NEFS Weekly Market Wrap-Up Presented by the NEFS Research Division
19.11.18
MACRO REVIEW
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United Kingdom The US and Canada Europe Japan & South Korea Australia & New Zealand
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EMERGING MARKETS
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Africa China Latin America Russia & Eastern Europe South Asia
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EQUITIES, COMMODITIES & DEALS
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Financials Energy, Oil & Gas Tech & FinTech Pharmaceuticals Mergers & Acquisitions
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CURRENCIES
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Major Currencies Minor Currencies Cryptocurrencies
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NEFS MARKET WRAP-UP
.MACRO REVIEW United Kingdom Both the UK stock and exchange markets took a hit this week due to the tumultuous nature of events surrounding Brexit. Despite Theresa May agreeing a draft deal with the EU, it appears unlikely she will be able to pass It through parliament. The growing uncertainty surrounding the UK's fate after leaving the EU has caused slumps in both the pound and FTSE 100 this week.
Laith Khalaf, senior analyst at Hargreaves Lansdown, explained that businesses based predominantly within the UK suffered the most, hence why banking and housing companies' shares dropped the most heavily. He also added that more global companies such as Shell and HSBC, with worldwide operations helped to prop the FTSE 100 up. Fiona Cincotta at City Index stated that RBS' weekly losses were left at 14%, and the uncertainty over Theresa May's position Increased the possibility of Jeremy Corbyn, "taking power and breaking up the bank".
As events unfolded over the course of the week, the Pound experienced high fluctuations, with volatility reaching 14%, the highest level since the EU referendum In June 2016, where volatility hit 29%. Following the resignations of Esther McVey and Dominic Raab on Thursday, Pound Sterling suffered The Confederation of British Industry backed the a 1.7% fall against the dollar and 1.9% against the draft deal declaring that It represented "hard-won Euro, again the greatest decline since June 2016. progress" and that It was a "step back from a cliff edge." The majority of businesses back the draft However, the pound has since stabilised after deal, so uncertainty within stock and exchange Theresa May's press conference on Thursday markets suggests that the reception of the deal by afternoon, and the backing of cabinet ministers politicians has been key to the decline In the Pound such as Gove, Grayling and Fox on Friday. and FTSE 100. The possibility of Theresa May getting her draft through parliament Is very The FTSE 100 also suffered, losing 24 points at the unlikely therefore speculation has Increased at the end of trading on Friday, finishing 1.29% down at chance of a no-deal Brexit. the end of the week. In addition, the FTSE 250, a more domestic focused market fell 73 points to 18589 points. Thursday saw individual firm shares Joe Houghton fall the most, with RBS' share price falling 3%, while housing firms Persimmon and Taylor Wimpey dropping 2% and 1%, respectively.
19.11.18
MACRO REVIEW
The US and Canada “The economy is in good shape” – Federal Reserve Chairman Jerome Powell said on Wednesday during a speech in Houston that laid out the Fed’s interpretation of the state of the US Economy. His speech was relatively upbeat and suggested he expected to increase the US base rate of interest next month. However, Powell urged some of element caution regarding the economy’s future and listed several possible challenges to growth in 2019. These included slowing demand abroad, fading fiscal stimulus at home and the lagged economic impact of the Fed’s past rate increases. This week saw a string of October economic data reports released, starting with US CPI figures on Wednesday. U.S. consumer prices increased by 0.3% in October (the largest increase in nine months) amid gains in the cost of gasoline and rents. In the 12 months through to October, the CPI increased 2.5 percent. This points to steadily rising inflation that likely will keep the Fed on track to raise interest rates next month.
On Thursday, the Commerce Department announced retail sales had increased 0.8% last month, rebounding sharply due to a surge in the purchasing of motor vehicles and building materials. This was driven by rebuilding efforts in areas devastated by Hurricane Florence. Furthermore, U.S. manufacturing output increased for a fifth consecutive month in October increasing by 0.3%. Meanwhile in Canada, the benchmark S&P STX index experienced a mixed week, finishing down 0.718% for the week. This was primarily due to the continuing decline of the world oil market, which is spooking Canadian businesses, investors and politicians in the oil exporting nation. Heavy Western Canadian Select crude fell to a record low as several oil producers shut in production with the oil-sands benchmark falling to US$13.46 a barrel on Thursday, the lowest in data extending back to 2008.
Sean O’Hagan
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NEFS MARKET WRAP-UP
Europe This week in Europe we have seen the realisation of the slowdown in the German Economy, where trade wars and a flagging car industry have caused economic growth to become negative for the first time in more than 3 years. The IMF has also weighed in on several European issues including the possible impacts of different Brexit scenarios along with forecasts for Italian economy. The German economy is the linchpin of the Eurozone economy and is a major world economic powerhouse. It was reported last week that growth was revised downwards and that tougher times could be ahead. However, the realisation of this has hit very hard this week with the German economy reporting negative growth (shown in the below diagram).
The main drivers behind these surprise figures include the slowdown in automobile exports due to new emissions standards. Furthermore, the burgeoning trade war between the USA and China has caused decreased exports to China, further exacerbating the struggles of the German economy.
The IMF bought out its initial assessment of the impact of Brexit in September. However, a new report this week bought new estimates about the possible impacts of different Brexit scenarios. The IMF report detailed that leaving with no deal and trading on WTO terms would lead to a contraction of 6.2% in the UK economy against the counterfactual that it did not leave the customs union. Even with a trade agreement, the IMF said the economy would likely be at least 2.6% smaller than under the case of remaining in the EU. These figures demonstrate the future problems facing government even after a deal is agreed. The IMF also weighed in on debate surrounding the Italian economy this week. The populist government in Italy has been battling against the EU for a while now to get its expansionary budget agreed.
The IMF has however backed the stance of the European Commission and stated that it believes any positive impact from the expansion could be negated by increases in interest rates which would then be passed onto members of the public. Sharply lower economic growth and higher budget deficits as a percentage of GDP were also predicted by the IMF, which further strengthens the EU stance against the Italian budget. Ashley Brumfield
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19.11.18
MACRO REVIEW
Japan & South Korea Despite the weakening of the US dollar to ¥113.30 on Friday morning and positive steps towards ratifying various trade deals, Japan’s future looks shaky. Continuous subdued inflation has forced the Bank of Japan (BOJ) to maintain its low interest rates, even though evidence suggests negative effects on financial institutions’ profits and dried up bond market liquidity. With only slight changes to monetary policy being allowed, the BOJ has looked to other forms of stimulus for the economy such as flexible movement of bond yields around its zero percent target - this has done little to help. However, this isn’t the whole problem. To keep these low rates, the country’s asset purchasing program has ballooned to levels above the country’s annual economic output, with asset holdings reaching a staggering ¥553.6 trillion (£3.8 trillion) compared to gross domestic product (GDP) figures of ¥552.8 trillion. Putting this into perspective, the Federal Reserve’s assets are 20% of US GDP and European Central Bank’s holdings are 40% of the Eurozone economy. Although it is true that, compared with the US, Europe and Japan have a lot more work to do to spur inflation, experts are worried that the BOJ is taking monetary policy “deeper into uncharted territory” and will only mean more challenges to lie ahead.
Across the sea, South Korea also finds itself in a difficult situation. Concerns with the growing list of investigations into the Samsung Group, undisputedly the most important conglomerate in corporate Korea, has raised concerns for the future success of these companies. The latest example of the scandal is the ruling that Samsung BioLogics intentionally committed accounting fraud in 2015. The company claims that it sought the advice of the Financial Supervisory Service (FSS) up until 2015, after which they decided to change their accounting standards, but the FSS denies this. In addition, despite their success in developing the technology to obtain hydrogen from water using ruthenium, the government has failed to take additional measures for its commercialisation due to China’s quick moves to secure these mines over South Africa. Despite the emphasis on the hydrogen economy, critics say that this has been a “waste of ten years” as Korea finds themselves lagging behind the likes of Japan and Germany. Kaythi Aung
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NEFS MARKET WRAP-UP
Australia & New Zealand Important labour market data was released this week in Australia. As the economy performs above its trend, the Reserve Bank of Australia has increased its forecast for GDP growth for 2018 from 3.25% to 3.5% last week. As a result, the market was expectant about how soon these positive figures would materialise in job creation and lower unemployment. With this in mind, analysts have been somewhat dubious regarding an acceleration of wage growth as after a steady decline since 2012, only this year it has started to slowly pick up. Continuing this trend of positive data for Australia, the Australian Bureau of Statistics (ABS) published on Wednesday that the wage price index rose by 2.3% annually in Q3, the fastest pace of growth in four years. In contrast with previous quarters this year, this acceleration was widespread both geographically (except in Victoria, where wage growth remained steady in 2.5% annually) and among industries (16 of 18 industries had a lift in wage growth). When employment figures for October were released by the ABS on Thursday, data showed that job growth remains robust and that the labour market is tightening.
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While it was revealed that the unemployment rate was unchanged from September to October at 5%, it confirmed a fall of 0.3% from August to September. In addition, employment rose by 33k in October and annual employment growth stands at 2.5%, up from 2.3% in the previous month. Overall, the Australian economy is finally experiencing what analysts and certainly workers have been anticipating for quite some time: a noticeable pick-up in wage growth. Still, as the labour market is expected to keep tightening, more pressure will be exerted on wage growth. This is consistent with recent business surveys which have shown that companies are having difficulties in finding skilled labour, which would lead firms to pay more to hire workers. As for New Zealand, food prices were published this week, showing a 0.6% drop in October from September. Compared with a year earlier, food prices climbed 0.6%. The most significant gains were in restaurant meals prices (2.9%) and in meat, poultry and fish prices (2.6%). On the other hand, a drop of 5.6% in vegetable and fruit prices have helped to cap food inflation of the year.
Sergio Bravo
19.11.18
. EMERGING MARKETS Africa In this week’s round-up, Sub-Saharan Africa (SSA) is projected to continue its growth revival from 2016 whilst Zimbabwe’s inflation surged at its fastest pace since the country’s 2009 spiral of hyperinflation.
Elsewhere, in Zimbabwe, inflation accelerated to 20.9% in October from 5.4% in the previous month. This increase was largely due to a 27% surge in the price of food from the previous year since food contributes a third to the inflation basket.
The IMF has forecasted SSA growth to increase from 2.7% in 2017 to 3.1% in 2018, crediting the widespread introduction of domestic policy reforms, from tackling corruption to improving electricity services. According to the World Bank 2019 `Doing Business` report, 40 African countries implemented 107 reforms in the past year, up from 83 in 2017. Improved global economic activity, higher commodity prices and rising consumer demand have also pushed growth in region with large SSA `consumer hub` cities, such as Mali’s capital Bamako, where per capita consumption is more than double the SSA average.
Severe shortages of foreign currency, resulting from cash circulating outside formal channels, have forced President Mnangagwa to resort to the use of temporary powers. Under regulations which came into effect last Monday, authorities have begun to track unexplained movements of money in the financial system in order to tackle illegal foreign currency traders. Contradicting the Central Bank, which insists that the local bond notes remain equivalent to one US dollar, these illegal foreign currency dealers have been using a ratio of one US dollar to three local bond notes.
Despite the IMF also predicting 18 out of 45 SSA countries to expand by 6% or higher in 2019, there remains a noticeable disparity in growth performance across sub-regions with east Africa enjoying consistent solid growth thanks to significant foreign investment. This imbalance, along with possible spillovers of China’s economic slowdown and SSA’s increasing political uncertainty, highlights the economic challenges that Africa continues to face.
However, the crippling supply of foreign currency is a deep-rooted problem in the Zimbabwean economy. Not only does the country’s low productivity mean that it imports far more than it exports but the government’s huge fiscal deficit, 4% of GDP, is funded by financial instruments that are not backed by foreign currency. While KFC may have finally reopened its Zimbabwean stores after a month-long `economic closure`, it is clear that the Zimbabwe’s economy is on the brink of collapse. Hannah Cousins
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NEFS MARKET WRAP-UP
China Another week has passed with little progress towards a US-China trade war resolution. Last week, hope jostled markets briefly following a confident presidential tweet, but this was quickly dismissed by the White House as overly optimistic. Markets seem to have already adjusted for the uncertainty around the trade war. In other news, President Xi Jinping continues to vow total support for Chinese companies, although it has been made clear that state owned companies will take priority over those which are privately owned.. Privately owned companies have suffered disproportionately from the financing squeeze, which was designed to contain financial risk from excessive debt. At least 10 struggling private groups have been nationalised this year. Credit risks remain a big cause of concern in China. High levels of corporate debt are set to hamper future growth potential, and the economy is expected to continue to decelerate. Consumption is now the main driver of Chinese economic growth, contributing towards 78% of GDP growth this year. However, rising household debt and slowing wage growth is set to drag on consumption in the coming months. Retail sales and automobile sales are among the hardest hit.
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In response to this, China’s legislature has approved cuts to personal taxes, set to come into effect in January. This is expected to boost retail sales by 1%. Despite the tariffs imposed on $250bn of Chinese goods, reported exports were strong last month. Long term outlook remains weak though, as October figures are expected to have been inflated by firms front-loading shipments to avoid the tariff hike to 25% from 10%, expected to take place in January. Beijing’s weak response to the depreciating Yuan shows that the country is content to allow a devalued Yuan to help offset the costs of tariffs by strengthening the country’s exports. The People’s Bank of China (PBoC) has spent $32bn this October to boost the currency, compared to the nearly $1tn spent in intervention during the last period of depreciation. For reference, during a 6-month period in late 2015, this was around an average of $70bn a month. Rudai Wang
19.11.18
EMERGING MARKETS
Latin America Central America is well known for gang-related crime, massive inequality and poverty. According to the United Nations Economic commission for Latin America and the Caribbean (ECLAC), Latin America is the most unequal region in the world. In 2008, the region had the highest combined Income Inequality in the world with a measured Gini coefficient of 48.3 (the UK's Gini Coefficient in 2015 was 33.2 and Central Asia of 35.4). According to a study by the World Bank, the richest 10% of people in Latin America earn 48% of the total income, whilst the poorest 10% only earn 1.6% of the income. Another problem facing Latin America is the extreme poverty. The World Bank estimates that undernourishment affects 47% of Haitians, 23% of Bolivians and 22% of Hondurans. Similarly, the level of poverty reached 30.7% in 2016 and is set to remain at this level. Approximately 130 million people in Latin America survive on less than $4 a day.
The state of the Economy in many Latin American countries is not good. A report by the World Bank shows that 28 out of 32 Latin American countries showed a negative overall fiscal balance in 2017. Also, on much of the continent, 40% of young people (30 million people) are unemployed and almost 140 million Latin Americans are part of the informal economy and have no access to social protection. Violence is another massive problem for many Latin Americans. The proliferation of drug cartels, homicide and gang violence has forced many people to escape their countries. 3.4 million people born In the Northern Triangle have left Latin America for the US as of 2015, and this turbulence in the countries has led to a 50% rise in migration since 2000. With all of these economic and social problems In Latin America, it is no wonder so many have chosen to migrate away from the continent and it is unlikely to get better any time soon. Abigail Grierson
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NEFS MARKET WRAP-UP
Russia & Eastern Europe Data released this week shows mixed GDP figures across Eastern Europe, whilst Russia attempts to improve international relations. Economic growth figures released this week highlight fundamental gains and weaknesses throughout Eastern Europe. Russian GDP growth slowed to 1.3% in the third quarter of 2018, due partly to slower industrial production and a contraction in agriculture and consumption, with the latter falling by 0.4%. This negative rhetoric can be supported by its long-run trend.
There has been positive sentiment in Russia regarding politics. Members of the US-Russia Business Council have started to discuss how to improve business ties, with deliberation on investments in Russian regions and creating favourable business environments there. Additionally, Russian President Vladimir Putin has advocated his desire to restore relations with the US when he meets Trump at the end of the month, which could facilitate a reduction in protectionist measures towards Russia in the long term.
The following graph indicates that Russia’s GDP is 10% smaller than what might have been at the end of 2013, with Bloomberg Economics explaining that this is due to the “enduring impact of sanctions both imposed and threatened over the last five years”.
This factor, combined with bilateral cooperation with China, indicates positive long-term economic projections. Nonetheless, Russia’s Central Bank chief still considers commodity prices and capital flows as posing a risk to Russia’s economy, through its volatile nature.
Similarly, lower rates of economic growth have been realised across other areas of Eastern Europe. For example, annual GDP growth in the Czech Republic slowed to a near-two year low of 2.3% in the third quarter, the weakest pace of expansion since the last quarter of 2016, due to a slower rate of household consumption.
Furthermore, GDP growth remains strong in other areas of Eastern Europe, such as Slovakia, where the economy expanded 4.6% annually, the best reading in three years. Meanwhile, growth picked up by 1.1% and 0.2% in Hungary and Romania respectively in the third quarter of 2018, as both countries achieved higher fixed investment.
Likewise, Slovenia’s industrial sector decelerated to 0.5%, down from a year-on-year expansion of 6.0% in August on the back of supply constraints in electricity and gas and weaknesses in the manufacturing sector.
Consequently, sentiment in Eastern Europe have been characterized by a complex interplay of both positive and negative GDP growth rates.
George Kennedy 11
19.11.18
EMERGING MARKETS
South Asia Singapore’s Prime Minister Lee Hsien Loong has made calls for a closer South East Asia after fears of worsening multilateralism. Lee has blamed increasing political pressure within the Association of Southeast Asian Nations (ASEAN), including the USA and China, who are currently experiencing heated relations as a result of trade conflicts. This will likely have a detrimental effect on Singapore’s economic growth since both China and the USA are amongst their top 5 trade partners whilst the rest of South Asia makes up the bulk of the top 10. Understandably, Lee is pushing for more multilateralism to boost Singapore’s trade with its neighbours and growth, which is currently lower than desired. Recent flooding and earthquakes in Japan has hindered economic growth, largely through a fall in exports as domestic firms rebuild. In the 3 months through September, GDP fell by 1.2 per cent. However, analysts believe growth will recover, concluding the fall in GDP to be a result of consumers staying indoors and halting of factory production leading to a fall in export production and investment. In addition, the closure of Kansai Airport in Osaka has contributed to the fall in exports. Important areas of Japanese trade are dependent on aviation.
In total, both consumption and exports each contributed to a 0.3 per cent fall in GDP however Katsunori Kitakura, an asset management strategist believes growth will rebound by 0.7 per cent in Q4. In Bangladesh, the garment and textiles industry is under increasing pressure from growing competition within the sector. The world’s second largest exporter of clothing is facing greater competition from rivals including China and Vietnam. The Financial Times concludes that the sector, responsible for 83% of Bangladeshi exports, is accountable for 6 per cent of growth over the last 10 years. However, the cost of production will increase for Bangladeshi factories after the approval of a 51 per cent increase in worker wages. Bangladesh also has a bad reputation with sweat shops which acts as a barrier to foreign investment, causing potential customers to seek deals with competitors. However, clothing firms in the country are seeking to further computerise the production line with the introduction of new machinery. This could have a negative effect on the economy as employment falls. Since the sector employs near 4 million workers and is the biggest in the country, effects could be drastic. Usmaan Jamil
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. EQUITIES, COMMODITIES & DEALS Financials Instability has been the key theme in financial markets this week. Firstly, UK investors are worried after Theresa May outlined a Brexit deal which caused several of her cabinet members to resign. The probability of no deal, or a deal which is bad for the UK, is getting higher, with the pound falling 1.65% against the dollar, and 1.71% against the euro on Thursday morning.
The apparent defiance that Italy has been showing for weeks in regards to the plans has worried investors, as the prospect of a Greek-style debt crisis is becoming more likely. Revising down the Italian debt and government spending is purported to have caused the fall in Italian government bond yields, by three basis points on two and five year bonds, this Thursday.
The LSE (London Stock Exchange) is likely to follow the trend, as uncertainty over business prospects continues to increase. Analysts claim that continued amendments to the Brexit deal will create a highly volatile stock market. The announcement of deals increases investor confidence, which is then swiftly destroyed when MPs resign, or express concern over said deal. This could make the effect of Brexit on business much more detrimental than necessary.
Despite the approach of Black Friday, the S&P 500 retail index fell by 1.6%, with American retailers such as Walmart seeing their shares fall by 2%. 8 of the 11 major S&P sectors closed on a negative on Wednesday, with Amazon falling 1.3%. Major reasons for the notable sell-off of shares include the prospect of the Federal Reserve raising interest rates in the near future, as well as Brexit and stagnation in consumer incomes and global economic growth.
Meanwhile, the European bond market picked up this week, as the Italian prime minister Giuseppe Conte announced that he was working with the EU to amend his 2019 budget. The budget was previously rejected by EU officials because it breached rules on budget deficits.
Facebook dropped by 0.8% after a New York Times article claimed that executives ignored suggestions on how to make the site less tolerant of political propaganda. Shares in Pacific Gas and Electric hit a 15 year low on Thursday, as it warned that its equipment may be held responsible for the California forest fires earlier this year. The S&P 500 closed trading on Wednesday at a 5-day low (see graph).
Megan Jackson
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19.11.18
EQUITIES, COMMODITIES & DEALS
Energy, Oil & Gas Oil prices have fallen for the sixth week running, with WTI crude oil futures going from $59.80 at weeks start and closing at $56.83 at weeks end. Brent oil futures also fell from $70.91 to $67.00. Whilst this is the sixth consecutive week that prices have plummeted, Russian president Vladimir Putin has insinuated that Russia will consider backing OPEC’s recently declared plans to curb oil production in order to stabilise the prices. US natural gas saw its greatest one-day price surge on Tuesday, with an 18% climb. Whilst this surge was counteracted by a slight sell off on Wednesday, it reflects fears that gas stocks will not last through the winter, as this year marks the lowest amount of gas stocked at winter’s start in over a decade. Such fears have only been compounded by meteorologists claiming we are set for a particularly cold December and temperatures of below freezing are already being felt across parts of the US. In line with this analysis, US natural gas has seen a 37% increase in price since this time last year. Rheinisch-Westfälisches Elektrizitätswerk (RWE) announced on Tuesday that following the Q3 reports “the transaction with Eon is proceeding according to plan”. The $40bn transaction in question will see fellow German utilities company Eon take over Innogy, a renewables group currently controlled by RWE.
This, partnered with a series of smaller asset swaps, will see Eon focused on retail customers and regulated energy customers, and RWE owning the renewables assets of both Eon and Innogy, placing it as one of the leading European producers in Europe. The deal is expected to be complete in summer 2019. This week saw the tragic wildfire known as the “Camp” fire take place, marking California’s most devastating wildfire in history, with at least 71 people dead, 1,000s of people missing and over 52,000 people displaced. Concerns that Pacific Gas and Electric (PG&E) equipment may have played a role in the creation and spread of said fire resulted in a culling of its $47.80 share price by 63% across Monday to Thursday, landing at $17.74 by market close on Thursday. Friday saw the share price rebound slightly to settle within the region of $24.00 – likely a result of Michael Picker, president of the California Public Utilities Commission, stating that they do not wish to see PG&E go bankrupt over wildfire costs. Sebastian Hodge
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NEFS MARKET WRAP-UP
Tech and FinTech The largely tech composed Nasdaq composite index closed at 7,259.03 up 122.64 points on Thursday, closing up 1.72% after a fall earlier in the day’s session. The Dow Jones also saw gains, closing up 0.83%, with the largest riser in the index - Cisco Systems - seeing a 5.50% increase on Thursday to $46.77 a share. This is the best share move the Silicon Valley based tech giant has seen in almost a year, after earnings smashed analysts’ expectations for the first quarter of its 2019 fiscal year. Earnings have exceeded analysts’ initial projections by 4% to 75 cents a share from 72 cents, a 23% increase compared to this time last year. Revenues are also up to $13.07 billion from a previously forecast $12.87 billion. The gains come after Cisco has adjusted their strategy, placing emphasis on growth areas like applications and cyber security, after many feared that improvements in cloud-based technology from competitors would render the San Jose based firm outdated. Cisco have also remained confident amidst concerns that tariffs imposed by the US-China trade war may damage revenues. The company’s CFO Kelly Kramer has ensured shareholders that the company is working to mitigate the effects of tariffs by re-directing the supply chain.
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Thursday’s results indicate that the networking giant remains strong while many begin to question the longterm success of tech stocks, which have been subjected to greater volatility recently. Stock in London headquartered payments processing company Worldpay slumped this week, falling 7.3% to 82.77 USD from 89.29 on Monday. This comes off the back of a poor week previously, where Worldpay shed $2 billion in market cap. The results come as a surprise to many considering that earnings beat analysts’ estimates with revenues matching estimates. However, Worldpay’s outlook for fourth quarter results is to blame for the decline over the course of the week. The company reported that it expects adjusted fourth quarter earnings to come in between $1.05 and $1.10 per share, not far off initial projections. But analysts’ consensus called for $1.09 on the high end of the scale. This highlights the importance of impeccable results in volatile markets, where companies like Worldpay are punished unless the results they deliver anything but pristine.
Oscar Miller
19.11.18
EQUITIES, COMMODITIES & DEALS
Pharmaceuticals Pharmaceutical firms Actavis UK and Concordia have been accused of illegally driving up the price of a life-saving NHS drug – Hydrocortisone. The UK’s Competition and Markets Authority (CMA) has alleged that Actavis UK incentivised Concordia to not enter the market with its own competing version of hydrocortisone tablets. According to the CMA, Actavis UK supplied Concordia with a fixed supply of its own tablets for a very low price for Concordia to resell to UK customers. Not only is this price fixing detrimental to the NHS and consumers due to the welfare loss of higher prices, but it is also a hit to future competition and productivity amongst Pharmaceutical companies. The CMA has said that “Actavis UK abused its dominant position by inducing Concordia to delay its independent entry into the market.” In other news, the first look of the Brexit’s draft agreement this week has revealed that on November the 20th, the European Union (EU) will announce the new home of its drug regulator, the European Medicines Agency (EMA), which is currently situated in London.
The future prospects of Britain’s Pharmaceutical industry may be worrying when considering that the contribution to manufacturing supply chains could diminish. Many firms are putting contingency plans in place, and the Association of the British Pharmaceutical Industry says that if progress on post-Brexit arrangements is not made by December, an increasing number of pharma firms will activate costly “no deal” plans to avert problems in the supply of medicines. AstraZeneca and Eisai have already started to duplicate their testing elsewhere in Europe other than Britain, in order to ensure access to the EU market after 2019. Despite this, Britain has some reasons to be optimistic about the future, as the Pharma business depends more than most on R&D. Centres of academic excellence such as Cambridge and Oxford are the leaders of scientific research, retaining some confidence in UK markets. Abigail Davis
The agency will have less than 17 months to relocate before Britain leaves the EU in March 2019, but the EMA reckons it needs a transition period of at least 2-3 years, which it will not have if the Brexit agreement is finalised. This therefore will create a period of uncertainty for the Pharmaceutical industries and the EMA.
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NEFS MARKET WRAP-UP
Mergers & Acquisitions This week has seen airline Flybe confirm that it is considering putting itself up for sale as well as the latest update on Takeda’s takeover of biotechnology company Shire. The announcement on Wednesday that confirmed that Flybe is up for sale comes just weeks after the firm announced a profit warning. Last month, the airline announced during a trading update that it expected full-year pre-tax losses of £22 million. This no doubt contributed to Flybe’s already-falling share price (see chart below).
Like other airlines, Flybe buy their fuel and lease agreements in dollars, and thus face a situation with the weakening pound whereby revenues are consistently either stagnant or declining and costs are rising. Whilst Flybe claim to be considering alternative options to a sale - notably ‘strategic’ ones that would likely see a cut in the quantity of flights most analysts are predicting a takeover. Flybe’s fleet of 78 aircraft and strong presence in both the UK and EU have helped generate interest from various firms regarding the sale, with the strong presence in the UK and EU becoming an ever increasingly important factor amid concerns relating to a loss of flying rights in the event of an unfavourable Brexit deal.
EasyJet and Stobart Group are currently the most likely candidates to acquire Flybe, with Stobart having already made a bid for Flybe in March this year which was later rejected. IAG, the owner of British Airways are also a potential candidate for this move given that they have recently been looking to expand but have been turned down twice with offers to takeover Norwegian Air Shuttle.
Takeda’s $62 billion acquisition of Shire is set to transform the Japanese drugmaker, providing the firm with a wider research range and strengthening its global network. However, the deal, which is scheduled to be closed on 8th January 2019, is also expected to bring about almost $1 billion in fees according to documents released on Monday. These fees will be paid to banks and law firms as well as other advisers and further highlight the magnitude of this deal, which is set to be the largest overseas acquisition by a Japanese firm in history. However, whilst the deal has already been approved by Chinese, Japanese and American authorities, it still needs the support of at least twothirds of Takeda’s shareholders when a vote will be held at the extraordinary general meeting (EGM) on 5th December.
Matthew Copeland 17
19.11.18
.CURRENCIES Major Currencies The Great British Pound has had the most volatile week of trading against the Dollar since the Brexit referendum. On Wednesday it was announced that the UK inflation rate has remained steady as October’s Consumer Price Index, a measure for inflation based on tracking the prices of a weighted basket of goods, stayed unchanged at 2.4% compared to last month. Although this level of inflation is still above the Bank of England’s (BofE) target of 2%, interest rates hikes are not expected in the short term as the BofE is uncertain how future growth rates will be impacted by current Brexit uncertainty, therefore there was little market reaction being driven by this news, leaving the Pound at £1 to $1.29. The key driver for this week’s volatility of the Pound was due to a “decisive step”, as put by Theresa May, in the Brexit process. A draft text agreed at “technical levels” by UK and EU officials was presented to the cabinet in a five-hour meeting.
On Thursday however, Theresa May was met with the resignation of Brexit Secretary Dominic Raab and Work and Pensions Secretary Esther McVey, which was compounded by MPs on both sides stating they shall not be voting in favour of the draft text. This news led to a strong negative movement of the Pound against the dollar from $1.301 to $1.275 (-2.03%) due to the shared concern that the increased “risk of a general election” has exacerbated “the risk of a market-unfriendly farleft government” led by Jeremy Corbyn, as put by Jane Foley from Rabobank. Meanwhile in the US, the inflation rate this October has risen from 2.3% to 2.5%, further reinforcing the Federal Reserve’s agenda to continue with interest rate hikes. This anticipation of monetary policy tightening, caused a gradual increase of the DXY, a US Dollar index, from 96.97 to highs of 97.38 on the Wednesday, however ending the week with a 0.28% movement. Amar Toor
The overrunning of the meeting led the market to believe that the cabinet was divided over the draft text forcing the Pound rapidly downwards against the dollar from $1.302 to $1.288. Nonetheless, Theresa May stated after the meeting that “the collective decision of the cabinet” was to back the draft text, causing a swift reversal, driving the pound upwards against the dollar from $1.288 to $1.305.
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NEFS MARKET WRAP-UP
Minor Currencies The New Israeli Shekel (NIS) has been hit by political uncertainty following the resignation of Minister of Defense Avigdor Liberman. The NIS fell yesterday in the wake of the rocket attacks on southern Israel by Hamas militants in the Gaza strip. But after the conclusion of a ceasefire with Hamas, the NIS has been hit by political uncertainty following the resignation of Minister of Defense Avigdor Liberman, who said that Netanyahu had surrendered to terrorism and called for new Knesset elections. The shekel-dollar exchange rate is up 0.25% against the dollar at NIS 3.698/$ and up 0.36% against the euro at 4.165/₏. South Africa's rand was steady against the U.S. dollar in early trade on Friday, in line with a rise in bonds, with turmoil around Britain's exit from the European Union boosting investor appetite for emerging market assets. The rand held its ground in trading at R14.16/$, despite the day’s focus on how the Brexit deal pans out. The Pakistani rupee is expected to strengthen against the UAE dirham in the coming weeks with the announcement of more financial packages for Islamabad. This would reduce pressure on the government to correct its balance of payments and falling forex reserves. Rajeev Raipancholia, CEO of Orient Exchange, said the recent developments, especially the $6 billion support offered by Saudi Arabia, has created a positive trend for the rupee and started its appreciation against the US dollar.
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Mexico's peso weakened in line with other emerging markets that were pressured by uncertainties around Brexit. The Mexican peso gave up almost all of its gains logged last session after the central bank hiked the overnight bank rate by a quarter basis point to 8% in a widely expected move. The currency's weakness comes as questions loom large about how Britain's exit from the European Union will play out. Emerging market currencies from China to South Africa all weakened on the uncertainty. The peso had climbed 0.86% on Thursday after the Bank of Mexico hiked rates to tame inflation; its weakness comes as automaker groups warn U.S. tariffs will undermine the new trade deal between the United States, Mexico and Canada. Freddie Serfaty
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Currencies
Cryptocurrencies On Thursday, the Bitcoin Cash (BCH) blockchain officially split in two. This split was due to the debate in the community regarding Bitcoin ABC’s (adjustable blocksize cap) and Bitcoin SV’s (Satoshi’s Vision) difference of opinion about the future of BCH. Bitcoin ABC argues that the basic structure of BCH is fine and does not need any radical change. However, Bitcoin SV promotes radical change including removing software bottlenecks and enabling node operators to change the block size limit. Bitcoin SV’s proposal mainly consisted of increasing the BCH block size from 32MB to a maximum of 128MB and entirely rewriting the Bitcoin ABC network scripts. The debate split the BCH community and resulted in two new currencies being formed. According to Coin Dance, mining pools had supported Bitcoin SV several hours before the hard fork with roughly 72% of the networks power. At the time of writing, Bitcoin ABC is 10 blocks ahead of Bitcoin SV. Bitcoin ABC is also leading in terms of hash power support which could signal the community is siding with ABC at the moment. According to numbers on crypto exchange Poloniex, the value estimated for Bitcoin ABC is about $285 compared to $94 for Bitcoin SV.
The hard fork unleashed chaos onto the crypto market, putting an end to the months of unprecedented calm. The war between the two new currencies over the dominance of the Bitcoin Cash community has resulted in one of the biggest selloffs, if not the biggest selloff, of this year. Many altcoins have broken critical support areas and some cryptos registered new yearly lows, including Bitcoin. Bitcoin Cash had an oversized influence on the markets; BCH accounts for roughly 4% of the total market capitalisation but the hard fork caused double digit percentage drop in almost all of the top 20 crypto currencies. The market capitalisation reached a new yearly low of $175.1bn, dropping from $203.9bn in just 24 hours. In the week ahead, expect the dominance war between Bitcoin ABC and Bitcoin SV to continue. Despite the huge dip in the market, prices are likely to recover in the next few days. The Bitcoin-US dollar Relative Strength Index (BTC-USD RSI) indicates oversold conditions and, if the bulls can bring Bitcoin above $5,800 before the week closes, the weekly support will be preserved. Despite the hopeful forefront, investors should still look out for any bearish indicators in this volatile market. Rhys Dil
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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 Amelia Hacon at ahacon@nefs.org.uk. Sincerely Yours, Amelia Hacon Director of the Nottingham Economics & Finance Society Research Division
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