Mexico but more importantly, China,” stated Edmund Shing, Head of Equity Derivatives Strategy at BNP Paribas. From this perspective, the $50bn U.S. tariffs announcement may represent a strategy pursued by Trump to reach a negotiating stage and secure more profitable deals with its economic allies. Asian markets were also negatively influenced by the announcement, as the CSI 300 index of Shenzhen and Shanghai stocks dropped by 1%, and the Hong Kong’s Hang Seng fell by 1.1%. Giovanni Cafaro
Shares in European industries that may be affected by a potential trade war had a mixed run, while steelmaker shares continue to fall (see figure below). European aerospace and auto stocks 14
Week Ending 25th March 2018
Technology & Health This week, scandal abounds in the technological sector and there are breakthroughs in neuroscientific medicine. Uber underwent a tragic incident this week in which a trialled self-driving SUV struck a pedestrian in Arizona, USA. The vehicle was moving in autonomous mode and did not detect, nor slow down, when a pedestrian walked across the road. Experts have raised questions about Uber’s ‘Lidar’ technology, the system of lasers that the autonomous cars use to detect the world around them. David King, an Arizona State University professor and transportation-planning expert, slandered the system, stating that the incident was a ‘catastrophic failure… exactly the type of situation that Lidar is supposed to pick up’. Only days after the incident, China’s Baidu (an artificial intelligence company) obtained approval to test self-driving cars in Beijing. Another scandal in this week’s news concerned Facebook’s leaking of 50 million users’ data to a firm called Cambridge Analytica, a political consulting firm. Cambridge Analytica have been linked to President Trump’s political campaign – the Federal Election Commission filings show that the Trump campaign paid Cambridge Analytica $5.9 million in hopes that Cambridge could target American voters with customized political messaging, based on personality profiles constructed from the leaked data. Cambridge Analytica oversaw a $5 million placement of TV ads during the election period.
Facebook has been sued four times in Northern Carolina federal courts this week in response to the leak. Its stock has consequently plummeted from $185 to $162 per share. Elon Musk, Mark Zuckerberg’s rival technological innovator and pioneer, appeared to join the #DeleteFacebook movement last Friday, created to slander Facebook in light of the data breach. Facebook is still the world’s eighth-most valuable publicly listed firm, but shareholders worry that politicians in Europe and America may impose heavy restrictions on data, hence suppressing its growth. In the health sector, Novartis Pharma published a study in which a new drug developed to treat Multiple Sclerosis resulted in a 21% reduction in risk of symptom progression. This is good news for the pharmaceutical giant who suffered a share-price loss in November 2017 as a result of a scandal that saw it threatening to undercut the NHS in the provision of an anti-macular degeneration drug. Professor Alasdair Coles, an expert in Multiple Sclerosis from the University of Cambridge, has stated: “at a political level, this is fantastic because it is the first time a drug which is reasonably safe to take has had any impact on progressive MS”.
Matthew Chapman
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NEFS Market Wrap-Up
Oil, Gas & Industry China and the United States sent global financial markets into a tailspin this week as the world’s two largest economies march closer to a possible trade war. This comes after the US President, Donald Trump, announced tariffs on up to $60bn worth of Chinese goods in bid to rein in the widening US-China trade deficit (see graph below).
While some experts may feel that Trump’s planned tariffs are more of a ploy to force China to the negotiating table, this adverse development in global trade follows the 25bps interest rate hike by the US Federal Reserve on Wednesday. The US Fed Chairman, James Powell, already sees more interest rate hikes in 2018 and 2019.
The US Dow Jones Industrial Average (DJIA) fell some 723 points alongside global stock indices on Thursday. Share prices of US companies in the industrial sector tanked after China introduced tariffs on $3bn worth of US goods, hence escalating fears of a trade war. US industrial stocks fell 3% while Boeing shares sank 5%. Caterpillar Inc saw its worst daily decline since Brexit in 2016, of 5.7%.
In the UK, two members from the Bank of England’s Monetary Policy Committee (MPC), Ian MacCafferty and Michael Saunders, backed an increase in rates to 0.75%, a departure from the unanimous vote at the last MPC meeting in February. Many analysts are already seeing this as a hint of a rate hike in May this year.
China responded to the proposed US tariffs by placing higher tariffs on various US goods, including pork, apples and wine, hence targeting the agricultural areas in the US that supported Trump in the 2016 US presidential election. The Chinese government could also target US technology companies that manufacture products in China, for example Apple Inc, in the hope that these firms would pressure the Trump administration to back off from the planned tariffs.
The possibility of a confrontation in terms of trade between the US and China, coupled with the current trend of rising interest rates, causes fear that storm clouds are beginning to gather over the current bull market cycle that started in 2009. Mingli Yong
BHP Billiton CEO, Andrew Mackenzie, said that the US imposition of controversial import tariffs were “regrettable” and warned that this could spark a trade war. Being one of the world’s largest natural resource developers, BHP Billiton relies on China for half of it sales figures, hence it would stand to lose much in the event of a USChina trade war. 16
Week Ending 25th March 2018
COMMODITIES
Energy Saudi Arabian oil imports to the US dropped by 14% last year to only 943,000 barrels per day, the lowest level since 1988. This decline was followed by the shale gas production boom in Texas and North Dakota, as well as Saudi Arabia’s strategic decision last May to slash production in order to drive up crude oil prices. This week Fatih Birol, the Head of the International Energy Agency, stated that this change in oil import will ‘have profound implications on energy geopolitics’. On March 26th China will launch its own oil futures, Shanghai Crude. The country recently surpassed the US to become the world’s largest crude oil importer. Future trading will make China gain more control over pricing to rival US dollar-based international benchmarks, predominantly WTI and Brent. This is also part of the Chinese government’s efforts to lure overseas traders, with the promise of a high level of liquidity and the possibility of arbitrage between other Asian, American and European markets. The dominance of the Chinese Yuan in oil contracts would promote the status of China’s currency in global trade, which is one of China’s longterm goals. The falling cost of renewable energy and improving battery technologies could lead to a £28bn investment boom in the UK by 2030. Meanwhile, the increase in government funding to renewable energy means that UK energy farms will be able to operate without taxpayers’ money by
2030. On-shore wind and solar farms will also both be viable without subsidies by 2025 in the UK. However, it is still essential for the government to continue subsidising the industry, as funds are needed for projects to take off. 18GW of renewable energy farms are expected to be built by 2030, with wind and solar energy anticipated to make up half of the share each. The rise of renewable energy means that more and more large gas power stations will be ruled out in the UK. As a result, gas power capacity could decrease to only 1GW once subsidy-free renewables take off. This might also trigger debate on the worthiness of building and operating nuclear power plants such as the 3.2GW Hinckley Point C, which will require tens of billions of pounds of funding from taxpayers for 35 years. On March 22nd, US competition authorities approved the $14.6bn proposed merger between Dominion Energy and Scana, two major American power and energy companies. The merged company is expected to provide services to 6.5m customers in the US, with a total power generating portfolio of 31.4GW and 93,600 miles of power transportation lines. Ang Gao
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NEFS Market Wrap-Up
CURRENCIES
Major Currencies The Yen has surged on risk aversion, hitting a 17-month high against the Dollar after the Trump administration announced plans to impose 25% tariffs on $60bn worth of Chinese imports. Charalambos Pissouros, Senior Market Analyst at JFD Brokers, Stated: “These tensions heighten concerns over a trade war and forced market participants to seek shelter in safe havens, with the yen being the main gainer among the major currencies.” Gold prices were up 1.5% at $1,347.50 an ounce, and the Yen rallied 1.1% against the Buck for the week, hence showing an increased interest in safer holdings. A good gauge of the current market sentiment is the Australian Dollar-Yen pair. Because of Australia’s substantial trade exposure to China, the selling interest of the Aussie is likely to increase as tensions surrounding a trade war continue. However the Yen, being a safehaven, is likely to attract more attention during times of trade uncertainty. The AUD/JPN traded at ¥80.75 on Friday, having hit its lowest level since November 2016. So the Yen continues to be the currency benefiting from this risk aversion sentiment.
The ICE Dollar index, DXY, is down 0.8% for the week. This is the first decline of the index since mid-February, further emphasising a mild flight from the currency amid trade tensions. On Thursday, the Bank of England announced that interest rates will remain the same, but hinted that an increase in May was on the cards. The bank’s Monetary Policy Committee (MPC) stated: "As in February, the best collective judgement of the MPC remains that, given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target at a more conventional horizon”. This caused positive reaction for the currency, as it rose to $1.4216 after the announcement. However it has since backed down to $1.413. Despite uncertainty surrounding trade wars, investors have remained relatively positive on the pound, mainly due to the increasing optimism regarding Brexit and the recently agreed transition period. Against the US Dollar, Sterling is up 2.9% in March (see graph below), and 4.8% this year. Edward Turner
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Week Ending 25th March 2018
Minor Currencies The Turkish Lira took a hit on Thursday, following an international get-away from assets thought to be too risky. The Asian morning period of trading saw the Lira fall by 2.3% in fifteen minutes against the US Dollar. On Friday morning in Sydney, the Lira traded at 4.0346 per US dollar, the weakest it has been in the last 28 years. Despite this, the Lira made a recovery to 3.9633 per US dollar at the end of trading in London on Friday. An analyst at Rabobank commented that this was “allegedly caused by Japanese retailer investors with substantial long [lira-yen] positions panicking and running for the exit after risk aversion escalated”. Overall the Lira is down by 4.4% this March. Traders are concerned with inflation being at 12% and the over looming deficit that makes the Lira susceptible to peripheral surprises. It is also not clear how the Turkish central bank will respond to a weakening currency and has thus increased the inflation rate.
News of substandard employment numbers also reduced the Australian dollar by 0.2% to $0.7746 per US dollar. Following the US Federal Reserve’s rate rise on Thursday, the New Zealand Dollar maintained a steady gain of 0.6% to $0.7725 per US Dollar. The rise was also credited to New Zealand’s central bank maintaining a continuous interest rate of 1.75% for the past sixteen months, a new record low. The Hong Kong Dollar this week edged towards the lower limits of its trading range that was set out by Hong Kong’s Monetary Authority, following extended losses of the US dollar (see graph below). The Hong Kong Dollar is at its weakest state in 33 years, trading as low as HK$7.8467 this week but hovering above the HK$7.85 limit. This limit is where the Hong Kong Monetary Authority has pledged that they will intervene. Sarren Sidhu
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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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