Week Ending 28th October 2016
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS M arket 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 Asia South East Asia
Equities 18 Financials Technology Oil & Gas
Commodities 21 Energy Agriculturals
Currencies 23 EUR, USD, GBP AUD, JPY & Other Asian
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Week Ending 28th October 2016
MACRO REVIEW Eurozone Following last week’s optimism about the slow but gradual recovery of the Eurozone, the ECB is standing tall again with new proofs of the positive effects of its monetary policy. The composite Purchasing Managers’ Index (PMI) in the single-currency area, averaged for the manufacturing and service sectors, showed an impressive improvement at 53.7 in October readings, the highest it has been all year. The PMI is one of the leading factors depicting economic health since it captures business conditions, such as employment, production, level of new orders and prices. Anything above the benchmark of 50 indicates industry expansion whereas anything below it – industry contraction. Key to the healthy outlook was the acceleration of the German economic growth, which is seen as the bloc’s economic powerhouse. With early estimates of October’s manufacturing sector PMI of 55.1 and services PMI of 54.1, the economy’s business is robust. This is supported by a wide range of indicators; one of which is the business climate index which improved to 110.5 from 109.5 in September, as shown below. The index depicting economic expectations has also climbed to 106.1 from 104.5.
heavily on monthly asset purchasing of €80bn. The policy has largely contributed to investment and consumption boosts by creating a favourable environment for credit holders which has also positively impacted job creation. However, this argument fails to fully meet facts for the periphery countries, which have been performing relatively weakly. French PMI in both sectors is estimated to stand at 51.7, much lower than the area’s average and with the service sector performing worse than anticipated in forecasts. Moreover, Italian change in Retail Sales, which indicates consumer spending, was measured at the disappointing -0.1%. “With other parts of the euro zone, particularly France and Italy, performing far worse than their larger neighbour, the ECB will remain under pressure to offer more policy support to achieve its region-wide inflation goal”, said Jennifer McKeown, chief European economist at Capital Economics in London. Desislava Tartova
The ECB’s president Mario Draghi was thus able to dismiss the wide criticism on the Bank’s monetary policy, which is maintaining the 0% interest rate and relying
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NEFS M arket Wrap-Up
United Kingdom Project Fear painted an all too dismal picture following the EU referendum; one that saw Britain marred with a financial crash and an austere recession in the near future. Ostensibly, this only seemed intuitive, as much of Britain’s growth depends upon its access to the single market. Nonetheless, Q3 GDP figures released on Thursday show the UK economy, in fact, expanded by 0.5% on quarter in the 3 months preceding September 2016, a rate broadly similar to levels seen in 2015, albeit down from a rate of 0.7% in Q2, shown below. This certainly exceeded the expectations of many, particularly the Bank of England (BoE), who predicted growth to curtail to 0.1%. Growth was driven by the services sector, which comprises almost 80% of Britain’s GDP, which grew by a substantial 0.8%. Other sizeable sectors, including industrial production and construction, however, contracted, by 0.4% and 1% respectively. Given the inevitable stagnation of the services sector (due to rising inflation), economists unanimously agree that growth is likely to become sluggish, particularly in 2017, as uncertainty caused by Brexit negotiations subdues future investment. Chancellor Philip Hammond claimed the figures reflect the British economy’s ‘resilience’ to the challenges it faces,
although shadow chancellor John McDonnel lamented that the figures allude to slowing growth in the economy. Although subdued, the growth figures remain respectable and the case for an interest rate cut by the BoE next week has undoubtedly diminished. In the past two meetings by the Monetary Policy Committee, an overwhelming majority claimed to be in favour of an interest rate cut (from the current base rate of 0.25%), contingent upon growth falling below 0.1%. Nissan, the Japanese carmaker, made a fairly audacious decision to increase the production of cars in their flagship Sunderland plant, eluding fears of foreign firms gradually withdrawing production from the UK. The decision followed Theresa May’s pledge to offer ‘commitment & assurance’ to the carmaker by ensuring their competitiveness is left unscathed by Brexit. Theresa May has been, hitherto, rather reticent, regarding the overture the government will take to support Nissan. With GfK Consumer confidence figures just released, next week’s issue will feature an analysis of the latest figures. Further news on the BoE’s interest rate and quantitative easing decision is also likely. Usman Marghoob
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Week Ending 28th October 2016
United States The Affordable Care Act, commonly known as Obamacare, is now facing a new foe: rising premium prices. A report by HealthPocket claims that "the percentage increase for each category of Obamacare nationwide is in the double-digits", as benchmark premiums are set to rise an average of 22% by 2017. Though the increase will be felt nationwide, the forecast varies across states. Arizona is said to see a 116% rise, Oklahoma a 69% rise, while Tennessee is expected to see a 63% rise. The problem stems from the fact that insurance companies are experiencing higher costs of coverage than anticipated. A study conducted by McKinsey & Co from 2015 found that $2.7 billion had been lost on the individual market, partly because they were forced to pay more claims than expected. Another key problem is the fact that there are more people on Obamacare with chronic illnesses than there are healthy, young people. This means insurance companies are paying out more in coverages than they are receiving from non-claimants. UnitedHealthcare and Aetna, insurance companies who currently offer plans on Obamacare, are now withdrawing these options due to high losses. Though there is going to be a 22% premium price rise for 2017, the majority of Obamacare users will not see their health
care cost rise. Of those currently on Obamacare, 80% receive a government subsidy, which then lowers the cost of coverage to less than 10% of their income. However, there are still those that lose out. The average 60-year-old, who does not qualify for the government subsidy, would have to spend 22% of their income in order to be able to afford a silver premium plan, while the average 30-year-old would spend 9%. Obamacare was labelled as the “craziest thing in the world” by former president Bill Clinton during a Democratic rally in Flint Michigan earlier this month, as healthcare remains an important issue during this campaign season. The chart below depicts the rising cost of healthcare deductible, a key issue for both candidates. With Democratic nominee, Hillary Clinton, suggesting plans such as larger government subsidies aimed at helping middle-income families cope with rising insurance prices, Republican nominee, Donald Trump, has indicated his desire to repeal Obamacare, declaring it “another big government failure”. His plan for healthcare is to drive down the cost of insurance by removing the state boundaries that prevent buyers from purchasing insurance across state lines. Disun Holloway
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NEFS M arket Wrap-Up
Japan
Kuroda encouraged reforms that would lead to “an increase in labour force participation and a further rise in labour productivity.” The country continues to have a tight labour market with an unemployment rate of 3% as of September. A tradition of life-long employment contributes to this low rate, but this consequently results in decreased labour mobility. Labour force participation has grown 0.9% over the year to 60.5%, but there remains significant potential outside of the labour force. The proportion of women in the labour force is still about 20 percentage points less than men. The government is launching initiatives to help women enter the workforce, which include leadership training and child-care support programs. As the population of Japan steadily ages, the government is also looking to raise the age of retirement. For Kuroda, these changes to the domestic labour market must be followed by efforts to open up the economy to foreign workers. In a world that is seeing isolationist rhetoric guide immigration policy, Kuroda maintains that increased globalisation is necessary to bolster low labour productivity. As in the graph below, productivity in Japan has lagged relative to other developed economies. An influx of foreign workers will
lead to growth by “generating innovation and raising labour productivity”, while competition in the labour market will encourage workers to be flexible and mobile. Kuroda’s comments came as the lower house of the Diet pushed through legislation to let more foreign care-workers into the country last Friday, evidencing the government’s recognition of the need to globalise. The government is using the 2020 Olympic games as a political springboard for pursuing similar structural reforms. The effectiveness of these reforms depends on an economic outlook that is conducive to growth, featuring rising consumer confidence, consumption and inflation. The release of the Core Consumer Price Index for September on Friday showed prices persisting at 0.5% below last year’s level. The BoJ policy board will meet this week, but even in the face of weak inflation and consumer spending data most economists expect the Bank to adhere to its current easing program. Daniel Blaugher Labour Productivity in Advanced Economies GDP per hour, USD 2010 PPP
The stagnant Japanese economy since 1996 serves to demonstrate the limitations of central banks and the need for a flexible workforce. Speaking at a summit in Tokyo last Friday, Haruhiko Kuroda, the Bank of Japan (BoJ) governor, singled out the need for structural reforms of the labour market to accompany the Bank’s monetary policy.
United States 60
France
50
UK
40
Japan
30 Korea 20 2006 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
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Week Ending 28th October 2016
South Korea Last week’s Market Wrap Up observed the impact that Samsung’s falling sales, due to the recalled Galaxy Note 7, could have on South Korean trade, and consequently on the growth of their export-dependent economy. Since then, further domestic woes - such as the bankruptcy of Hanjin have dented economic growth to a year-onyear (yoy) change of 2.7%, the slowest since July 2015 (see diagram below). Issues with some of South Korea’s major ‘chaebols’ (family owned conglomerates) have certainly hit Q3 growth, coming in at 0.7% QoQ (as of October 24th), down from 0.8% in Q2. Hyundai recently settled a fourmonth wage dispute that it estimates may have cost $2.6bn in lost production, along with the high-profile withdrawal of Samsung’s latest smartphone. The management style of South Korean chaebols has even come into question, with the recent Hanjin Shipping bankruptcy (world 7th largest shipper), and the tragedy last month of Lotte vice-chairman Lee Inwon committing suicide amid a corruption investigation. South Korea may have to consider a gradual shift in the balance of their economy from exports to consumption, in order to limit its dependence on the troubled chaebol model, and be less
susceptible to shocks such as the nightmare episode with Samsung’s flagship smartphone. Indeed, in holding the base rate at 1.25%, a record low, the Bank of Korea (BoK) are facilitating growthsupportive consumption and investment. Though growth in consumer spending slowed from 1% in Q2 to 0.5% in Q3, this is most likely in response to jobs lost through government-led corporate restructurings of troubled industries, such as shipping. Chung Kyu-il, a director at the BoK noted that “When you take away the effects from Samsung and Hyundai, third-quarter growth was considerably better than expected,” – further highlighting South Korean dependence on large conglomerates. Analysts at the state-run Korea Economic Research Institute forecast a QoQ contraction in GDP growth for Q4, though this was ruled out by finance minister Yoo Il-ho, who expects annual GDP growth stagnating at 2.5% for 2016 and 2017. This is yet lower than the BoK’s revised forecasts of 2.7% and 2.8% respectively. Whatever the case, South Korean growth is currently very dependent on its chaebols’ wellbeing and whether they can navigate their present crises. Jamie Peake
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NEFS M arket Wrap-Up
Australia & New Zealand Australian corporations came under fire this week from the Australian Competition and Consumer Commission (ACCC) which warned against an increasingly monopolistic market economy with widespread barriers to entry for new, small firms. Chairman of the ACCC, Rod Sims, delivered the keynote speech at the RBB Economics Conference on Thursday, saying that “highly concentrated markets with high entry barriers are going to see consumers worse off.” Consultancy firm Port Jackson Partners, concluded that Australia’s 100 largest listed companies had 27% of the market share in 1993, rising to 47% in 2015 and overtaking the USA’s figures, which went from 33% to 46% in as many years. The competition watchdog’s chairman argued against beliefs that certain concentrated sectors were not detrimental to the strength of the Australian economy. He called upon the lack of “convincing economic and evidence based wisdom” to explain how further mergers of large companies, will “avoid harming consumers” as large firms squeeze out their smaller rivals and continue to make great profits, as shown by the graphs below. These strong remarks come amid the ACCC’s current assessment of the
consequences of an $11.4 billion merger between giant Australian betting companies Tatts and Tabcorp. Despite cautionary words against future mergers, Sims did recognise the benefits that largescale companies have brought and continue to bring to the Australian economy. He remarked that some markets, which are more suited to being concentrated as firms, “pursue efficiencies from scale” as well as acknowledging the tax benefits that large profit making firms bring. Meanwhile, data published on Thursday by Statistics New Zealand showed that the country’s marine economy contributed $4 billion or 1.9% to GDP in the year to March 2013. Oil and gas extraction were the greatest contributors, generating 48% for the marine economy. Over 102,000 jobs were also supported by the marine economy which, despite being smaller than global estimates, counts as a “significant part of our economy”, as said by the island nation’s environmental statistics manager, Danny Oberhaus. A parallel report released recently highlighted the need to cut greenhouse gas emissions and improve environmental protections and welfare for both the health of the economy and the environments themselves. Nikou Asgari
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Canada The main economic story over the past week involving Canada has revolved around the potential collapse of the CETA trade deal between Canada and the European Union due to three Belgian regions rejecting the potential trade agreement. However, it now appears that the problem has been averted, with Belgian leaders managing to agree to settle with these regions and give their backing to the trade agreement. Negotiations began between the EU and Canada in 2009, with the terms of the deal being agreed in 2014. It is hoped that the CETA deal will lead to the elimination of 98% of tariffs between them, which would in turn enhance trade by 20% and be of support to small businesses. Earlier this week though, Belgium declared that it could not support the CETA deal because three French speaking regions led by Wallonia had rejected the proposed agreement. The trade arrangement requires support from all 28 EU nations before it can be officially approved. Regions like Wallonia are mainly industrial areas which are fearful of the proposed threat of new competition from Canadian imports. This has led to demands for greater protection for Walloon farmers as well as assurances over labour and environmental standards. However, this
Thursday, Belgian political leaders announced that Belgium could now provide their support to the CETA deal after addressing regional concerns and offering concessions to regions like Wallonia. Canada's Foreign Minister, Stephane Dion, suggested that she was ‘cautiously optimistic’ that there would be a final agreement, which be a major stimulant to Canadian growth and employment rates. Nevertheless, she acknowledged that there was ‘still work to do’ to complete a deal which has taken seven years to negotiate. In other news, the Canadian government recorded a budget deficit of 2.7 billion CAD for August 2016, which represented a rising deficit in comparison to the July deficit of 1.8 billion CAD. The graph below demonstrates the trend for the Canadian budget balance over the past year. The government experienced increased revenues of 0.7 billion CAD from corporation tax and other excise duties, but this was offset by a 1.7 billion CAD rise in expenses. Next week’s article will involve analysis and discussion of the released data regarding the Canadian balance of trade and the unemployment rate. Isher Hehar
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NEFS M arket Wrap-Up
EMERGING MARKETS China The 6th plenary session of the Communist Party of China (the Party), the single most important meeting of policymakers in the country this year, concluded on Thursday, with the core position of Chinese President, Xi Jinping, becoming cemented further and a new and rigorous code of conduct to regulate the behavior of the tens of millions of Party members being implemented. Four years after taking the helm, Xi is now officially pronounced the “core� of the current leadership, a phrase that is often used for established leaders in China and reflects the complexities associated with power transition. Nevertheless, there is now admittedly established mechanisms to ensure a peaceful transfer of power between the generations and stability. Xi needs the concentration of power in order to push through challenging reforms. Xi has launched a sweeping campaign to rein in rampant corruption since taking office in 2012, too, with many high-level officials including ministers, falling. However, corrupt practices are still not uncommon among petty officers, though it is obviously improving. Such efforts tie in with the current economic and political reforms needed in China. With GDP per capita at 6,416 USD, and per capita GDP PPP at 134000 USD, China is keen to upgrade its manufacturing economy and grow its services sector,
which eventually boils down to improving governance and resource allocation efficiency. With certain consumption, such as feasting by officials reduced to a very limited level, it is not surprising for the economy to slow down. The MNI Consumer Sentiment Index (shown below), reported by the MNI Deutsche Borse Group, rose from 115.2 in September to a better-than-expected 117.1 in October, its highest since April, driven by strong buying of durables. Separately, China ran a merchandise trade surplus of 44 billion dollars and a services trade deficit of 23.3 billion dollars in September. The Shanghai Composite Index closed 0.26% lower at 3,104.27 on Friday, but gaining 0.4% over the week. It tested higher levels but failed to hold, partly due to profit taking. The market is watching for the PMI indexes due on Monday local time next week. Michael Chen MNI China Consumer Sentiment Indicator 118.1117.8 117.1 115.9 114.9 114.2 114 115.1115.2 113.7 113.1 115 111.3 110 120
105
MNI China Consumer Sentiment Indicator
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Week Ending 28th October 2016
India The recent publication of India’s September inflation rates has confirmed that India’s inflation rate has cooled to a 13month low (see below). The Consumer Price Index (CPI) fell to 4.31% last month, having been 5.05% in August. One major cause of this decrease is lower food prices, where CPI has fallen sharply from 5.91% in August to 3.88% in September. This lower inflation is fantastic news for the Indian economy, which earlier this month made some very questionable decisions regarding its repo rate (the rate at which the central bank of an economy lends money to commercial banks in the event of any shortfall of funds). It is normally expected that if the repo rate is decreased, through cheaper borrowing for banks, they will then pass this lower rate onto their customers in order to stay competitive. With borrowing cheaper, spending and consequently inflation, increases. Despite already high inflation rates, the Reserve Bank of India (RBI) cut its repo rate from 6.50% to 6.25%. Fortunately, the expectation of lower food prices has proved correct, which in turn has counteracted any inflation triggered by the repo rate cut. A lower inflation rate enables the RBI to further decrease interest rates, yet some
economists are wary about this. High interest rates has made India a very attactive investment area. For example, following the introduction of negative interest rates in Japan, more Japanese investors are buying Rupee-linked bonds, which this year surged to a record total of $1.45 billion. Bloomberg consequently predicts that the Rupee will climb 8.1% against the Yen by 2018. This significant increase in demand for Rupee-linked bonds is evidence of the extremely stable and promising nature of the Indian economy. Yet this fantastic opportunity for the Indian economy to harness further growth may be dented if interest rates are lowered too much. It is thus paramount that the interest rates are lowered to an optimum point, where the loss of investors in the economy will be balanced by higher spending. Finally, this week the Vice-Chairman for the National Institution for Transforming India stated that the Indian economy has the potential to reach $6-8 trillion in the next fifteen years, as opposed to the current value of $2 trillion. With current growth trends of 6-8%, this is yet another sign of confidence within the rapidly expanding Indian economy. Charlotte Alder
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Russia & Eastern Europe Czech Republic is arguably the most prosperous post-communist nation in Eastern Europe. Recent positive news on improved consumer confidence has supported the upward trend in the outlook for the country’s aggregate demand. Despite the questions that still surround the economic impacts of a nation’s budget surplus, Czech Republic’s economy seems to be well positioned within the global economy. On Monday, the Czech Republic reported its third consecutive month of increasing consumer confidence, as measured by the Consumer Confidence Index (CCI). The country currently boasts a 108.9 CCI level. The CCI is particularly impressive when compared to the 100.0 CCI-benchmark. The CCI measures the degree of consumer optimism regarding the state of the economy, based on spending and savings expectations. With consumer demand expected to increase, Czech Republic’s 2017 GDP growth forecast is currently 2.6%. Additionally, business confidence remains steady at 95.20 and although confidence in the industrial sector fell slightly, an increase in construction and trade sector confidence stabilized overall levels. Czech Republic businesses are in a solid place, for the time being, with new orders nearing five-year highs at a strong 118.72 index level.
Jiri Rusnok said, “We will definitely end the year with a public-finance surplus”. Rusnok attributes the additional revenue flows to the country’s harsh crackdown on tax evasion. However, one can’t help but speculate – how will the surplus impact the economy? A surplus can hinder growth by the increasing tax collection and government receipts (+17.9% y-o-y) while reducing public spending (-1.6% y-o-y). Conversely, a surplus can also stimulate growth due to the lower borrowing costs associated with the reduced national debt (-0.4% expected y-o-y), causing lower government bond yields (-2bp y-o-y). The net effects of a surplus are therefore not entirely clear. This week, Czech Republic will release the Market Manufacturing PMI and its interest rate decision on Thursday. Manufacturing is projected to fall slightly from 52.0 to 51.2 index levels, while interest rates are expected to remain steady at 0.05%. Due to the potential contractionary effects of the budget surplus looming, the Czech National Bank’s easy monetary policy seems appropriate. Dan Minicucci
The Czech Republic is currently on track to produce a budget surplus for the year, which is rare amongst the countries of the European Union. Central Bank Governor
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Latin America The Latin American region had a similarly turbulent week to the last. The latest Mexican CPI figures were released early in the week, as well as Brazilian economic growth statistics and GDP forecasts. On Tuesday, Mexico released monthly CPI figures, which showed that in the previous 12 months, prices rose by 3.09%, topping the Mexican Central bank target of 3%. The general consensus on the rate change was highly accurate, with a Reuters poll estimating a rise from 2.88% in early September, to 3.08% The latest figures represent an 18-month high (see graph below), sparking speculation that policymakers may push interest rates higher after a fall in the value of the peso. Inflation is predicted to remain above target in the medium term, with estimates around the 3.2% mark for Q3 2017. As expected, the markets responded to the announcement, with the Mexican IPC Index (.MMX) tumbling from a weekly high 48423 to 47726 points on Tuesday. However, it found resistance around this mark and rallied to finish Thursday in a relatively healthy state. Michel Temer, president of Brazil, did not receive news that he would have wanted to hear this week as Brazil announced its
economic activity figures late last week for August. The damage was to the tune of 91 basis points compared with July, overshooting market expectations. In line with the new figures, economists announced reduced growth forecasts for Brazil for the next year, to their lowest level in two months. A central bank survey predicted an expansion of 1.23% in GDP, down from 1.3% previously. It is evident that Latin America’s largest economy is struggling to emerge from deep recession. Taking a break from the markets, Venezuela is facing a deepening political crisis as the opposition party organised mass street protests on Wednesday and called for a general strike on Friday. The opposition is demanding a referendum (which is constitutionally allowed) as the popularity of current President Nicolas Maduro rapidly decreases. A recent survey of Venezuelans indicated that a whopping three-quarters of the population want rid of President Maduro. Despite holding the world’s largest energy reserves, Venezuela is now flirting with the prospect of default, although a $3.4 billion bond swap this week has stemmed the tide – for now. Alistair Grant
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NEFS M arket Wrap-Up
Africa Mixed bag this week macro-wise in Africa. The South African finance minister released economic figures, the IMF put out some interesting findings that run contrary to the exciting prospects I prophesised last week, and questions were raised over the suitability of the Western-led neoliberalist oppression of Africa – perhaps this is the root African economic troubles. South African finance minister, Pravin Gordhan, announced a downgraded revision of his growth estimate, down to 0.5%, in his mid-term budget policy statement. He named “low levels of business and consumer confidence” as the culprits. In my view, we can also put alongside this negative market sentiment, parlous supply of electricity, corrupt freemarket crushing cronies, and, of course profoundly low commodity prices. The minister did go on to say that he believes South African growth will increase by 2.2% in 2019, something that is entirely possible. Indeed, while some may view the 8.3% contraction in the agriculture, forestry and fishing sectors as a negative, it illustrates that South Africa is transitioning from rural to urban, which is completely positive, economically speaking.
same downwards trajectory, as shown below. This is wrong, for it is quite true what I said about Nigeria overtaking South Africa as Africa’s largest economy, and it is true also that Lagos is thundering with prosperity, as its state governor voiced his vision of a vibrant economy built on a tripod of “security, job opportunity and infrastructure development.” The issue comes in measurement, for in SSA, much of economic wellbeing is dependent upon natural resources; the IMF says that resource-rich countries will grow on average by only 0.3% of GDP, an example being Angola, which is heavily endowed with oil, will not grow at all this year. Coupled with its inflation rate of 38%, the prospects economically are bad. In addition to this, dependence on fiscal adjustment is heavy for countries inside monetary unions, which places further strains on economic potential. Overall, what is needed is diligent, policy based approaches that encompass all of Africa; only then will we see the full and seamless transition from rural to urban that is so needed in the third world. Thomas Dooner
Now compare this with the rosy picture I painted of sub-Saharan Africa last week – stark, right? In light of recent news from the IMF and The Economist, you wouldn’t be mistaken in thinking that both South Africa and its northern neighbours are both on the
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Middle East After the government took weeks’ worth of sugar hostage to combat the nationwide shortage, major food companies in Egypt have been forced to halt production. Egypt consumes nearly 3 million tonnes of sugar per annum, but produces 2 million tonnes domestically. The shortage is usually filled by imports, but with supply critically low, the government has accused factories and traders of hoarding stocks to push up prices (prices have almost doubled to 10 Egyptian pounds). The government’s plan is to resell the sugar through government owned state outlets at subsidized prices. One of the afflicted companies, Edita Food Industries (Egypt’s maker of Twinkies), told Reuter news agency on Monday that they were forced to temporarily close their factory in the Beni Suef province for three days, after officials seized 2000 tonnes of sugar. Edita slated the governments’ intervention as iniquitous, claiming it obtained its stocks legally from the private sector, not the black market. Regardless, Prime Minister Sherif Ismail said the raids have had ‘a positive impact’ and current sugar stocks would now last at least three months. However, I believe that the government’s policies are overbearing and may ward off potential foreign investment. This will have dual ramifications at a time
when the government is scrambling to offset the acute shortage of dollars in Egypt. In other news, Iraq insisted on Sunday that it should not have to cut production in line with OPEC’s expected new deal in a month’s time in Vienna. This led to a drop of 1% in oil prices as the validity of any future OPEC deal was thrown into doubt, considering Iran, Libya and Nigeria are already excluded. Iraqi Oil Minister Jabar Ali al-Luaibi argued that whilst Iraq’s internecine conflict with the Islamic State was extant, it cannot cut production because it desperately needs oil revenue to fund the fight. Iraq’s macabre economy has been heavily damaged by the weight of war, so it cannot afford to cut oil production. However, a cut in production would reduce the supply of oil and its inelastic nature would result in an increase in price, providing the economic boost that Iraq so desperately needs. Iraq is caught between a rock and a hard place and their current situation shows no signs of abating. Ali al-Luaibi’s comments should be dealt with by OPEC members in a peremptory manner. Vincent Egunlae
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South Asia Pakistan has been experiencing a steady rise in its rate of inflation since the end of FY2015, and it is not showing any signs of slowing down. According to a recent report by the IMF, Pakistan’s inflation is expected to reach 5.2% in 2017, which is almost twice the current year’s rate of 2.9%. This rise is explained by the Asian Development Bank (ADB) as being largely due to a recovery in oil and food prices. Oil prices have rebounded from early year lows, and food prices have also risen by 9% globally in June 2016. Pakistan will also be affected by the global rise in the prices of petroleum products, coal and gas, in 2017. It is important for the State Bank of Pakistan to set tight inflation-control targets in order to maintain the macroeconomic and financial stability of the country, and thus ensure sustainable economic growth. Inflation tends to give rise to business uncertainty, as firms are unable to ascertain future prices and costs. This could in turn, result in less capital investment spending, thereby generating a loss in GDP. In addition, inflation compromises the export competitiveness of a country, as its goods become relatively costlier in the global markets. This could result in a fall in the demand for exports, thereby triggering a negative multiplier effect in the form of falling national income and employment. Pakistan’s exports have reportedly fallen by 11.1% in the first half of FY2016 due to
falls in global demand and infrastructural bottlenecks. In the face of rising uncertainty due to expected inflation, Pakistan needs to implement key reforms to expand electricity supply, strengthen its business environment and encourage its private sector to invest. According to the IMF Managing Director Christine Lagarde, the country was on the brink of an economic crisis back in 2013. The economy is currently on much stronger footing, having implemented growth-supporting policy reforms as advised by the IMF. One of the biggest improvements came in the power sector, as disruptive power outages have come down from nine hours to one hour per day for industries. This is an important development since services and largescale manufacturing sectors are the primary drivers of growth for Pakistan. On a positive note, this steady rise in inflation rate could be considered as an indicator of economic growth for Pakistan. The ADB has forecast a significant boost in Pakistan’s economic growth due to improvements in energy supply, infrastructure investments and overall business environment. Pakistan’s economic growth rate is projected by the World Bank to rise to 4.8% in 2017, which translates to rising national income levels and overall improvements in the living standards of its population, irrespective of rising prices. Tahsin Farah Chowdhury
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South East Asia This week we continue with the theme of macroeconomic instability by turning our attention to foreign policy developments in the Philippines, as well as inflation data releases for five South-East Asian countries. Filipino markets experienced turmoil last week, after president Rodrigo Duterte announced a “separation from the United States” during a state visit to Beijing. The move, which was met by widespread bemusement across the political sphere, damaged the close political relationship that extends back to 1951 and potentially vast inflows of American investment, which have proved critical in maintaining the country’s high growth rates in recent years. These fears were reflected in Filipino markets last Friday, with the country’s benchmark stock index falling 0.8%, and the Philippine peso falling 0.5% to reach 48.3 against the US Dollar – only 0.39 off the seven-year low reached earlier this month. Financial secretary, Carlos Dominguez, has since been forced to defend the country’s stability, describing the move as a purely “economic realignment.” The Peso has declined 7% against the US Dollar since Mr Duterte entered office on 31 June (see graph below), and his increasingly volatile behaviour has been a major driving force behind this fall. Official
policy of the government remains unclear; whilst some commentators view the president’s actions as nothing more than inflammatory rhetoric, others argue that they represent a genuine attempt to build an alliance with China and Russia, and that they form part of a wider trend developing in the region. Indeed, FT’s Gideon Rachman points to Thailand and Malaysia as evidence of countries falling under China’s growing influence in the region at the expense of the USA. In other news, five countries announced CPI inflation figures for September 2016 this week, with all but Malaysia performing roughly in line with market expectations. Year-on-year consumer prices rose 1.5% in Malaysia, 0.2% below market estimates, the cause of which was primarily low global commodity prices. This is the sixth straight month of prices being below the central bank’s 2.5-3.5% inflation target. With a further three countries releasing CPI inflation figures in the next five days, we should have a clearer idea of any broader price trends in the region next week. Provided there are no major macroeconomic developments in the region, we will also focus on consumer confidence data for Indonesia, Thailand and Singapore next week. Daniel Pettman
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NEFS M arket Wrap-Up
EQUITIES Financials This week we focus on the potential of a “hard Brexit” and its impact on the UK financial sector, before looking at financial market performance across the globe. As Theresa May’s contemplates an inevitable “hard-Brexit”, the Mayor of London has warned the government that its “hard-headed, hard-nosed, hard Brexit approach” is reckless and will cause the loss of millions of jobs in the financial district and across the UK. The term “hardBrexit”, refers to Britain giving up freedom of access to EU’s single market, a scenario dreaded by bankers and business executives, as the financial services industry would lose their passporting rights which allow them to trade with the EU under a common regulatory framework. Sadiq Khan cited figures showing that banking, finance and professional services contributed £190bn to the UK economy – almost 12% of GDP. These remarks came on the 30th anniversary of the “big bang” – the measures adopted by Margaret Thatcher to revolutionise the City. London is the largest financial centre in the world and maintains the biggest trade surplus in financial services around the world. This will cease to be the case if, in April, Article 50 is triggered with a “hard-Brexit” being implemented.
boosted by a strong performance in the its investment banking business, pushing its shares up 4.8%. Over in Asia, Japan’s Nikkei Index was the standout performer, with gains in global bond yields lifting shares of Japanese financial firms. Shares of brokerage, Nomura Holdings, surged 5.1%, among the day’s biggest gainers, adding to the index’s performance. On Thursday, Nomura posted a 31% increase in net profit from the previous quarter, boosted by high-profile deals including the IPO of messaging app ‘Line’. The Nikkei Stock Average ended 0.6% higher, while Hong Kong’s Hang Seng Index fell 0.8%, and Australia’s S&P/ASX 200 declined 0.2%. In the US, the S&P 500 has been ranging within a 3% channel, as shown in the figure below. Future earnings optimism, a generally well-received third quarter reporting season, and the impending end of U.S. political stress (if Clinton is elected President) are the main drivers of such ‘uncertain’ market behaviour. The Federal Reserve’s interest-rate rise in December should also be priced in by the market, too. Angelo Perera
Despite this, the FTSE 100 ended up 0.4% at 6,986.6, lifted by Barclays reporting a rise in third-quarter profits, 18
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Technology It has been a busy week in the technology world, with many big players in the industry releasing their quarterly results with mixed outcomes. Thursday saw an announcement by social media giant Twitter to cut its workforce by roughly 350 jobs. The news comes after shares in the company fell by 7% last month as US cloud computing company, Salesforce, walked away from negotiations to buy the company. Despite share price dropping by a quarter this year, the most recent figures in Q3 have exceeded analyst’s expectations with revenue at $616 million and importantly, daily active users being up 7% year on year. Despite these gains, Twitter continues to be a loss-making company as it posted a net loss of $102.8 million (the decline of the share price since the initial public offering can be seen in the graph above). News also came on Thursday that Twitter would shut down Vine, the video sharing service the company bought four years ago; however, despite the setbacks, CFO Anthony Noto said Twitter aimed to be profitable in 2017. Elsewhere, on Wednesday, electric car manufacturer Tesla reported its first quarterly profit in more than three years. The reported net income of $21.9 million comes after 13 consecutive quarterly
losses and a staggering loss of $229.9 million a year earlier. The announcement that Tesla delivered a record 24,821 cars, is believed to have offset the rising costs of the company’s new high volume electric car – the Model 3. The news resulted in the company’s share price rising initially by 6.2% in after hours’ trade but gave back some of those gains and ended up trading at approximately $211, up 3.76% from the closing price of $202.24. To finish off the hectic week for technology firms, Amazon and Google released their quarterly results. Multinational conglomerate and parent company of Google, Alphabet, beat analyst’s expectations with quarterly revenue rising by 20.2% thanks to a surge in advertising sales on mobile devices and video platform YouTube, both of which aided the world’s second biggest company’s shares to rise by 1.6% in after-hours trading. Amazons record streak of quarterly profits came to an end on Thursday, after the e-commerce and cloud computing company significantly missed its earnings expectations in Q3, resulting in its share price falling by more than 5% in after-hours trading. William Bunnis
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NEFS M arket Wrap-Up
Oil & Gas This week the West Texas Intermediate (WTI) passed $50 per barrel and posted highs not seen since July of 2015 due to talks of an output freeze between OPEC and non-OPEC countries. However, this value did not uphold after Iraq announced that it does not believe that the deal will occur; bringing prices below $50 US a barrel again. The deal between OPEC and non-OPEC countries has been in talks for quite a while, and recently Iran, Saudi Arabia and Russia have all agreed to freeze output in order to drive oil prices up. However, conflicts between the Saudi Arabia and Iran originating from the SunniShia issue has led to uncertainty over the reality of the deal occurring. After Saudi Arabia issued its first government bond last week, its budget deficit has risen to $70 billion US, hence needing oil prices to rise in order to relieve its deficit through the revenue. However, this would mean giving up market share that could become available to Iran. Since the sanctions were lifted in Iran earlier this year, they have aimed to increase market share from below 1 million to 5 million barrels per day. However, they have only been successful in producing around 3 million barrels per day.
This complex and historically rich conflict between the two nations have led to Iraq’s announcement that it is unsure the deal will fall through, taking a toll on the WTI prices this week as illustrated through the graph bellow. Referring to oil companies’ stocks this week, Chevron started the week by opening at $101.56 a share and ended at $104.46 a share, meaning an increase by 1.03% throughout the week. Moreover, Exxon opened this week at $86.74 and closed this Friday at $84.90 a share, indicating a -1.02% grow in the stock price. However, both stocks have a high dividend yield in a low interest rate environment which supports the stock price, hence benefiting from the continuation of low WTI prices due to Iraq’s announcement. Halliburton saw a decrease in its stock price by -1.03%, as it opened at $48.54 on Monday and closed at $46.77. Finally, smaller companies in US shale which have invested in areas such as the Permian Basin, located in West Texas, have been issuing stocks to fund projects that would produce barrels at less than $2 US a barrel. Maria Fernandes Camaño Garcia
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COMMODITIES Energy It has been a bad week for energy prices on-the-whole. Speculation of a mild winter resulted in natural gas futures suffering its biggest drop since July, falling to $2.831 per million British thermal units (mmBtu), as shown in the chart below. Prices dropped further when the Energy Information Agency (EIA) released its weekly report on Thursday, showing a build on US natural gas inventories by another 73 billion cubic feet for the week ending October 21. It certainly looks like natural gas futures will continue to be under heavy selling pressure, as analysts are seeing weather forecasts as the determining factor for future prices in the coming months. The other important story of the week is the performance of crude oil. OPEC’s agreement to cut production levels is now in jeopardy, as Iraq - OPEC’s second largest producer is demanding an exemption from the production cuts as they seek all the revenue they can in their fight against the Islamic State. As a result, oil prices fell to a three-week low on Wednesday, despite the EIA reporting a draw of 600,000 barrels in US crude oil inventories for the week ending October 21. Brent Crude, the global benchmark, fell 1.59 per cent to $49.98, whilst US benchmark, West Texas Intermediate (WTI) closed at $49.18, down by 1.56 per cent.
On Thursday, oil climbed from its threeweek low as reports came out that the Gulf nations may be willing to “cut 4 per cent from their peak oil output”. However, despite this reaction from the markets, the reality of an OPEC output cut in their November meeting is far from certain. Secretary General of OPEC, Mohammed Barkindo, described dealing with the current oil climate as the “hardest challenge” in OPEC’s history. Iran, Nigeria, and Libya, have all been given exemptions from the output cut that was agreed in September, whilst Russia continues to send mixed signals as to whether they will cooperate with OPEC in stabilising the global supply. This now puts a lot of pressure on the Gulf nations, and it looks like the much-anticipated deal in November will only materialise if Saudi Arabia - the world’s largest producer of oil - will shoulder the bulk of the cuts. Bunyamin Bardak
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NEFS M arket Wrap-Up
Agriculturals Volatility in grain markets continued this week, as traders contemplated the impact of bumper harvests and government policy changes on future supply. Chicago futures markets moved particularly erratically on Monday, when rice and wheat prices fell by as much as 5.1% and 3.6% respectively. Rice finished the week at $9.81/CWT as concerns over high global stocks persist. As the second largest importer of rice in the world, Nigeria’s agricultural policies are monitored closely by traders. Monday’s 5.1% fall came almost immediately after Adu Ogbeh, Nigeria’s Minister of Agriculture, announced that the government would seek to deter the importation of rice by supporting domestic production through a subsidy scheme worth more than £52m. Alhaji Sani Ali, a wholesale trader at Dawanau International Grains in Nigeria, believes the excess supply is set to increase further, “As farmers continue to harvest, the supply of the commodities will continue to flood the markets and this will push prices further down”. Wheat prices fell by slightly less to $4.16/BU as the U.S. Department of Agriculture reported that global wheat stocks are expected to exceed demand by more than a quarter of a billion tons this year. Wheat markets have also been
affected by speculation over policy changes in Egypt, as the government continues to negotiate aggressively with wholesale traders over the quantity and quality of the wheat allowed into the country. As global inventories continue to swell for both commodities, traders should consider the importance of China on both markets. The government’s price support schemes helped China become the world’s largest producer of both rice and wheat. But in March this year, oversupply of corn caused China to scrap their financial support to corn farmers, which resulted in short-term price spikes and depleted domestic stocks. Changing sentiment in Beijing in favour of free-market policies in agricultural commodity markets should act as a reminder that supply shocks in the rice and wheat markets cannot be ruled out. It is also worth remembering that the harvest season is far from over and the current expectation of favourable farming conditions throughout, could turn out to be overly-optimistic. Traders can expect further clarity next week, as the USDA releases its Crop Progress and Agricultural Prices reports. Until then, rice and wheat prices (shown below) can be expected to remain low. Aidan Dominy
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CURRENCIES Major Currencies A relatively quiet week for the major currencies, aside from the volatility of the sterling. The main drivers of spikes are from the comments Chancellor Hammond and Mark Carney made, as well as the market’s reaction to the firm third quarter UK GDP data up 0.5% (forecasted 0.3%) and up 2.3% on a year-on-year basis (forecasted 2.1%). The sterling (against the dollar) opened at 1.222 and closed this week in the 1.217 region. Tuesday was an exciting day for the sterling as the seemingly random slump, at its weakest, of 1.3% on the day to lows of $1.2083 was attributed to the pre-testimony nerves of the market. Other traders point towards Chancellor Hammond’s comments of reassuring the BoE of his support for QE. Others even pointed, speculatively, to the potential resignation of Mark Carney. By the end of the trading day, losses were made up and the pound recovered to only a 0.5% slump closing at $1.2182. On Thursday, following the bright UK Q3 GDP announcement the markets reacted aptly and the pound momentarily rallied a spectacular increase of 0.08% on the day to $1.2270. The UK bond market has dramatically cut away any bullish sterling sentiment. Gilts
suffered their biggest monthly loss in 8 years, with the benchmark 10-year yield at 1.278. The better than expected GDP figures have removed market expectation of a further BoE rate cut, driving a gilt selloff – causing the pound to fall 0.85% on the day. Nothing of major interest in the euro this week, with the euro (against the dollar) flatlining at around 1.092 with a resistance at 1.0945, capping gains. The dollar (against the pound) saw a rise of 0.85% this week, closing at 0.8227 with highs of 0.826 mid-week. The strengthening currency is due to the Fed being more likely to hike rates. Per Fed fund futures, there is a 72% chance of an increase by the end of the year, with the yield on the 10-year US government bond at a near 5 month high at 1.84%. Next week the focus should be on Eurozone performance, with data regarding Q3 performance being released. The sterling is likely to continue to be volatile, whilst the Fed continues to create a bullish environment in the dollar space. Robert Tse
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NEFS M arket Wrap-Up
Minor Currencies In contrast to the US dollar’s strength in the recent weeks, the Chinese Yuan has had a difficult one, a struggle that has brought the currency to a six-year low. In recent weeks, investors have become increasingly concerned about a possible Yuan devaluation, and these fears have forced the currency down to its lowest level in almost 6 years. In response to such fears, the People’s Bank of China (PBOC) have used their access to state controlled media to assure the world that they intend to keep the exchange rate stable, and that there is no basis for persistent declines. This comes alongside expectations that the Federal Reserve are due to raise their own interest rates, a move that could potentially weaken the Yuan further. The extent of the decline in the currency over the last 4 months has been severe, with the Yuan already losing more than 1.5% against the dollar so far this month. In addition, the offshore Yuan weakened to 6.7921 per dollar, it’s weakest level since October 2010. These recent developments follow a trend that some investors have
taken as an indication that the Chinese juggernaut of an economy is slowing, as it comes after China’s surprise devaluation last August, depreciation through the year, and growth rate reduction. Nonetheless, Frank Zhang, a Shanghai based head of foreign exchange trading at China Merchants Bank has insisted that "there’s no basis for the market to panic as the PBOC has built credibility for itself -investors trust the fixing mechanism and China’s capability to keep the yuan stable." Though China has sought to liberalise its markets, easing access to onshore bond markets and ending quotas for an inbound investment program, it retains control of the currency through a daily limit that moves to 2% on either side. Furthermore, China has been accused of intervening in the market to slow declines, such as is suspected in this current scenario. Despite the fact the current state of the Yuan may not be too optimistic, the fact that the People’s Bank of China are alive to the situation is encouraging. Mikun Olupona
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About the Research Division 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 monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. TheThe goalResearch of the division is both development of theand analysts’ writing and market Division wasthe formed in early 2011 is a part of theskills Nottingham Economics knowledge, as well as providing NEFS members with quality analysis, keeping them of up teams to dateof with and Finance Society (NEFS, formerly known as NFS and UNIS). It consists the analysts most important news. closelyfinancial monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. 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 For date any queries, contact Homairah Ginwalla at hginwalla@nefs.org.uk. with the please most important financial news. Sincerely Yours, We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. Homairah Ginwalla, Director of the Nottingham Economics & Finance Society Research Division For any queries, please contact Josh Martin at jmartin@nefs.org.uk. Sincerely Yours, Josh Martin, Director of the Nottingham Economics & Finance Society Research Division
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