Week Ending 4th February 2018
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Macro Review 3 United Kingdom United States & Canada Europe Japan & South Korea Australia & New Zealand
Emerging Markets 8 Middle East Africa China Latin America Russia & Eastern Europe
Equity and Deals 13
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 17
Energy Currencies EUR, USD, GBP 18 AUD, JPY, Other Asian
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Week Ending 4th February 2018
MACRO REVIEW United Kingdom The UK entered the New Year with a positive end to 2017. According to the National Institute of Economic and Social Research (NIESR), UK economic growth grew the fastest in Q4 throughout the whole of 2017 (see graph below), with domestic output having expanded by 0.5% since October. Real GDP growth for 2018 is also forecasted to be 0.5%, ahead of the initial 0.3% prediction. This is a considerable improvement on Q1 and Q2 2017 growth (0.2% and 0.3% respectively), as Brexit-fuelled growth has faded out from the previous year.
However this boom in growth is expected to slow down in the first months of 2018, with a consumer confidence index of -9 and inflation at 3%. With 70% of the British population “feeling negative” about the current level of inflation, including rising food, petrol and heating prices (Lloyds Bank), this is likely to discourage high street spending. It is also likely that current political uncertainty will force businesses to delay investment, with adverse effects on productivity and aggregate demand.
It is worth mentioning however that speculation has a key part to play in these forecasts, yet these speculations may never come to fruition. Despite rampant theories regarding the ‘post-referendum recession’, this never occurred. Consumer spending has been maintained and global growth/EU recovery has played a prominent role in the UK’s recent economic performance. Economists are hopeful that the Bank of England (BoE) will keep interest rates low, and therefore maintain lower costs of borrowing. Provided that future negotiations with Brussels do not have an adverse impact on the pound’s value, it is hoped that the sterling’s heavy devaluation since the referendum will start to soften. In turn, this should lead to a fall in inflation, closer towards the Bank’s 2% remit. Something to watch out for in 2018 may be speculation regarding Mark Carney’s replacement, as the BoE’s Governor is set to retire in 2019. Politicians and city investors particularly will therefore be anxious to settle on a successor, and there is likely to be uncertainty over the future of British monetary policy. This could be another contributing factor to lowering UK CPI, depending on how further economic activity unfolds.
Amelia Hacon 3
NEFS Market Wrap-Up
United States A lot has happened in the US during Christmas and January. According to the Federal Reserve Atlanta on Friday, the US is expected to have 5.4% annualised growth in the first quarter of 2018 – this figure was raised from last Monday’s 4.2% prediction. The Fed had its first Open Market Committee meeting this year on January 31st, leaving its target rate unchanged at a range between 1.25% and 1.5%. Last year, the Fed raised the interest rate three times due to strong economic performance. Regarding employment, the US unemployment rate is at a record low of 4.1%. 200,000 jobs were added in January and wage growth is at its fastest rate since the recession, with a year-onyear wage growth of 2.9%. The rise in employment was driven by restaurants, health care, manufacturing and the construction industry, with the demand for US-manufactured goods having increased by 1.7% in December. The US equity market had a booming year in 2017, with the DJIA and S&P 500 increasing by 24.4% and 21.1% respectively. Shareholders’ expectations on future profits are increasingly becoming more optimistic under the Trump Administration’s new taxation policies. The market had a good start in 2018 as well, with both the DJIA and S&P 500 edging up by more than 5% and reaching new record highs.
However on Wednesday the Congressional Budget Office said that the government’s cash reserves will run out faster than expected due to the tax cut, and the government might default on its debt obligations if the debt ceiling isn’t raised by March. The big drop in tax revenues hasn’t even kicked in yet, as corporations will only start to see the full effects of the cut later this month. The CBO estimated that the tax cut would reduce tax receipts by $10bn to $15bn every month. The federal government is therefore expected to receive $136bn less taxes this fiscal year. Meanwhile, there is a real possibility that another government shutdown could happen on 8th February if Democrats and Republicans fail to reach a deal on spending and the immigration policy DACA (Deferred Action for Childhood Arrivals). Following the government shutdown in January, this could be the second shutdown this year. Finally, the tense relationship between the Republicans and the FBI escalated further this week. On Friday, a memo accusing the FBI of abusing its surveillance authority on Carter Page, an advisor of Trump, was declassified. The Democrats and the Department of Justice condemned this release, arguing that it undermines the credibility of the FBI’s investigation into the possible collusion between the Trump campaign and the Russian government during the election. Ang Gao
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Week Ending 4th February 2018
Europe The on-going saga surrounding the German elections from September has yet to be resolved, with no official Government formed. Having won the most seats in September, Merkel’s conservative CDUCSU party initially failed to form a coalition with the liberal FDP and the Green party. Subsequently Merkel has turned to the SPD for support, a party who Merkel ruled with in coalition for eight of the last twelve years. The SPD stated that they were open to talks with the CDU-CSU on the 22nd January; Merkel expects talks to be finalised by 12th February. However if the talks are not successful, Merkel has stated that she would prefer another election to occur rather than to rule with a minority Government. The European Central Bank (ECB) announced on the 11th January that they would revisit their policy message regarding their quantitative easing (QE) programme. This message was then reinforced on the 29th January when the ECB’s chief economist, Peter Praet, stated: “Once the Governing Council judges that the three criteria for sustained adjustment have been met, net asset purchases will expire, in line with our guidance”. The ECB have announced that they will continue buying bonds as part of the QE programme until September, but will only purchase €30billion worth instead of €60billion.
The ECB’s QE programme has been widely criticised for causing asset bubbles across the Eurozone, with the winding down of the programme marking the end of a historic experiment. The overall effects of completely ending the programme is causing uncertainty for investors, as the ECB is the last of the major central banks to halt its QE programme. Markets are becoming increasingly concerned as to what will transpire once the ECB ceases to be a major buyer of bonds and instead potentially begins to sell bonds so to unwind its position. On the 2nd February Deutsche Bank released its 4th quarterly earnings report, showing that their revenues have fallen to a seven year low, reporting a third consecutive annual loss. The company reported a pre-tax loss of €1.3billion for the quarter. This was significantly higher than the average loss predicted by sixteen independent analysts the firm had employed, of €478million. Despite Deutsche Bank announcing a profit warning on the 5th January that combined revenues in fixed income, equity trading and financing would be down by 22%, share prices still dropped 6% on the news.
Nicholas Gladwin
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NEFS Market Wrap-Up
Japan & South Korea Positive signals from South Korea’s recent economic activity suggest the start of a new period of growth. Following the GDP rise of 1.5% in Q3, the 0.2% drop during the last three months of 2017 caused concern amongst firms (see figure below). However manufacturers have been benefitting from an increase in sales and output since the start of 2018. The rise in commodity prices has allowed companies to increase their output prices, despite reports showing that firms have less incentive to hire new staff due to the recent minimum wage increase. Recent data released regarding South Korea’s trade during 2017 showed a 22.2% rise in exports and a slightly lower 20.9% increase in imports, resulting in a $3.5bn trade balance figure. From a foreign policy perspective, the U.S. President’s decision to impose a steep tariff on imported washing machines and solar panels has raised concerns from China and South Korea. While negotiations on a two-way trade pact are “far from complete”, according to South Korean Trade Minister Kim Hyun-Chong, it is extremely important for South Korea to achieve and maintain a shared agreement with the US, its second-biggest trading partner after China. Japanese e-commerce company Rakuten Inc announced that it would launch its offer to acquire Asahi Fire & Marine
Insurance Co Ltd for 45 billion yen ($412.6 million). This would involve paying 2,664 yen per share of Asahi Fire, which is currently owned by Nomura Holdings. In the meanwhile, Fujifilm wants to cut 10,000 jobs globally at its joint venture with Xerox Corp due to restructuring. As a consequence, the operating profit forecast for the year will be 55 billion yen lower. Cryptocurrency trading is causing concerns in both South Korea and Japan, inducing a reaction from Government and institutions. South Korea’s Justice ministry, Park Sang-ki, claimed that “there are great concerns regarding virtual currencies and the justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges.” In particular, buyers are being exploited by the increasing demand that is causing them to pay high premiums over international rates. This has raised the attention of officials who fear that speculation might inflict serious financial damage on citizens. Japan’s Coincheck Inc, which last week saw 58 billion yen (£376.86 million) being stolen by hackers, announced that it would lift its suspension of withdrawals in the near future.
Giovanni Cafaro
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Week Ending 4th February 2018
Australia & New Zealand Data released last week by Statistics New Zealand (StatsNZ) showed the consumer price index (CPI) for inflation to have slowed by 0.1% to 1.6% for the end of 2017. This falls within the Reserve Bank of New Zealand’s (RBNZ) target of 1%-3%, but short of the ideal 2% target. Factors that increased CPI included a 6.1% increase in petrol prices and a substantial 11% increase in airfares. Housing and household-related prices also contributed to inflation according to StatsNZ. However these price rises were offset by a fall in food prices, specifically the price of vegetables, and household items, such as household appliances and the price of clothing (see chart below). The news triggered a fall in the value of the New Zealand dollar against the US and Australian dollars by almost a full cent. This suggests that the weak inflation rate came as a surprise to many analysts, some of whom hoped that stronger CPI inflation would drive GDP growth for the foreseeable future. It can consequently be inferred that the Reserve Bank is unlikely to take measures to increase the Official Cash Rate (OCR) from its current level of 1.75%. Many analysts believe the RBNZ won’t increase
the rate until mid-2019 due to the lacklustre inflation, emphasising that inflation will not generate much short run GDP growth. However on Tuesday, StatsNZ released optimistic trade data suggesting tradedriven growth is a possibility for the economy in 2018. Annual exports grew by $5.2 billion (11%) compared to December 2016, with dairy products leading the rise. Although the economy is still running a trade deficit of $2.8 billion, this has decreased from December 2016. This suggests that aggregate demand driven growth through net exports is likely if this trend continues. Depending on the strength of trade growth, the RBNZ may have to consider it when deciding on future interest rates. In other trade news this week, Australia has announced it plans to become one of the world’s top 10 defence industry exporters within the next 10 years. This will be achieved by government loans to the manufacturing industry that will increase exports to New Zealand, Canada, the US and the UK. Deevya Patel
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NEFS Market Wrap-Up
EMERGING MARKETS
Middle East For the last couple of weeks all eyes have been on the OPEC 14 who, late last year along with Russia, Libya and Nigeria, decided to cut down on their oil production beginning January 2018 until December 2018. In 2017 oil supply from Libya and Nigeria surprised the market and contributed to falling oil prices, with the two countries initially exempt from cutting supply due to their output being curbed by conflict and unrest. However they have since been recruited into the pact, which should reduce uncertainty about oil supply in 2018. The agreed production cuts are motivated by the desire to stockpile oil reserves and combat falling oil prices, which are mainly due to America’s growing shale industry. The 2015 oil bust saw prices fall to an all-time low of $26 per barrel, however in the last two years they have since levelled out at around $40-$50 per barrel. OPEC’s recent cut in production has successfully boosted oil prices, with prices reaching $71 per barrel last week for the first time since 2014. Saudi Arabia – OPEC’s largest oil producer - continues to be the focus of global news as Mohammad bin Salman (MBS), the Saudi crown prince, continues
with his Vision 2030 reforms. His vision focuses on transforming Saudi Arabia into a more market-centred economy that’s less oil dependent. To achieve this vision MBS plans to have an IPO of Aramco, Saudi Arabia’s national oil company and the world’s biggest company valued just north of $2 trillion. He plans to sell off around 5% of Aramco and use the revenue to invest in other sectors of the economy, including a petrochemical industry. Last year, in preparation for the IPO, he reduced Aramco’s proportion of taxes from over 80% to 50%. While this put a strain on the Saudi government’s deficit, it falls in line with Vision 2030 through the attempt to shift the country’s culture away from state dependency towards paying taxes. This has already begun, with Saudi Arabia introducing a 5% value added tax for the first time, as of January 1st 2018. While these reforms have been welcomed by the world, particularly through increasing female participation in the workforce, the country still faces criticism from human rights activists over its treatment of detained citizens.
Changu Maundeni
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Week Ending 4th February 2018
Africa Last week a report on Africa was published, which disclosed that growth is expected to increase from 4% to 4.4% in 2018. This optimistic forecast emerged as a result of a combination of factors, including policy reforms, stabilisation of global commodity prices and the amelioration of drought conditions. Nevertheless, research from Oxford Economics warns that Africa’s economic growth will be curbed by the low growth of its two largest economics: South Africa and Nigeria. Whilst political uncertainty impedes growth in South Africa, it is the decline in international energy prices and disruptions to domestic oil production that hinders growth in Nigeria. According to The World Bank, South Africa’s growth forecast for 2018 is only 1.1%, whilst Nigeria’s is 2.5%. The recent 11% appreciation of the South African rand and the significant rebound in investment flows hasn’t helped the country’s economic outlook, with experts stating: “investment in South Africa remains far below the level achieved in previous years”. Investment is predicted to rise by a modest 1.3% this year. The main reason for the constant decreases in FDI is the political instability brought about by the country’s governance and the accompanying corruption scandals. Another concern is inflation, with the South African Price Parity Index having increased from 5.1% to 5.2% in December 2017. According to Elize Kruger, an analyst at NKC African Economics, inflation is predicted to “trend gradually higher”. A final concern is the unemployment rate, which currently
stands at 25%. These factors, together with a mixture of higher international oil prices, unsustainable levels of high consumption, debt-reliant public expenditure and the risk of rand depreciation, have negatively impacted South Africa’s 2018 growth predictions. The issues leading to these pessimistic forecasts however can be solved to an extent. The country’s president is to be replaced at the end of 2018 and the deputy president, Cyril Ramaphosa, is to take over. Ramaphosa is expected to promote effective policies that will reduce unemployment, increase investors’ confidence and attract capital (considering the immense support for him coming from the country’s business community and his own involvement in business). Apart from ameliorating political uncertainty, another solution would be promoting access to financial services, which would be crucial to encouraging investment and promoting effective economic growth. In addition, there is a strong case for economic diversification and the acceleration of industrialisation. These would be key to solving many of the country’s issues and could potentially promote inclusive economic growth. Improving the growth forecasts of South Africa is a crucial step towards the advancement of the whole continent, with the report claiming that stronger growth in Africa’s largest economics will have significant “positive spill over effects into other countries in the region”.
Felicia Bogdana Cornelia Ababii
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NEFS Market Wrap-Up
China On Friday, applications for China’s new visa application scheme opened. Though this may seem insignificant, this is actually part of a much larger push to attract more foreign investment in the New Year and consequently boost economic development. China has long been trying to push its way towards becoming a developed nation. This can be seen through many of the PRC government’s major policy decisions over the past five years. Some of the most obvious include the recent emphasis on green technology and environmentally sustainable growth. Another recently launched policy was Xi Jinping’s battle against corruption, showing China taking into account both the wellbeing of the economy and the social wellbeing of the nation as a whole. Finally, there are the government’s attempts to move away from being a goods and manufacturing based economy towards a services based economy. Rather than simply being part of the global supply chain of their competitors’ companies, China is now driving for its own companies to be leading players in the global markets, with two major success stories being Alibaba and Geely.
pushing back against the growing issue in many developing nations of “brain drain”, whereby many of their most talented workers are employed by overseas companies. The visa will enable those of ethnic Chinese descent living abroad to stay in the country for short-term family or business related matters. Successful applicants would then be able to apply for a second longer-term visa that would allow them to work or study in the nation for up to five years. The government also announced trials for a new fast-track visa scheme for “high-end foreign talent” that will enable successful applicants to work in China for up to 10 years. This visa will be directed at those who have particularly strong credentials in the fields of sport, science, business and technology. It also applies to holders of awards recognized for “international criteria of professional achievement”, such as Nobel Prize Winners. Overall, China’s new visa applications are part of a much larger strategic push away from its manufacturing-based past, towards becoming a leading services economy. Laura Leng
The Foreign Ministry spokesman, Geng Shuang, argued that these new visa policies will “boost China's overall capacity for innovation.” The scheme will do this by
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Week Ending 4th February 2018
Latin America In economic terms, the Latin American outlook for 2018 is seemingly promising. But for some regions, geopolitical turmoil may yet uproot such positive projections. At face value, the IMF estimates growth within the Latin American region to have reached 1.3% in 2017. Projections for 2018 and 2019 appear stronger, at 1.9% and 2.6% respectively, with the Peruvian economy expanding the most at 3.9%. The IMF cites consumption and export increases as the main drivers of this growth, in addition to the end of recessions in areas such as Brazil, Argentina and Ecuador. In the same positive light, fiscal performance is on the rise. Brazil’s budget deficit narrowed to 7.8% of GDP, down from 8.99% the previous year. Contextually, America’s average historical deficit is 3.2%, a figure not entirely healthy in itself. Brazil’s recent Central Bank policy to reduce the budget deficit is a step in the right direction. Comparably, Mexico registered its smallest deficit in three years. With recent EU-Latin American trade talks coming to a close, Jyrki Katainen (the EU Commission’s Vice President) is “hopeful”. The deals aim to boost the Latin American economy, create jobs after its economic crisis, and promote multilateralism in light of Trump’s protectionist trade stance. One important element of such EU talks is their haste. Katainen aims to conclude talks before Brazil’s presidential election.
This caveat points towards one of the main problems facing Latin America in 2018 – there will be at least 5 presidential elections: Brazil, Mexico, Paraguay, Colombia and Costa Rica. Violence is likely, portended by the killing of dozens of protesters in Honduras in November, and the post-electoral protests in Tegucigalpa in late December. Geoff Thale, of the Washington Office for Latin America, says the atmosphere in Latin America is “very tense”, with “political polarization in the region (having) intensified”. Political turmoil will inevitably feed into economic instability, and in turn likely uproot the promising growth figures previously estimated by the IMF. IMF statistics also shroud a Venezuelan disaster, currently suffering a period of hyperinflation. Venezuela has not published economic data since 2014, but Professor Steve Hanke, of John Hopkins University, pinned annual inflation to be 4305% as of late December. Other sources estimate levels of 13,000% up to highs of 30,000%. The currency is worthless, and President Maduro’s attempts to raise wages do not mitigate falling oil prices and food shortages. Venezuela’s economic and humanitarian crisis is deepening rapidly. Having the world’s largest oil reserves has not saved them; these too are collapsing, down 29% across 2017.
Matthew Chapman
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NEFS Market Wrap-Up
Russia & Eastern Europe 2017 ended on a strong note for Eastern Europe, with the MSCI Emerging Markets Europe showing growth of 15.52% in the 12 months leading up to January 18th 2018. This index result beats both the FTSE 100 and S&P 500 for the same period. This excellent growth is thought to be down to low unemployment and high wages, which has led to high consumer confidence as well as strong investment. However, the picture in Eastern Europe has not been completely optimistic. Several recent elections have resulted in far-right parties coming to power. This includes Andrej Babis, the new Prime Minister of the Czech Republic and a member of the party ‘Action for Dissatisfied Citizens’, an antiestablishment party. Bloomberg analysts also suggest that the “support for populist radical-right parties is higher than it’s been at any time over the past 30 years” in Europe, hence making the future of the European Union and European Politics very uncertain. Despite political uncertainty in Eastern Europe in 2018, the economic outlook is mostly positive. GDP is expected to continue growing in numerous countries, such as Romania, the Czech Republic, Hungary, Poland and Croatia.
thought to have been boosted due to the depreciation of the Romanian Leu (RON). This is extremely important to the Romanian Economy due to consumption accounting for two thirds of economic activity. On the other hand, the weakest performer of 2018 for Eastern Europe is expected to be Croatia, with growth rates of only 2.8%. Croatia suffered a great deal during the Financial Crisis and only emerged from a 6-year recession in 2016. It is only set to return to pre-crisis levels in 2019. The main driver of demand in Croatia is likely to continue to be domestic demand, with contributions also from rising wages and both private and public investment. Because of this, GDP will continue to rise but at a lower rate than in 2016 and 2017. Overall, the outlook for Eastern Europe in 2018 is positive (see graph below) with most countries continuing a pattern of strong growth (even with some modest slowdowns). The later part of the year is nevertheless set to bring about inflationary pressure due to the strong growth and rising commodity prices. Abigail Grierson
The top performer for 2018 is predicted to be Romania. Unemployment in 2017 fell to lows of 5.1%, a 20-year low for the country of almost 20 million. Similarly, levels of private consumption are high and inflation is low but rising. All of these factors are likely to lead to consumption-led growth for Romania in 2018. Currently, forecasts predict that Romanian GDP growth in 2018 is likely to be 4.4% (which, compared to the UK’s predictions of 1.5%, is very impressive). Private consumption is 12
Week Ending 4th February 2018
EQUITY AND DEALS
Financials Both the FTSE 100 and FTSE 250 saw a rather pleasing end to the year. The FTSE 100 saw a closing high of 7,687.77 points on the last day of December, having risen a total of 7.6% over the course of the year, and FTSE 250 finished at an all-time high of 20,726.26, with an overall rise of 14.65% throughout the whole year. This was likely due to the UK agreeing to the first phase of a Brexit deal in early December, thus increasing confidence in UK companies. Some of the more important companies behind this rise in both indexes were gold miners Fresnillo and Randgold (up 2.8% and 2% respectively, after Gold broke $1,300 for the first time since in October) and Just Eat (up 2.8%). However 2018 has not been so kind to these indexes. House builders have sent FTSE 100 to its lowest level this year, with the worst performing blue-chip companies being Persimmon (down 2.8%), Barrat Developments (down 2.8%), Taylor Wimpey (down 2.3%) and Berkley Group (down 2.0%). This is cited to be due to Government pressure to speed up the home building rate (in an attempt to increase the supply of new houses), by threatening to rescind planning permission on land that isn’t being developed.
On the other hand, FTSE 250 was hit hardest by its worst performing midcap company, Capita. With an estimated £469million of UK government deals about to expire this year and having reportedly under-invested in business growth by £250million over the past decade, Capita shares fell to a 15-year low of 181.15 pence. It consequently closed with its shares down 46%. Overall about £1.10billion was carved off the company’s total profits, after it warned on profits for the year, announced plans to launch a rights issue, and suspended dividends in a bid to revitalize its business. From where the UK Indexes stand at the moment, buying long-term futures for the FSTE 100 and FTSE 250 would be the most viable option for a swing-trader looking to make good from a bad situation. Over the course of weeks and months, Indexes such as the FTSE and NASDAQ always tend to re-balance themselves, with failing companies being removed and thriving companies added in their place.
Mario Pucinelli Filho
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NEFS Market Wrap-Up
Technology & Health The past month has seen a growing number of mergers and acquisitions in the healthcare industry. The total value of deals since the start of the year is around $30bn, the strongest start for healthcare deals in over a decade. This week Amazon began its venture into healthcare by announcing its plans to create an independent not-for-profit company with JPMorgan Chase, the largest US bank, and Berkshire Hathaway, a multinational conglomerate. The not-forprofit company aims to provide their US employees with high quality and low cost healthcare. Shares in healthcare companies have plummeted following the news (see diagram below) as investors worry that the plans could disrupt the industry. The US healthcare sector is currently extremely inefficient and absorbs around 18% of US GDP. Although there was a lack of details given in the announcement, the company is expected to improve efficiency through technology solutions. Thus far nobody has figured out how to disrupt the industry, however the size and value of the three firms could allow them to have a huge impact. This week has also seen the release of earnings reports from tech giants. Apple announced earnings for the quarter ending in December. The results show a
drop of 1.2% in iPhone sales compared to the same quarter of 2016. Despite the performance in sales, the higher price tags (particularly of the iPhone X model) have boosted Apple’s higher-thanexpected revenues to a record-breaking $88.3bn for the quarter. The Apple stock fell by around 1.5% following the earnings report. However it has since shot back up after Apple hinted that it could return around $160bn of its cash reserves to shareholders or use it for acquisitions. This has been made possible by President Trump’s tax reforms, which will allow the company to repatriate overseas profits at a lower tax rate. Luca Maestri, Apple CFO, has stated: “we now have an opportunity to target a more optimal capital structure for our company”. Amazon’s stock jumped more than 6% following an extremely strong earnings report. Revenue for 2017 Q4 was $60.5bn, beating analyst expectations. Meanwhile, Google’s parent company Alphabet missed revenue targets, sending the stock immediately down by 4.3%. The lower-than-expected revenues can be attributed to tax expenses and higher traffic acquisition costs, which are payments to companies that distribute Google’s ads or services. Jessica Murray
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Week Ending 4th February 2018
Oil, Gas & Industry This week will be focusing on the developments regarding the price of crude oil, the revival of US oil production over the past few weeks, and the reported earnings of Royal Dutch Shell. The oil price broke the $71 mark on 25th January for the first time in three years but has since fallen slightly down to $68.33 (see graph below). The price of oil has more than doubled since hitting below $30 in 2016, which can be attributed to the soaring demand for oil and the restrictions placed on oil output by Russia and OPEC. Demand for oil has grown at more than double the rate when oil prices were above $100, as demand has responded to the lower prices. US crude oil production has surpassed 10million barrels a day (the first time since 1970), with the shale oil revolution helping double output in under a decade. The US is one of only three countries that are capable of pumping above the 10million a day mark, with the others being Saudi Arabia and Russia. The growing prominence of shale production in the oil industry has caused a tremendous shift in the industry’s structure. Shale oil producers have the ability to respond far
more smoothly to oil price changes than conventional oil producers, by bringing wells in and out of production very swiftly. At the moment, the low recovery rate for shale oil suggests that there is big potential for an increase in production as producers improve the techniques used. Royal Dutch Shell recently reported their 2017 Q4, with their profits having more than doubled in the last quarter of 2017, even after being hit by a $2bn charge in relation to President Trump’s US tax reforms. The gains have been primarily driven by rising oil prices and cuts in costs. The measure most watched by analysts, Earnings on a Current Cost of Supplies Basis, was $4.3bn, however this had increased from $1.8bn in Q4 2016. The $2bn charge stemmed from changes in the rules governing the use of past losses to offset future profits. However the tax reforms are expected to be beneficial to Shell and other large companies in the long run.
Abdul Akhtar
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NEFS Market Wrap-Up
Deals There has been some major developments in mergers and acquisitions whilst we have been away. The most notable has been the $66 billion deal between The Walt Disney Company and 21st Century Fox, announced on the 14th December. Whilst this deal includes Fox’s entertainment business (which values Fox’s equity at $52.4bn), it also requires Disney to take on Fox’s debt, valued at $13.7bn. The deal reaffirms Disney’s position as the world’s largest Media company, which now includes Fox’s 39% stake in Sky (the pan-European broadcaster) and the 20th Century Fox movie studio. In other big news, on 29th January, Consumer group JAB Holding announced it would acquire the soft drink company Dr Pepper Snapple in an $18.7 billion cash deal. It would then combine it with its Keurig Green Mountain coffee business in the largest ever acquisition of a soft drinks company. On Friday, the Labour Party called on the government to blocks Melrose’s £7 billion takeover of industrial group GKN. Melrose continues in their efforts of buying unloved industrial businesses with the aim of selling them once they have been turned around. Shadow business secretary Rebecca Long-Bailey, who has criticised the hostile takeover, wrote to Business secretary Greg Clark in an effort “to prevent hostile takeovers which risk weakening our industrial base and
diminishing capabilities”.
our
national
defence
Also on Friday, it emerged that Vodafone, one of the world’s largest mobile phone operators, was in talks with Liberty Global to buy large parts of the cable group. This comes two years after talks between the pair collapsed when neither party could "figure out a way to make [a deal] mutually successful". According to Vodafone the talks are only in the “early stages”. If it goes ahead, analysts see the deal exceeding €14bn in value. Japanese technology firm Fujifilm and printing company Xerox announced on Wednesday an agreement to combine Fujifilm and their longstanding Fuji Xerox joint venture. Fujifilm stated: "New Fuji Xerox will benefit not only from its size but also from its solid management resources, including strong brands, state-of-the-art technologies and excellent human resources". The company will be called "New Fuji Xerox" and Fujifilm will own 50.1%. Finally, Blackstone Group LP, the American multinational private equity firm, is in advanced stages of talks to buy a majority stake in the financial and risk business of Thomson Reuters for more than $17 billion.
Edward Turner
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Week Ending 4th February 2018
COMMODITIES
Energy Despite losing $2bn in US tax reforms, Royal Dutch Shell (RDS) generated over double profits in Q4 2017. President Donald Trump’s tax reforms, passed in December 2017, are expected to be in favour of RDS, as well as other similar sized companies in the long run. Despite the positive outlook, RDS in December 2017 alerted that they faced a $2-2.5bn charge related to alterations in the procedures governing the use of previous losses to offset forthcoming profits. RDS recently publicised that this charge was to be at the lower end of the specified range. However, the excellent posted quarterly earnings have helped RDS’s debt ratio at the end of 2017 to fall to 24.8%, compared to 28% at the end of 2016. This is equal to an $8bn debt reduction. Since RDS’s $50bn takeover of BG group in 2016, RDS have announced they have completed $24bn worth of divestments. Another $6bn of transactions that are known to be in the advanced stages will reach the $30bn disposals target that is set for the end of 2018. RDS’s CEO, Ben van Beurden, stated: “2017 was a year of strong financial performance for Shell. A year of transformation, in which we showed we have what it takes to deliver a world-class
investment case. Our relentless focus on value, performance and competitiveness meant we were able to deliver $39 billion of cash flow from operations excluding working capital movements from our upgraded portfolio. We enter 2018 with continued discipline and confidence, committed to the delivery of strong returns and cash.”
In the UK another major coal power plant will be decommissioned following an attempt to secure government sponsorship. This will cause 130 jobs to be lost. The Yorkshire-based plant supplies electricity to approximately 2 million homes. This move by the government comes as no surprise as the government pushes to decarbonise the energy system in the UK. By 2032 the government has committed to producing 85% of the UK’s power from low carbon sources. Many other power plants are now fighting for survival in the “capacity market”, where small and large companies bid with one another to secure contracts to supply electricity to the national grid, to ensure there is adequate power supplies.
Sarren Sidhu
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NEFS Market Wrap-Up
CURRENCIES
Major Currencies The dollar's strength was hit by comments made by the US Treasury Secretary Steve Munchin at the World Economic Forum in Davos on 24th January. Invoking the "America First" mantra, Mr Munchin expressed support for a weak dollar and its benefits to the American economy. The market reacted in tune, interpreting the comment as a sign to expect policies biased towards devaluation, despite international agreements to avoid currency manipulation. The dollar index hit a three-year low of 88.4 following the remarks. President Trump contradicted the claim the following day, claiming that his administration was committed to a strong dollar. However a weak dollar aligns with the US President's other international economic policies, including punitive trade tariffs and efforts to revive America's manufacturing sector. Nonetheless, strong US wage growth over the past year bolstered the dollar last Friday. The dollar index rose to a peak reading of 89.3, reclaiming losses after Mr Munchin's statement. A resilient stock market and climbing long-term yields on long-term government debt helped boost the dollar, despite cooler US GDP growth of 3% in the fourth quarter. The Brexit row between Britain and the EU continued through January. However the pound has remained relatively stable, at around 88p per euro. Recent delays in
negotiations have stemmed from disagreements over the ability of Britain to influence EU policies during the transition period, while the possibility of the UK staying in the customs union remains uncertain. Despite this, the pound performed the best against the dollar relative to the other G10 currencies. The pound has made significant ground against the US currency, gaining 12% over the past year and climbing back above the $1.40 threshold. Before Brexit, USD/GBP traded at $1.49. While this may signal rising confidence in the Brexit deal, a CBI survey reported in January that nine out of ten firms in the financial sector view Brexit as the most serious challenge to the UK’s future as a significant global financial centre. Cryptocurrencies have been battered by constant headlines over the past two months, portraying the digital assets as sharply volatile and unstable. The cryptocurrency exchange Coincheck th announced on 28 January that the equivalent of $500 million in digital coin had been stolen. Bitcoin has already lost 40% of its value since the beginning of the year. It comes as little surprise that financial authorities worldwide are moving to regulate the financial technology. Daniel Blaugher
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Week Ending 4th February 2018
Minor Currencies Both Antipodean currencies ended 2017 on a high note when they posted strong gains against the USD in December 2017. Being commonly known as commodity currencies, AUD/USD and NZD/USD both gained 4.9% and 4.4% respectively as they closely tracked the broad commodities price rallies higher in December 2017. AUD/USD traded as high as US$0.81358, some +19% off the lows of $0.68270 in early 2016. The current bullish trend in crude oil prices also pushed the Canadian Dollar (CAD) higher as USD/CAD price action reversed sharply from its 2017 high of $1.2922 in December to trade as low as $1.2249 in January this year. As the commodity currencies gradually emerge from their multi-year bear market, AUD, NZD and CAD are expected to post further gains in 2018. Despite being regarded as a safe haven that rises in value during market risk aversion, the Swiss Franc (CHF) also saw a surprising price rally against the USD in December 2017. USD/CHF has been falling steadily since, from its high at $1.0000 to its current exchange rate of $0.9307. This is largely due to the broad USD weakness seen in the currency market as the US Dollar Index has recently broken below the 2017 support level at 91.00. In short, minor currencies typically perform well when the greenback is on a downward trend and vice versa.
In 2018, more central banks will be confronting the possibility of raising interest rates after having gotten into the habit of cutting them for the past decade. A sustained rise in commodity prices, coupled with solid GDP growth rates, is very likely to create further price inflationary pressures in Australia and New Zealand. The Bank of Canada (BoC) has already hiked interest rates thrice since July 2017 to the current rate of 1.25%. AUD, NZD and CAD are likely to strengthen further in 2018 when investors start to price in the likelihood of rate hikes by the Reserve Bank of Australia, Royal Bank of New Zealand and the BoC. Several notable economic developments of late look set to continue unabated in 2018. These include robust 2017 global economic growth momentum, US tax cuts, China’s economic growth exceeding expectations, rising commodity prices that bode well for future inflation outlook and an upgrade by the IMF in its 2018 and 2019 growth forecasts. Overall the 2018 global economic outlook seems bright (see graph below), albeit for market jitters over future Fed monetary policies under the new Fed Chairman, Jerome Powell. Mingli Yong
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NEFS Market Wrap-Up
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Charlotte Alder at calder@nefs.org.uk. Sincerely Yours, Charlotte Alder, Director of the Nottingham Economics & Finance Society Research Division
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