Week Ending 4th November 2016
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS M arket Wrap-Up
Contents Macro Review 3 United Kingdom United States Eurozone 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 4th November 2016
MACRO REVIEW United Kingdom It has been said that the Bank of England (BoE) was relatively despondent following the EU referendum; engaging in excessive scaremongering and interspersing dismal future expectations. Take their forecasts for growth, for example, Q3 growth was predicted to be a paltry 0.1% but latest figures released show that GDP, in fact, grew by almost 0.5%. The BoE’s growth & inflationary expectations were evidently erroneous, however, in the latest report, some respectable and seemingly accurate predictions were made. GDP growth is now expected to curtail to 0.4% and the near term-outlook for activity is much better. Ambivalence towards the economy remains palpable, nonetheless, as the BoE truncated long-term GDP growth expectations (shown below). The Monetary Policy Committee convened on Thursday for their Quarterly Inflation Report, and unanimously agreed to keep interest rates at 0.25% (the current level), although deciding to prolong their programme for the purchase of £60 billion of UK government bonds. The BoE appeared to be pleased by the ‘resilience of consumer spending’ and the ‘strength’ of the housing market’. The UK manufacturing PMI – a reputable survey of activity produced by IHS Markit reflected the sentiment, showing construction to be 52.6 in October, indicative of growth. Coupled with a plunging sterling, this was sufficient to influence the nine-member strong MPC to abdicate plans for a cut in interest rates in the foreseeable future.
With rising petrol prices and increasing prices of other imported goods, The BoE cautioned households/consumers of a sharp and imminent rise in inflation in early 2017 (this should reduce spending power). The Bank expects inflation to rise from 1.3% this year to 2.7% in 2017 and 2018 – much higher than the last set of forecasts in the previous report. Mark Carney predicts inflation to dwindle back towards the 2% target in late-2020. The High Court ruled that only parliament has the authority to trigger Article 50 (the legal route for Britain to leave the EU). Markets responded positively to the notion that parliament could perhaps establish conditions maximising the prospects of soft Brexit, with the amendment of primary legislation. Sterling rebounding by 1.5% to hit $1.249 – the highest level seen in 3 weeks. Theresa May was quick to mention that she has no ‘intention of letting this derail our timetable’, although many lawyers and cabinet ministers believe the introduction of legislation to be approved in both Commons & Lords, will result in a much more time consuming route, and prolong Brexit-induced uncertainty. Usman Marghoob
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NEFS M arket Wrap-Up
United States On the 8th of November, the world will be introduced to the 45th President of the United States. With new polls suggesting a close finish, here’s a review of the economic plans of Democratic nominee Hillary Clinton, and Republican nominee, Donald Trump. If elected, Hilary will be the first female President of the US. With a campaign slogan of “stronger together”, her economic goals are to raise the national minimum wage from $7.25 an hour to $12 an hour, invest more in childcare subsidies, and provide tax reductions for working class families. She has proposed to stimulate economic growth by investing $275 billion on infrastructure, paid for by a 4% increase in income taxes for those who currently earn over $5 million annually, what she calls the "Fair Share Surcharge". Additionally, she plans to “reign in Wall Street” by imposing risk fees on large financial institutions and high-frequency trading. Though it is thought to decrease investment from top earners in the economy, Mrs. Clinton’s plan would significantly reduce the federal deficit, currently at $587 billion, by adding $1.1 trillion in revenue over the next 10 years. On the other hand, Republican nominee Donald Trump, suggests he can “make America great again” by giving Americans
the largest tax cut in US history: cutting corporate tax rates from 39% to 15%. Alongside this, he will increase the disposable income of American families and bring jobs back to America from overseas. Similarly, he intends to rewrite American trade policies under an “America First” doctrine. Mr Trump believes the current trade deficit of $40.73 billion is caused by “poorly negotiated” trade deals, namely the Trans-Pacific Partnership (TPP) and The North American Free Trade Agreement (NAFTA). However, many economist have a sceptical view of Mr. Trump’s plans. Kevin Logan, Chief US economist at HSBC believes “the tax cuts that are implemented in the first year of a Trump administration might give GDP a short-term boost … [However] combined supply shock from a contraction in the labour force and from the disruption to international trade would likely put the economy into a recession after a year”. With the election day now in sight, the next President will be forced to tackle the problem that is the federal deficit. Be it by implementing new government programs or reducing taxes, the next President must maintain a commitment of preventing the federal debt from rising. Depicted below is the US Federal Debt. Disun Holloway
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Week Ending 4th November 2016
Eurozone Having witnessed a relatively promising performance of the euro area in the past month, one may conclude that member countries are all gradually returning to their previous economic health. Since robust statistics for frontline countries from the bloc can sometimes be deceiving by boosting up aggregated scores, it is important to stop and reflect on the general situation in some of the weaker links of the bloc. Eurostat announced its measures of unemployment rates amongst the area this week, which are calculated as a percentage of the total work force that is unemployed, but is actively searching for employment. The aggregated Eurozone rate for September 2016 was unchanged at 10%. Below the surface, the persistently highest rates were again detected in Greece with its astonishing seasonally adjusted 23.2%. Having said this, the number has decreased from 23.4% in August. Similarly, the Spanish economy, which has the second highest unemployment rate, has recorded 18.91% down from 20% last month. Youth unemployment for both member countries has also seen a decrease, although it is still at alarmingly high levels – 42.7% and
42.6% respectively. Greece’s economic picture of recovery is nevertheless still painful, with a stagnating deflation rate of 1%. Spain, on the other hand, has been the star pupil of the bloc, with an inflation rate healthily increasing from 0.2% to 0.7% in October. This is higher than the Eurozone’s aggregated inflation rate of 0.5% for the month. However, the picture is not as bright for other members of the area. Italian Prime Minister Matteo Renzi, for example, has had a very weak quarter to defend. Italy’s unemployment unexpectedly rose to 11.7%. This is accompanied by a dramatic increase in the youth unemployment rate, from 37.3% to 39.2%. In addition, the country’s GDP growth in the last quarter remained flat in the second quarter of 2016, down from 0.3% in the previous one. This has been the lowest GDP growth since the last quarter of 2014, and was mainly attributed to a contracting consumer demand. With inflation falling to a negative territory at -0.1% in addition to everything else, Italy is struggling to boost the economy in the last quarter of the year. Desislava Tartova
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NEFS M arket Wrap-Up
Japan Inflation woes continue for the Japanese economy. Prices in September as measured by the Consumer Price Index (CPI) remained down -0.5% from the previous year. In its policy meeting last week, the Bank of Japan (BoJ) revised its inflation forecasts, projecting that its price target of 2%, as measured by CPI, will be achieved in the 2018 fiscal year. This is a year later than the Bank’s last forecast, and comes as another delay in a protracted hunt for positive inflation. The meeting concluded with the Bank certain that the economy can achieve this target, and it did not move on interest rates. Slowdown in emerging economies and a stronger yen will hamper growth through the end of the fiscal year, after which the BoJ predicts that government stimulus spending, coupled with a loose monetary policy will build momentum for domestic demand, and likewise for economic growth. Based on this outlook, and including forecasted strength in consumer and investment spending, the BoJ felt it inappropriate to ease further. By the close of the 2017 fiscal year, the Bank expects actual output to exceed potential output, which will lead to inflation. The Bank is confident that an underlying power to boost the economy exists, but the matter of when is subject to events outside
of its control. Principle among these conditions is increased growth in emerging markets, which will fuel exports, particularly capital goods. The result of the US election will also have ramifications going forth, where any chaotic outcome could see investors sell off US assets for a stable currency like the yen, appreciating the currency’s value and negatively affecting demand for the country’s exports. Since the surprise narrowing of Mrs Clinton’s lead beginning last Tuesday, the yen has strengthened 1.8% against the dollar, rising to ¥102.98 at the start of trading Friday. Reflecting similar nervousness, the Nikkei 225 index fell 2.9% over the week. The export sector faces further uncertainty due to both candidates’ opposition to the Trans-Pacific Partnership, a trade agreement that would lower trade barriers and promote innovation across the region. Prime Minister Abe has in part bet the success of his economic revitalisation plan on the effectiveness of the Partnership. As in many other markets world-wide, the outcome of Tuesday’s election could be a turning point in growth outlooks, and any turbulence resulting from the US’s future decisions may feed negatively into actual growth of Japan’s economy. Daniel Blaugher
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Week Ending 4th November 2016
South Korea South Korea is yet to steer clear of troubled waters as talk of a corruption scandal engulfs premier Park Guen-hye. This comes just weeks after a corruption investigation at major conglomerate, Lotte, and amid continued problems for the nation’s ‘chaebols’.
economics needs. This is likely in an effort to prevent further bankruptcies (Hanjin), to stabilise the GDP growth rate (0.7% QoQ) and maintain unemployment at a healthy 4% - in 2015 shipbuilding accounted for 7.1% of manufacturing jobs, and ships for 7.6% of exports in a trade-driven economy.
Choi Soon-sil, a long-time friend of Park Guen-hye, was arrested on Thursday [November 4th] following allegations that Choi, a private citizen, was exerting influence over the head of state. Previously, Park has had to apologise for allowing the friend to read presidential speeches. These events could not have come at a worse time, as Korean exports and growth are suffering due to conglomerate woes. Questions over Park’s leadership are only likely to mar confidence in South Korean markets further. As Professor Kim Jung-sik (Yonsei University, Seoul) has it– ‘History shows economic crises tend to happen when there is political chaos, as politics take any attention needed on the economy’.
This is the second fiscal stimulus of 2016 that has been announced by the government. In June, a $17bn spending package (with a $8.5bn supplementary budget) was announced as a response to the result of the UK’s referendum on EU membership, with the aim of boosting slow growth and stabilizing financial markets. One may be concerned with this heavy handed approach to economic policy by the government, especially as they have been running a budget deficit since 2009 (currently 3.1% of GDP). Yet government debt provides less cause for concern – at 35.12% of GDP, it is far below the 89.2% of the UK, and well within European Commission guidelines of 60%.
However, there is yet reason not to despair – Finance Minister Yoo Il-ho has announced that the government will provide a $9.6bn fiscal stimulus towards a sinking shipbuilding sector, by directly financing over 250 vessels. Clearly, politics has not totally distracted from current
Nonetheless, it would be unwise for South Korea to follow an excessively and arguably wasteful fiscal policy in order to bolster growth. In the face of declining global trade and a retreat from globalisation, it’s time to swap their exportled model for a more versatile economy. Jamie Peake
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NEFS M arket Wrap-Up
Australia & New Zealand This week began with the Reserve Bank of Australia’s decision to maintain the interest rate at 1.5%. In a statement released by Governor Philip Lowe, the unchanged interest rate was deemed to be “consistent with sustainable growth in the economy and achieving the inflation target over time.” Keeping the interest rate low thus far has incentivised Australian shoppers to spend and consequently supported the rise in domestic demand. The Bank’s statement also said that the lower exchange rate has been significantly helping the traded sector for three years now. The graph below shows how Australia’s cash rate (Australia and New Zealand’s term for bank rate of interest) has generally fallen over time and continues to do so despite some fluctuations. Next week’s US Presidential election has heralded speculation of effects across the ocean and a fall in New Zealand’s economic output is considered likely. The New Zealand Institute of Economic Research has said that a win by Republican candidate Donald Trump would lead to increased borrowing costs for New Zealand firms and individuals. The institute’s deputy chief executive said that there would be “significant instability” in financial markets as “credit conditions
tighten in the face of uncertainty.” Short term financial uncertainty is of grave concern for New Zealand; export prices for the island nation may rise if the New Zealand dollar appreciates in value. This is a likely possibility if markets are “concerned about future US competitiveness” following Trump’s anti-globalist trade policies. This is a concern for New Zealand firms as the US is the country’s third largest export partner, with a market valued at over $8 billion. ASB Bank’s chief economist Nick Tuffley added to these concerns, saying that New Zealand’s annual 3.5% growth rate over the next year was in danger of getting “trumpled” if Hillary Clayton’s bid for the White House was unsuccessful. He added that potential trade friction was the main matter to consider. As ANZ Bank’s chief economist Cameron Bagrie said, “markets are going to be naturally on edge” and there will inevitably be short term shocks following the outcome of the American election. However, as happened in the weeks following Brexit, markets adjusted and bounced back, so for now all that can be done is to wait expectantly for Tuesday’s election to come. Nikou Asgari
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Week Ending 4th November 2016
Canada Canada, this week, released figures for a record trade deficit of C$ 4.08 billion for September 2016. Meanwhile, the unemployment rate in Canada represented no change and remained at 7%, coinciding with a rise in labour participation. Firstly, the Canadian government released the disappointing yet expected news that the country faces a record balance of trade deficit. Statistics for Canada reported that the trade gap for September had risen to C$ 4.1 billion compared to the previously recorded trade shortfall for August of C$1.99 billion. The graph below shows the Canadian balance of trade figures over the past year. However, the considerable increase in the trade deficit can be regarded as a one-off occurrence, with Canada importing costly machinery for an oil project which represented a significant proportion of the total imports for September. Import rose by 4.7% which coincided with a 71.4% increase in imported machinery. The machinery has been purchased from South Korea and was required for the Hebron offshore oil project in Newfoundland and Labrador. It does not appear that there will be any similar major capital investments soon, so the Canadian authorities will be hopeful that the figures for the balance of trade will begin to improve over the coming months.
In other news, the unemployment rate in Canada remained stationary at 7%. Overall, the October figures demonstrated improvements in the labour market, with labour participation increasing by 44,000 while employment rose by 0.2%. The youth labour market, for those aged 15-24, saw a marked rise of 26,000 in the employment rate for October. Moreover, there was a slight increase in the employment rate for men aged between 25 and 54, while all other groups had employment rates that remained virtually the same. Finally, after several years of negotiation, Canada and the European Union signed the CETA trade agreement. The deal stood on the verge of collapse due to opposition from Belgian regions such as Wallonia but this opposition was dropped as Belgium officials provided assurances over labour and environmental standards. It is hoped that the trade agreement will generate an increase in trade equivalent to $12 billion per year. Canadian Prime Minster Justin Trudeau expressed his approval for a ‘progressive trade agreement’ which he feels will ‘create more good, well-paying jobs for our citizens.’ Isher Hehar
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NEFS M arket Wrap-Up
EMERGING MARKETS China
The official manufacturing PMI (see graph below), with relatively more weight on large state-owned enterprises, rose to 51.2 in October, beating market estimates of slightly above 50. Meanwhile, the nonmanufacturing PMI rose to 54. The private Caixin China Composite PMI, with more focus on mid-sized firms, also rose to 52.9 in October from 51.4 in September. A reading above 50 indicates expansion while any numbers below 50 point to a contraction. Recent statistics, including industrial output, seem to point to signs of the vast economy stabilizing after slowing down to an annual growth rate of less than 7 percent from around 10 percent. The PMI index has been struggling at around 50 during much of the first half of the year as China tried to maneuver an economic transition to more sustainable growth and rolled out massive stimulus measures. This explains why some analysts continued to call for measures supporting growth upon the release of the upbeat PMI data. “Supportive policies must be continued, or industrial output may be dragged down by a slowdown in investment,” said
Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group. The “old versus new” remains the key story as China upgrades its manufacturing sector and grows the services sector to meet fast-growing demand, though we can continue to expect challenges to abound, such as asset bubbles and overcapacity in certain sectors. The Shanghai Composite index gained 0.68 percent to close at 3,125.32 on Friday, after testing its recent peak on Thursday. It failed to break through resistance. Investors are looking out for US presidential election results amid expectations of a December interest rate hike by the Fed, while expecting Chinese foreign reserves and inflation statistics. Michael Chen China PMI indexes 60 50 40
Oct… No… De… Jan… Feb… Ma… Apr… Ma… Jun… Jul-… Au… Sep… Oct…
The upbeat purchasing managers’ index (PMI) is definitely the good news investors have been waiting for on China recently and a driver behind the rising trend in the stock market.
China Manufacturing PMI China non-manufacturing PMI
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India India has been severely criticised this week over the continued boycotting of Chinese goods, which has seen the sale of Chinese goods drop 60% over the course of India’s Diwali Festival, according to All India Traders. This boycott comes in response to the recent announcement of India’s trade deficit with China, which totaled $52.7 billion in 2015 and comprised nearly half of India’s overall 2015 trade deficit (see graph below). Whilst trade from China to India reached an astounding $61.7 billion last year, India’s exports to China only amounted to $9 billion. Protectionist policies are gaining ground however, with talks to reduce tariffs on Chinese goods being undermined by proposals to instead increase tariffs on certain Chinese goods. These developments in trade are going to be disasterous for the Indian economy, which is far more vulnerable to trade alterations than China. Imports to India amount to a mere 2% of total Chinese exports, whereas China is India’s largest trading partner. The subsequent loss of Chinese trade would hence create a vacuum that wouldn’t be easily filled. India’s intention to not remove, or potentially increase tariffs will also prove detrimental. Increased tariffs on Chinese goods will augment prices, affecting both Indian manufacturers and consumers.
Higher prices that are not matched by higher wages will inevitably send more people into poverty and cause job redundancies. Furthermore, higher prices will force the inflation rate even higher, despite India already suffering from excessive inflation. At the moment, the low and competitive price of Chinese goods acts as a cure for this ailment. There is also the impact that this reduced trade would have on India’s future growth, with India recently postulated to overtake China in becoming the new ‘Factory of the World’. This growth target will not be met however, if India can’t get access to the necessary technology and manufacturing goods to enable this success. Unfortunately, with roughly 40% of India’s technology imports coming from China, India’s inability to meet this growth target may become reality. It is consequently of vital importance that India recognises the significance of Chinese trade. The solution to India’s trade deficit is not enforcing further protectionist policies or continuing this boycott of Chinese goods. Instead, India should reject such trade policies, utilise Chinese manufacturing imports and make the domestic industry more efficient. Charlotte Alder
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NEFS M arket Wrap-Up
Russia & Eastern Europe Developments in our favorite Eastern European countries are on today’s menu. Inflation in Russia is struggling to meet the central bank’s target rate, despite persistent monetary policy efforts. Hungary, home of the largest electronics manufacturers in Central and Eastern Europe, is currently approaching its record high in manufacturing numbers. Finally, important GDP indicators revealed a positive outlook for economic growth in Croatia. Last Thursday, Russian year-over-year inflation came in just below consensus forecasts at 6.1%. The Central Bank of Russia currently has a 4% inflation target which it seeks to achieve through the use of “moderately tight policy”. The primary monetary policy tool for affecting inflation is manipulating the CBR key rate, which is currently at 10%. Challenges like weak sectorial diversity of the economy and strong monopoly presence are a few of the problems preventing inflation levels from reaching the 4% target, according to the central bank. The central bank believes achieving “low and stable” inflation is going to be essential for revitalization the country whose population has lived through multiple recessions, by encouraging citizens to believe that the value of their savings won’t erode, and by encouraging businesses and households to have the confidence to make investment decisions.
HALPIM Manufacturing PMI recorded an index level of 57, which is less than 2 points away from the country’s all time high. The recent boost in monthly new orders index rose from 94.8 to 115.4 and strong exports are sustaining current manufacturing levels. Distancing itself from its recent five-year negative GDP growth streak, Croatia is forecasted for strong and positive GDP growth of 2.6% for the Q3. Retail sales data was released last Thursday and reported a 4.5% increase over the same time last year. Industrial production also increased 1.9%, despite weak performances in mining and quarrying. There’s much to look forward to next week in Eastern Europe. Russian foreign exchange reserves have been steadily increasing over the year and data for October will be released Wednesday. Retail sales in Hungary will be released Monday, which are projected to increase. Croatia will also report its balance of trade on Wednesday. Dan Minicucci
In other news, Hungary released strong manufacturing data last Monday. The
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Latin America This week there will be continued coverage of macro-indicators along with greater focus on long term trends and issues faced by Latin American nations on an economic and political level. Contrary to last week’s negative news regarding Mexico’s CPI rates, there was good news for GDP growth statistics. The economy recorded a GDP growth rate of 1% for Q3 2016, recovering from the 0.2% decrease in Q2. The figure, announced on Monday, exceeded analysts’ expectations, who predicted figures closer to 0.8%. Despite the fact that the results recorded the best quarterly growth since 2014 (see graph below), Mexico’s central bank is continuing to tighten monetary policy, due to the rapid depreciation of the peso against the dollar, which reached an alltime low in September. Continuing from last week’s coverage of the Venezuelan political crisis, President Maduro has agreed to participate in negotiations with The Democratic Unity Party (MUD), in talks mediated by The Vatican. The talks are expected to be fruitless, but from Mr Maduro’s point of view, he can buy some time and popularity, both of which are lacking after he made the decision to suspend the leadership referendum (allowed by the constitution). Since then, the opposition has called off a
mass march on the presidential palace scheduled for Thursday, causing internal divide. Fiscally, Venezuela is in a poor state; the IMF has predicted that GDP will fall by 0.1% this year. Additionally, the nation holds nearly $100 billion worth of debt and the prospect of default looms. In the past month, Brent Crude has once again fallen to around the $45 mark, a slight recovery from this time last year, but the overall slump in the medium term has done nothing to assist economy, especially combined with a fall in production by 25% to 1.5 million barrels per day in October. The outcome of the leadership challenge remains unclear at this moment. Whilst unpopular with the vast majority of Venezuelan’s who have seen living standards squeezed, with high inflation and shortages of consumer goods, Mr Maduro holds the support of the upper echelons of government. This week, the country’s key military figures (who hold vast amounts of power in Venezuela) appeared in a rare television broadcast supporting Maduro. Onlookers predict this to be the prequel to an authoritarian crackdown; although the scale is yet to be seen. Alistair Grant
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NEFS M arket Wrap-Up
Africa Little in the way of revelatory news this week in Africa; some developments, however, are of significance. The tension building around the proposed prosecution of the South African Finance Minister came to its head, and Turkey pledged a trade allegiance with Africa at the Turkey-Africa Economic Business Forum. In light of the current political turf war engulfing the South African Communist Party, in particular surrounding the direction of the country’s public spending stance, suspense has been rising, as the fate of Finance Minister Pravin Gordhan was thrown into question. Having been brought into disrepute over the alleged orchestration of a more-than-generous early retirement plan for a senior colleague, there were fears that Gordhan would face prosecution; the market reaction to which, was negative. As illustrated below, the South African rand had been hovering around the 13.5 (to the USD) mark for the past week. After the Central Prosecutor dropped the fraud charges however, the rand jumped 1.4% to 13.635 to the USD; while this increase is wholly positive, it
highlights a degree of uncertainty in the political future of the country. Moreover, news for African countries is positive following the Turkey-Africa Economic Business Forum this week in Istanbul. Turkey’s economy minister Nihat Zeybekci announced a vested interest in the region, going beyond the political and economic expectations of the trade collaboration, but also alluding to the historical and cultural aspects. In this vein, trade and economic cooperation agreements were signed with 40 countries – and there are plans for more. The minister went on to say that he wanted to expand the current 39 embassies to cover the whole continent, making clear his ambition to form a formidable bond with Turkey over the coming years. Erdogan even took the stage, echoing his minister’s eager sentiment. He cited the surge in trade with Africa over the last decade, which rose by $10.5 billion from 2005 to 2015. If this to be continued, we can expect a surge in interest in Africa, and indeed, a boom may be on the horizon. Thomas Dooner
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Middle East This week, as in Week 1, attention has been drawn to Saudi Arabia, where the ramifications of their unprecedented bonds deal have been keenly felt by the (now former) veteran finance minister, Ibrahim al-Assaf. A man who has held the post since 1966, has been unceremoniously ushered out of the back door by royal decree, one of a series of orders from King Salman in an attempt to arrest plummeting energy revenue. The determination of the largest oil exporter in the world to diversify its revenue streams is proving as inveterate as it is inexorable. The $98 billion budget deficit has forced a massive government reshuffle, with oil minister Ali- Al Naimi being relieved of his duties in May after two decades of service, alongside painful austerity measures. In a televised interview broadcast just last week, al-Assaf was effulgent in his praise of the government’s recent austerity measures, whilst defending lavish expenditures during the oil boom years quickly fading from memory. Some Saudis responded to the news of his removal with joy on social media, as often is the case when the winds of change blow through. However, other more temperate Saudi’s duly paid homage to his half century of
service. I believe as the public face of the fiscal strain, perhaps this decision may prove visceral. In other news, the biggest of Egypt’s list of reforms designed to inspire confidence in its economy was the devaluation of the Egyptian pound by 48% against the dollar in exchange for a $13 billion loan from the IMF. Thursdays much awaited decision by the Egyptian Central Bank meant the Egyptian pound was pegged at 13 to the dollar, four pounds up from the nine Egyptian pounds the bank was desperate to keep it at. This is a move with dual intentions, with the first being to secure the loan from the IMF and secondarily, to eliminate a flourishing black market for U.S dollars. Matt Jarvis (IMF Mission Chief), expects the move to ‘help foster growth, job creation and stronger external position for the country’. However, I am of the opinion that whilst the liberalisation should help the country to strengthen its economy, it will make life harder for Egyptians and the cost of all imported goods will rise sharply, as we saw last week with the sugar shortage. We hope the Egyptian people do not suffer for the governments mistakes. Vincent Egunlae
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NEFS M arket Wrap-Up
South Asia South Asia is being touted as the regional growth leader, outscoring previous top performing regions like East Asia and the Pacific. But is this growth sustainable? According to reports by the World Bank, this rapid growth rate relies on an increasingly volatile private sector. The gradual acceleration of regional growth is being driven mainly by strong domestic consumption, rather than exports or capital accumulation, which was the case for East Asia and the Pacific. Following a strong growth spurt in the early 2000s, South Asia’s gross fixed capital formation has recently started to stagnate. In the coming years, investment growth has been forecasted to stabilize slightly above the 6% level. As of FY16, the private investment growth of India, which accounts for 80% of South Asian GDP, contracted by 1.4%. Pakistan, accounting for 10% of regional GDP, has been facing a sluggish private investment growth as well. Bangladesh’s private investment growth as a percentage of GDP growth has declined from 1.5% to 1.3%. Overall, the state of private investment in South Asia is very disconcerting. South Asian economies need to implement policy reforms that will enhance private investment growth as it is one of the primary sources of gross fixed capital formation. Although public investment accounts for around 20% of capital formation in Bangladesh, Pakistan and Sri Lanka, it has been slowly declining over time. One key mechanism for enhancing private sector investment is through the effective mobilization of savings. Savings is
the part of income that is not spent on consumption, so it can be used to increase a country’s capital stock by directing it towards capital goods and financial assets investment. This would eventually raise the overall productivity of the country, thereby leading to higher national income. To ensure efficient allocation of financial resources, it is important for the South Asian economies to strengthen their financial sector by enhancing the regulatory capacities of central banks, improving financial market infrastructures, and raising accessibility to long-term financing for private firms. Ultimately, the business climate of a country is the highest determinant of its private investment growth, and South Asian economies largely suffer from a challenging environment. The uncertainty and insecurity that is associated with these markets is detrimental to investor confidence. Development of Special Economic Zones (SEZs) has helped China and India to overcome business environment related constraints in the past. These zones are areas within a country with favorable economic regulations and infrastructural facilities, and these are primarily aimed towards increasing investment growth. By attaining a solid growth rate in private investment, South Asia will be able to sustain its rapid economic growth, and thereby cement its position as the top performer among its neighboring regions. Tahsin Farah Chowdhury
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South East Asia This week we look at inflation trends for the region in more depth, with a further three countries releasing consumer price figures for October 2016. Over the last two weeks, the six biggest economies in the region – Indonesia, Thailand, Malaysia, Singapore, the Philippines, and Vietnam – have all released new consumer price data. Over the last month prices have generally grown in line with expectations, with the exception of Singapore, where prices fell, and Vietnam, which recorded its highest inflation rate since August 2014. Rising food costs were the primary driving force behind these price rises, notably in Indonesia, where food prices increased 7.1%, compared to 6.2% in September. Despite this, inflation remains benign; in the case of Indonesia this compares to a historical average food inflation rate of 13.61%. However, the steady consumer price growth seen across the region hides a more worrying trend, namely surging healthcare prices. Last Friday, Vietnam reported a staggering 46.8% rise in medicine prices for September, whilst a recent Mercer survey (see chart below) found that medical inflation for the region is
expected to rise by an average of 13.03% in 2016 – one of the highest rates in the world. This compares to a general inflation rate of just 1.9%. Rapid population growth and a rise in non-communicable diseases (“diseases of affluence”) have been attributed to causing the rise in healthcare demand, and it is starting to put public healthcare systems in the region under strain. Deloitte’s 2015 healthcare outlook reports that Thailand is one of the countries feeling the most pressure; its spending on healthcare is expected to rise 8% a year to reach US$18.7bn by 2018. For a country that hasn’t recorded a budget surplus since 2006, serious reforms will have to be considered in the near future if Prime Minister Chan-Ocha is to maintain Thailand’s commitment to provide universal healthcare that was made in 2001. Provided there are no major macroeconomic developments in the region, next week we will focus on data releases for Indonesia and Malaysia, with GDP, unemployment and current account figures being released throughout next five days. Daniel Pettman
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EQUITIES Financials This week we look at some developments in the banking industry, before analysing the effect of uncertainty over the US presidential election next week. Both UBS and Standard Chartered are under investigation for their IPO work in Hong Kong. The Securities and Exchange Commission in Hong Kong plans to take action against the bank over UBS’s role as a sponsor of certain initial public offerings, which may be fraudulent. Such “action” could result in suspension of UBS’s ability to provide corporate-finance advisory services in Hong Kong for a period of time. This saw the company’s share price fall within a week from around CHF 14.2- 13.2 by the 4th of November. It is a similar story with Standard Chartered. The troubled, emerging markets-focussed lender worked on the IPO of a company named China Forestry- a timber manufacturer with questionable accounts, whose shares were suspended five years ago-, alongside UBS. The bank warned that the investigation could have financial repercussions, causing its share price to fall 10% at the close of trading on Friday.
narrowing margin of a Clinton victory. Additionally, reversal of the monetary policy stance from the Bank of England, coupled with questions over whether Brexit will ever come to fruition has caused the pound to rally, dragging the FTSE's exportfocused firms lower. On Friday, the US S&P 500 index has fall for an eighth straight day, its longest losing streak since the 2008 financial crisis. Hong Kong’s Hang Seng Index was also dragged lower by global risk concerns surrounding US politics. This is a recurring theme across the world’s market indexes this week, as the election outcome will influence international trade policies. "It's a pretty simple equation: uncertainty goes up, stock markets go down," said David Kelly, chief global strategist at JPMorgan Funds. Therefore, any return to ‘normal’ levels will only come with the conclusion of the election, when markets are certain about the type of policies that will be implemented in the US. Angelo Perera
The FTSE 100 has suffered its worst week since early January, down nearly 100 points, as shown below. This has been caused primarily by two factors- the news from Standard Chartered and the growing uncertainty over the result of next week’s US elections, as polls show a gradually
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Technology The importance of diversification within technology brands for their success and survival has come to the fore this week, with two large hardware companies reporting stunningly weak quarterly results and in some cases threatening their existence. Fitness tracking group Fitbit lost almost a third of its value in after hours trading on Wednesday with its share price tumbling by 31% (demonstrated in the graph below), leading to an all time low of $8.80. This comes after weak revenue forecasts for the holiday season, with investors looking for sales of $1 billion, the company now has a projected outlook in the region of $725m-$750m. CEO James Park gave several reasons for the dramatic fall, including a “product transition” compounded by having to “scrap” a “few million dollars” on the company’s new venture, the Flex band, due to production issues as well as not unlocking the Asia pacific region. However, this can all be underpinned by the lack of diversification and end to end product experience within the company by making the consumer stick with the hardware through in-hardware purchases e.g. applications. This is
something which companies like Apple have done exceptionally well at, demonstrated by the recent update of the Apple watch which is a large competitor to Fitbit. Technology company GoPro has also seen a drop in its share price after announcing its quarterly results on Thursday – this time by a fifth. Again, much like Fitbit, the firm insists that the problem is production issues, however the loss in investor confidence suggests a more deep rooted problem. The company’s revenue declined by nearly 40% (£193 million), a much steeper figure than analysts had predicted, meaning that when trading began after the results, GoPro’s worth dropped from $1.23 billion to $972 million in a matter of minutes. Like Fitbit, it has demonstrated that pegging the companies hopes on a strong holiday season is a risky one, due to the possibility of supply issues, but like many analysts are stating, the lack of diversification may prove to be the true problem for these hardware companies. William Bunnis
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NEFS M arket Wrap-Up
Oil & Gas This week oil prices fell sharply on Monday 31st of October, leading to a one-month low, and continued to fall throughout the week by over 3%. This is believed to be due to doubts over OPEC’s implementation of the production cut deal- hence a shake in global equity prices. Several countries including Iran, Iraq, Nigeria and Libya requested an exemption from OPEC’s production cut deal. Each country has based their request on different rationales, such as Iran’s lack of production due to sanctions, or Iraq’s need of the revenue to fight ISIS. However, Saudi Arabia is still trying to maintain hope as winter approaches the northern hemisphere, reducing the need for a cutback as demand from these regions, in order to heat their homes, will be high. However, the cartel has seen record output in October. On another note, Royal Dutch Shell PLC (RDSA: LSE) saw a big increase in share prices on Tuesday, with share prices reaching 2110.50. However, this high did not persist, as share prices only increased 0.65% throughout the week. At the end of September, Shell’s net debt reached almost $78bn, representing a debt-toequity ratio of 29.2%. However, analysts hypothesize that Shell can decrease a
large part of its debt by selling its 300-000 position in the Permian basin, a region attracting large investments. BP PLC (BP: LSE) saw a decline in share prices by 6.45%, $484.35 at the beginning of the week to $453.10 most recently. Tullow Oil PLC (TLW: LSE) recovered from a drop of its share price by 5.65% to an only 1.28% decrease. Norway’s Statoil ASA (STL: OSL), similarly to Tullow Oil PLC, also recovered from a -4.51% drop to a 2.95% drop in share prices throughout the week. Lastly, companies such as Chevron (CVX), Exxon (XOM), and Halliburton (HAL) all saw increases in their share prices by 1.16%, 0.25%, and 0.11% respectively. Lastly, the Dow Jones industrial average fell 18.77 points to 18.14, a 0.1% drop. The S&P 500 lost 0.01%, and finished at 2126.15. NASDAQ dropped 0.02%, ending at 5189.14. Moreover, Monday marked the sixth consecutive day that European equities fell, due to energy shares battling low crude oil prices and pressure in financial stocks, leading to a decrease in the FTSEurofirst 300 index by 0.55%. The WTI price saw a sharp decline of 7.7%, from $48.66 a barrel to $44.92 a barrel. Maria Fernandes Camano Garcia
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COMMODITIES Energy Bad news continues for global energy prices. Warmer-than-average weather forecasts for the next couple of weeks have put pressure on natural gas prices which fell by 2.5%, to $3.026 per million British thermal units (mmBtu). Prices climbed when the Energy Information Agency (EIA) released its weekly inventory report on Thursday, showing an increase in US natural gas stores by another 54 billion cubic feet for the week ending October 28. This was in line with expectations from analysts, and so prices probably climbed due to relief in the markets that there had not been a larger increase. Weather conditions and inventory figures certainly look to be the determining factors for future natural gas prices. Tim Evans, from Citi Futures, noted that “the forecast for warmer-than-normal temperatures and further storage injections in the weeks ahead” will be keeping the market’s recent bearish view.
in the chart below. This complicated matters for OPEC who are already failing to agree on member quotas, required to implement an output deal which was reached in Algiers, back in September. Brent Crude, the global benchmark, fell a further 2.9 per cent to $46.86, whilst US benchmark, West Texas Intermediate (WTI) closed at $45.34, also down by 2.9 per cent.
Meanwhile, oil prices hit a one-month low on Monday, down by 3.8%, after last weekend’s talks between OPEC and nonOPEC producers failed to reach an agreement on how to reduce global oil production. Prices dropped further when the EIA released its weekly report on Tuesday, showing a record increase in US crude oil inventories of 14.4 million barrels for the week ending October 28, as shown
Bunyamin Bardak
The continued drop in oil prices reflect growing scepticism on OPEC’s ability to agree a deal to cut their production levels. In addition to this, the growing list of OPEC members that are seeking exemptions from the planned supply cuts also weigh into the possibility of future price drops. On this matter, Goldman Sachs’ analyst, Damien Courvalin, is predicting that the current climate is “warranting oil prices in the low $40 per barrel if OPEC is unable to deliver a convincing agreement.”
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Agriculturals International sugar prices retreated by more than 6% from a 4 year high this week, as bullish sentiment faded and speculators closed long positions. Whilst the data released over the past few days has drawn attention to slowing production in Brazil and Thailand, traders appear to have reacted cautiously to the price rise which. according to the Bloomberg Commodity Index, has seen the sweetener appreciate more than any other agricultural commodity this year. Sugar started 2016 trading at around $0.15/lb and ended this week 46% higher, at $0.22/lb. Following 5 years of oversupply, speculators began building net long positions from the end of 2015, when it first looked as though demand would finally catch up with supply. Heavy rains in Brazil, combined with the impact of droughts in Thailand and India, caused sugar stocks to fall to their lowest levels since 2011. The slow response of farmers to the rising prices has also contributed to demand outstripping supply by as much as 7.5m tonnes - the highest since the 2008 world food price crisis. In response to the current high prices and slowing domestic production, the Chinese government successfully sold 200,000
tonnes of its sugar reserves at premium prices last Friday. Auction participants expressed their surprise at the level of interest shown by wholesale buyers given the recent bullish environment. The success of such a large sale suggests that China could be open to offloading more of its 7 million tonne reserves in further auctions later this year. Despite the slight pull-back in the futures markets this week, data from the US Futures Trading Commission shows that net long positions are still hovering around all-time-highs, as shown below. This threatens to destabilise the sugar market, leaving investors exposed to a potentially disastrous price crash, should bearish news trigger a large-scale sell off. While a price crash appears unlikely in the short-term, it remains to be seen whether the market has fully considered the impact of a likely surge in supply for the 2017 harvest season. Over the coming week, investors will remain focussed on data coming from Brazil and Thailand, which should give a clearer indication of the impact of extreme weather on current harvests. Aidan Dominy
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CURRENCIES Major Currencies Once again the circus that is Brexit has given the sterling the spotlight this week with an impressive rally from $1.216 to $1.250. The Euro is showing more bearish signs, which is exacerbated by the faltering US currency amidst the comical election debacle. The first spike was seen on Tuesday at 0.25% to $1.2272 (see graph) as Mr Carney announced he will stay until June 2019. Such is the peculiarity of the markets; the British economy itself can barely rally the currency but when a Canadian man decides to stay, the sterling rallies. It spiked to $1.2470 as the Bank of England (BoE) held rates and revised up growth forecasts. However, with the BoE predicting the biggest inflation overshoot since 1997, the gilt rally ended as 10-yr govvies yielded up 0.07% at 1.237%. The main talking point this week was the pound’s surge, following the High Court’s ruling that Article 50 (essentially the execution of Brexit) cannot be triggered without a parliamentary vote. This brings joy to the slightly bitter losers of the EU referendum and the sterling jumped 1.5% (against a drop of 6% in October) to just under $1.25. This indicates the sterling is a politically driven currency right now and even though this rally may be short lived, volatility is once again injected into the sterling.
In the US, the election fears have again spooked investors. With rates unchanged, as the case for a rate hike strengthens, there is an indication that monetary policy in December will tighten, amid rising inflation concerns. The dollar index, which tracks the buck against a basket of its peers, fell 0.7% to 97.77, corroborating with the decline of the dollar (against the euro) opening at 0.917 and closing at 0.901. Eurozone GDP growth is steady at 0.3% in Q3, a two-year high, indicating life in the stagnant Eurozone. GDP data was helped by an improving France, the Eurozone’s second biggest economy, returning to growth in Q3. But with the ECB expected to extend its asset purchasing in December, the Euro’s rise was hindered this week at 1.93% up at 1.11 (against the dollar). Another volatile, but bullish, week for the sterling as the Euro begins to steady. Next week is unlikely to be quieter and with the US election scheduled for Tuesday, who knows what will happen to the dollar. Robert Tse
Source: Bloomberg and FT.com
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Minor Currencies As the race to American presidency heightens, the effects of the election are being felt throughout the currency markets across the world as investors seek out what have been coined traditional safe havens for capital, the Swiss Franc and the Japanese Yen. In recent weeks, movements seen in the markets have to some extent been related to the American election, as investors anticipate that the result will have direct effect on the dollar, thus affecting other exchange rates. As a consequence, with recent news that Trump is ahead in certain polls, the prospect of a possible Trump administration has sent investors into some panic. Whilst the Swiss franc traded at its strongest in a month against the dollar and in more than four against the euro on Wednesday, the Yen strengthened against the dollar to trade as high as 103.21 on Thursday. Although these may on the surface appear to be positive movements, the wider economic ramifications have been severe. For example, the relative strength in yen pushed major Japanese exporters lower, with Toyota shares closing down 4.04 percent, Sony lower by 2.76% and Mazda
Motor down 5.08% as a direct result. Consequently, Ric Spooner, chief market analyst at CMC Markets, has explained this recent volatility in saying "Markets are currently attempting to strike the right balance between the greater probability of a Clinton win and the possibility of a significant sell-off on a Trump victory". As a result, they are favouring these safer currencies. However, in particular, the yen is not simply advancing as a result of American influences, but the nation itself is experiencing delicately improving growth rates. The economy is expected to have grown at an annual rate of 0.9% in the third quarter, following a 0.7% expansion in the second quarter, and this data comes alongside next Wednesday’s current account balance release for September which is expected to show a surplus of 1.9602 trillion yen (15 billion pounds). All in all, though situations in the US have boosted the desire of investors for these so called safe havens, the general goods performance of these economies means they have themselves merited an improvement in the yen and franc. Mikun Olupona
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