Week Ending 8th November 2015
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 3 United Kingdom United States Eurozone Japan Australia & New Zealand Canada
Emerging Markets 10 India China Russia and Eastern Europe Latin America Africa South East Asia
Equities 16 Retail Oil & Gas Financials Technology Pharmaceuticals Industrials & Basic Materials
Commodities 22 Energy Precious Metals Agriculturals
Currencies 25 EUR, USD, GBP AUD, JPY & Other Asian 2
Week Ending 8th November 2015
THE WEEK IN BRIEF
Interest rates Despite learning that GDP growth fell to 1.9% in the US last week, the Federal Reserve signalled that there is a real possibility of an increase in the base interest rate in the near future, as the underlying strength of the economy appears to be growing. Meanwhile, Mark Carney, Governor of the Bank of England, surprised many by eluding that UK interest rates could be raised earlier than many have been forecasting; markets have now priced in that rates could rise in the second half of 2016 rather than 2017. This came in spite of the BoE’s downward revision of inflation forecasts for 2016 and 2017, with inflation still remaining well below the BoE’s 2% target. However, this week we also learned that the Eurozone’s growth forecasts have been revised down for each of the next two years; monetary easing seems to be approaching, and the prospect of interest rate hikes there seems a long way off.
Strengthening Dollar The US dollar has continued to appreciate this week, hitting a three month high on Friday following the non-farm payrolls report, with the EUR/USD being driven closer to parity. As a
result, the price of commodities (which are traded in USD) have fallen on the week. Already very low oil prices posted their third weekly decline in four weeks, falling for three days in a row over the week, while the price of gold hit a seven week low. The price is being pushed down further by the belief that a US rate hike could be approaching, as this would reduce demand for gold as the rate of return from saving increases.
TPP Made Public This week the terms of the Trans-Pacific Partnership were released to the public for the first time, bringing together the US with a number of Pacific Rim countries. Covering 40% of the global economy, the agreement is the largest regional trade deal in history. The Partnership is focused at reducing barriers to trade between members, such as tariffs, quotas and “red tape”, as well as harmonising regulations. It is hoped to instigate increased trade between those signed up, bringing efficiency benefits and increased economic growth. It is clear that it will take time for the terms of the deal to be fully implemented, but if they can be, the scope for benefits is huge. Jack Millar
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NEFS Market Wrap-Up
MACROREVIEW United Kingdom This week’s headline regards the release of the Bank of England’s (BoE) quarterly inflation report. The report presents inflation projections and analysis, on which the monetary policy committee bases its interest rate decisions. CPI inflation in September fell to -0.1%, well below the BoE 2% inflation target. The BoE is unlikely to meet its target until the end of 2017 and the lower bound of 1% not before the second half of 2016, illustrated below. However the BoE estimates that around four fifths of the deviation is attributed to negative contributions from energy and food prices. These are subject to greater short term volatility and therefore do not represent a long term deflationary trend; only one fifth of deviation is due to subdued demand cost growth. In fact the current zero inflation is regarded as an economic stimulus, which, coupled with real wage growth is set to boost consumer spending. With a weaker global economic outlook, brought about by a slowdown of many emerging economies like China on export orders, robust domestic household and corporate spending is needed. As a result the report has made no plans for an upcoming base rate rise, suggesting it will remain at 0.5% well into 2016.
manufacturing. The PMI are an indicator of economic activity, derived from monthly surveys of businesses, and therefore are a good measure of current economic performance. The services PMI rose to 54.9 and manufacturing posting a surprising 55.5, where a figure above 50 signalling growth. Manufacturing figures posted well above expectations, suggesting that the sector may be in better health than previously thought. All in all, with manufacturing and exports currently struggling due to weak demand from developing nations and a strong pound, domestic consumption must be reinforced to drive economic growth. As a result, households and businesses need a prolonged period of stability and the continuity of the present low base rate provides this. Matteo Graziosi
However, encouraging domestic consumption does have potential negative consequences. In particular uncontrollable credit and house price growth. Indeed the BoE is considering using measures to rein in credit, as it has the power to raise capital requirements for bank lending. While household debt to income has declined since the financial crash recent high lending trends could reverse this. This week also saw the release of the Purchasing Managers’ Indices for services and
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Week Ending 8th November 2015
United States Ms Janet Yellen gave an indication that the Federal Reserve’s December 15-16 meeting would be a “live possibility” for a rate rise. Diminished downside risks from global economic and financial developments and significant labour market tightening since the start of the year prompted the remark. Hiring in the US reached its highest level this year. According to the Bureau of Labor Statistics, nonfarm payrolls rose by a seasonally adjusted 271,000 compared to forecasts of just 181,000. This also beat last month’s figures of 137,000, bringing the monthly average over the last three months to 187,000. Nonfarm payrolls measure the change in the number of employed people during the previous month, excluding the farming industry. On a similar note, the unemployment rate matched estimates and fell slightly to 5.0% in October from 5.1% in the previous month. It is now at its lowest level since April 2008 and is closer to Fed officials’ 4.9% median projection for its normal long-run level. Average hourly earnings in the private sector rose last month by 9 cents to $25.20 from October. Wages are now up 2.5% over the year and this is higher than the 2% average pace during the six-year expansion. Overall, this week’s encouraging labour data should be more than sufficient for the Fed to consider a rate rise at its next
meeting, as it tries to boost inflation levels to meet its 2% target. The US Trade Balance, the difference in the value of imports and exports of goods and services, went up by $7.2 billion to a $40.8 billion deficit, beating a forecast of a $42.7 billion deficit. Broken down, imports fell by $4.2 billion to $228.7 billion, while exports rose $3 billion to $187.9 billion. Given the sharp rise in the US dollar over the year, we should expect the deficit gap to widen in the near future, as US exports become more expensive, dragging modestly on US GDP growth. On Thursday, we got a look at the text of the Trans-Pacific Partnership agreement. Tariffs on everything will be lowered or eliminated and 40% of the global economy will be open to easier trade in services and electronic commerce. The agreement also sets international rules in areas such as the intellectual property of advanced pharmaceuticals and arbitration that lets investors challenge foreign governments. Rather interestingly, the agreement makes no explicit mention of one of the hottest phrases – ‘climate change’. Sai Ming Liew
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NEFS Market Wrap-Up
Eurozone In its autumn forecast the European commission has downgraded its prediction on the growth level of the 19 nations of the Eurozone. In May, it was forecast that growth in 2016 in the Euro area would be 1.9%, while it is now predicted that the Euro area will grow by 1.8% in this time period. In 2015 the growth of the Euro area is expected to be 1.6% and in 2017 the European commission is expecting the growth rate to be 1.9%. It is also expected that inflation will increase from 0.1% currently to 1.6% in 2017; the cost of living for Eurozone citizens is predicted to rise at an increased rate. The European commission stated that the weaker Euro, challenging global market conditions and a slowdown in major emerging economies has played a role in the reduction of the growth forecast. The Vice President of the European Commission, Valdis Dombrovskis, did say in a statement that “Today’s economic forecast shows the euro-area economy continuing its moderate recovery,” A challenge for the economic performance of the countries in the Euro area in the immediate future is the level of uncertainty. There are risks associated with the slowdown in emerging markets on trade with the Euro area. China for example is one of the biggest trading partners
of the Euro area and it has recently experienced a greater than expected slowdown in its economic performance. The report also states that some of the uncertainty has been caused by US monetary policy. In a different report released this week by Destatis, production levels in Germany, the Euro area’s largest economy, declined In September. Industrial production fell by 1.1% in comparison to August 2015, as shown on the graph below. This is the biggest fall in industrial production in Germany since August 2014, which was due to a fall in production in all sectors of the Germany economy except the energy sector. Once again one of the reasons given for the fall in production was a slowdown in emerging economies. The German economy ministry stated "After a good development in the first half, German industry is currently experiencing a light headwind from the world economy, in particular due to a slowdown in some large emerging markets”. With the Eurozone continuing to be afflicted by global uncertainty, it seems likely that it will take longer than expected for the economy to make a full recovery. Kelly Wiles
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Japan On Wednesday Prime Minister Shinzo Abe called on his ministers to create a new set of economic stimulus measures within the month. The fresh stimulus measures will aim to achieve targets such as the gross domestic product goal the PM announced in September – to raise nominal GDP to ¥600 trillion in five years. To achieve this Mr Abe has called on the business community to “actively engage in capital investment and wage increases,” and added that the government will support firms to do so. These new stimulus measures will aim to bolster the credibility of the “Abenomics” programme that got the current PM re-elected in 2012. Abenomics consists of three “arrows” which includes loose monetary policy, expansionary fiscal policy and structural reforms. Thus far the government has been overly reliant on quantitative and qualitative easing (QQE), fiscal policy has been modest, and structural reforms are considered to be the “missing arrow”. The latest consumer confidence data indicates an increase on the previous month from 41.1 to 41.5. However, this measure which surveys around 5,000 households has not made significant progress since the inception of Abenomics. The graph below shows how, despite a strong recovery in consumer
confidence during 2013, respondents think Japan’s economic conditions have improved only marginally since the PM’s re-election. This builds a growing case for Abe’s government to shift importance to structural reforms. With the returns to QQE seeing diminishing returns, like most QE programmes worldwide, structural reforms have the potential be a significant driver of Japan’s economy in the long run. Since 2012 Mr Abe has made some progress in areas such as agriculture by limiting the power of special interest groups, moving towards the liberalisation of the energy market and increasing female participation in the labour force. However, reforms for more politically sensitive areas such as immigration have been ignored. Foreign workers currently only account for 0.3% of the labour force, the lowest figure across any OECD country. Reforms to relax immigration could help eliminate Japan’s chronic labour shortage and provide an instant boost to growth. The scope for further labour market reforms – which could raise productivity and real wages in Japan – remains significant and largely unaddressed. Loy Chen
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NEFS Market Wrap-Up
Australia & New Zealand After enjoying trade surpluses in 2010 and 2011, Australia recorded its 16th consecutive monthly balance of payments deficit. As illustrated in the graph below, the deficit has marginally improved by 15%, falling from 3.10 billion to 2.32 billion, a much better result than predicted by economists. What caused this improvement? The value of exports rose by 3% owing to a rise in nonmonetary gold by 10%. This was aided by the stabilisation of iron ore prices along with the depreciation of the Australian dollar, contributing to a surge in iron ore exports by 7.9%. However imports continued to remain strong, rising by 3% as consumption goods also rose by 3%. National Australia Banks’ (NAB) Tapis Strickland believes the deficit may fall further as Liquefied Natural Gas (LNG) projects began in Queensland in October and are due to start elsewhere, therefore boosting exports further. However, such sentiments are not shared. JP Morgan’s economist Tom Kennedy believes that “the pick-up in nominal export growth” is unlikely to continue as it was “owed entirely to a surge in non-monetary gold shipments”, an unreliable indicator for continued improvements.
Could these figures have a larger impact? Strickland believes that the improvement in the trade balance may make significant contributions to economic growth, expecting a 0.6 percent improvement in the September quarter. In other news, New Zealand’s labour market appeared to be keeping up with population growth until recently. Unemployment rates reached 6 percent, a 0.1% rise since August and a 0.4% rise over the past year. Figures have shown that the number of people employed dropped by 11,000 in three months, however economists previously expected that 10,000 jobs had been added during the September quarter. Unemployment remains higher in the South Island, which experienced a 1% rise, compared to the North Island, which saw a 0.3% rise, however this gap is narrowing. Despite the creation of jobs in the economy over the past year, the growth of the workforce has exceeded any potential for this to improve employment rates. The fall in employment is mainly due to the 4.1% drop in part time jobs, however, record high migration (net gain by around 60,000 in August) has meant the number of those unemployed has risen by 10.5% in 12 months. Meera Jadeja
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Week Ending 8th November 2015
Canada There was some encouraging news for Canada this week, as figures from October’s Labour Force Survey beat economists’ expectations four-fold. After four months of little change, 44,400 jobs were created in October, compared to the 10,000 increase that economists forecasted. As shown in the chart below, this led to the unemployment rate falling from 7.1% in September to 7.0% in October, as employment is up by 143,000 compared to October 2014. Youth unemployment also fell from 13.5% in September to 13.3% in October.
previously stated that inflation, which is at 1.0%, may only reach the 2% target in mid-2017 due to slack in the economy. Regardless, there has been an increase of 9,000 full time jobs which is a positive step.
Canada is not currently performing at its economic potential, so these are welcome figures from Statistics Canada - however, the headline news is not as reassuring as it seems, owing to three main reasons.
In other news, Scotiabank have predicted that the Canadian dollar will continue to depreciate for at least the next year. Downward pressure on the currency is due to a distressed energy sector along with a GDP rate of 0.1%, making Canada less attractive to invest in. Additionally, the prospect of a rate rise by the Federal Reserve in December makes nearby US a more attractive place for investment, in comparison to Canada where a rate cut would seem more likely than an increase. This is already being evidenced as the US dollar increased by more than 1% as traders predict a 72% likelihood that US rates will rise next month.
The public administration sector accounted for 72% of the new jobs, but these are temporary jobs for the federal election, so is not a lasting boost to the economy. In fact, this should have been expected; past trends show similar spikes in employment during election and consensus periods. Secondly, 80% of the new jobs are for part time work. This could imply slack (excess capacity) in the labour market. Stephen Poloz, the Governor of the Bank of Canada, has
Thirdly, unemployment in the resource industry has steepened, due to ongoing effects of the fall in the oil price. 26,000 job losses have occurred in the resource industry over the last 12 months, many of which have been geographically concentrated in the province of Alberta.
Shamima Manzoor
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NEFS Market Wrap-Up
EMERGING MARKETS China In the face of recently rising market rates, China’s Securities Regulatory Commission stated this week that IPOs would be restarted after they had been suspended in July as a part of a rescue package to stabilize the stock markets. On Friday the Shanghai Index closed up on the highest level since midst of August. "The new shares won't be issued immediately and the amount of fund used for new shares will be relatively small. Investor confidence has recovered and they may interpret this as a sign of market stabilisation," said Mr Jiahe, an analyst of Cinda securities. Furthermore, the Caixin Manufacturing PMI for the last month has been published. It rose to 48.3 in October from 47.2 in September and, thereby, exceeded the forecast which has been 47.7. This index measures the nationwide manufacturing activity. It's a leading indicator of economic health - businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company's view of the economy. Thereby, a reading below 50 indicates a contraction in manufacturing activity, while a level above 50 indicates an expansion. Hence, the reading suggests the shrinkage in manufacturing activity, marking the
eighth straight month of contraction, as the graph below shows. "The slight upswing shows the manufacturing industry's overall weakening has slowed down, indicating that previous stimulating measures have begun to take effect," said He Fan, chief economist at Caixin Insight Group. Besides, the Caixin Services PMI was also published this week. The index rose to 52.0 in October, up from September's 14-month low of 50.5 while it also succeeded the forecast of 51.0. China's service sector has been one of the few bright spots in the economy, helping to offset a sharp slowdown in traditional industries battling idle capacity and weakening demand. In the first three quarters of 2015, services accounted for 51.4% of gross domestic economy, up from 49.1% in the year-earlier period. Additionally, since the actual indices exceeded the expectations this could be considered as good signal for the Chinese currency, as well, as it indicates that China is recovering from its recent economic struggles. Alexander Baxmann
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India Despite the world’s optimistic outlook for India and its economy, inequality in different forms still persists on a large scale within the country, hindering development and economic growth. We often forget that a predicted growth rate of 7.5% and a steadily decreasing unemployment rate are not all-encompassing and that the rapid growth that India has seen in the past decade has sadly not led to substantial improvements in gender equality on a scale that it perhaps should have. Female labour participation in India has not increased in recent years despite the country cementing itself as the fastest growing economy in the world. A new report now suggests that the way to maintain this status is by pushing for gender equality, which could add $700 billion to the economy by 2025. The female labour force participation rate in India currently stands at a disappointing 31%, but by raising this to 41% by 2025, GDP growth could see an incremental boost of 1.4% per year. At 17%, the female contribution to GDP in India is much lower than the global average of 37% and when compared to other nations such as China and Sub Saharan Africa, where women
account for 41% and 39% of GDP respectively, the figure is embarrassing. The report states that the Indian economy would receive the highest relative boost among all regions of the world if its women participated in paid work on a similar basis to men. The extensive gap between the male and female participation rate is illustrated below, highlighting that the gap is much greater in India than in other economies. The research also highlighted the unequal sharing of household responsibilities between men and women in India. Women perform 10 times the amount of unpaid care work than men and if this unpaid work could be valued and compensated, it would contribute $0.3 trillion to India's economic output. If the government wants to unlock the vast untapped potential that lies within the female population of India, it must help expand skills training in key sectors and provide greater access to financial services, along with getting more girls into primary and secondary education. Ultimately, the country must address deep rooted patriarchal attitudes, both at home and in the workplace. Homairah Ginwalla
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NEFS Market Wrap-Up
Russia and Eastern Europe Following news this week that Russia may face a meat and dairy shortage in 2016, the Western view of the Russian economy is one of a stark nature. In addition, Dr Birgit Hansl – lead Russia economist for the World Bank – shared her macro outlook, and the findings are somewhat more hopeful than one might think.
– a dire outlook in itself – but even worse when combined with the predicted climb of 14% in the rate of poverty - the greatest increase since 1998/99. This carries knock-on effects for the Russian middle classes who are already bearing the brunt of high inflation rates as they see their real wages and savings eroded.
Often forgotten is the import embargo Putin ordered in retaliation to the Western sanctions, just over a year ago. A government report shows that the embargoes have made a disproportionately large contribution to the general decline in trade, resulting in a 38.8% decrease in imports and, subsequently, a blatant hole in the market. Unprepared producers failed to fill this gap in the short term, leading to a rapid increase in domestic prices, which contributed to the already present inflationary pressures. Only now have Audit Leaders hinted at a possible shortage in essential foodstuffs in 2016, alongside estimations that 80% of cheese in supermarkets is counterfeit.
Conversely, the private sector is benefiting from the economic disarray, heeding Putin’s advice and making use of the exchange rate uncertainty by paying off foreign debts (see graph below) and loading up on foreign assets. With this comes an increase in capital flight – just this week Alexander Grigoryev (a high level banker) was arrested for illegally moving $50 billion out of the country over the last 3 years.
Birgit Hansl identifies the 2014 trade shock as a significant contributor to economic troubles in Russia and the addressing of the high inflation rate through a shrewd budget policy as a matter of high importance. The World Bank estimates Russia’s recession will continue, with -3.8% growth forecast for this year and -0.6% for 2016
This economic slowdown is an opportunity to address structural faults such as reliance on natural resources and an ageing population. What is more important in the short term, however, is making clear the economic policies the country is to pursue. This week, Rosstat surveys showed that “uncertainty about economic policy” has become a key constraint mentioned by Russian businesses. This recession is not a time to repent, but to restructure. Tom Dooner
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Latin America Brazil reported a USD 1.996 billion trade surplus in October of 2015, compared to a USD 1.1 billion gap a year earlier, higher than market forecasts. It is the eight straight month of surplus as imports fell more than exports. Although it beat expectations, these results aren’t surprising considering September’s figures on Brazil’s Trade Surplus were at a three month high. In fact, for the first nine months of the year, the country has posted a surplus of USD 12.24 billion. A major contributing factor is that over the past year the Real has lost circa 50% and 30% on the dollar and euro respectively, so something would be very wrong with Brazil’s economy if they were not now trading in a surplus considering the Eurozone and US are key trading partners for Brazil. In the past Brazil ran regular trade surpluses, primarily due to high export of mining and agricultural products. In 2013, the country started recording trade deficits and in 2014 registered their first annual trade deficit since 2000 as a decline in the value of commodities exports had a greater effect than the fall in imports of consumption products. So perhaps Brazil is on the road to recovery. However this seems unlikely due to other
economic indicators looking bleak for the country. GDP in Brazil contracted 2.60% in the second quarter of 2015, year on year, worse than market expectations. Brazil is struggling through this current recession which has seen five straight quarters of contraction and a reduction in GDP of 6.2 percentage points. There’s no single reason why the economy has nosedived, but comes from a confluence of factors. Individually many of these reasons would have caused minor blips in the economic performance of a country, however when pooled together their effects are multiplied. Such factors include; dire performance of the Real, poor consumer confidence and subsequently low personal consumption, political crisis and a credit rating that in August was rated at near junk by Moody’s. It is very difficult to predict the future movements of Brazil’s economy especially when so many factors are determining it, however one indicator may be certain, as the government expects the trade surplus to reach USD 15 billion this year and to widen to USD 25 billion in 2016, as a weak Real could be here to stay. Max Brewer
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NEFS Market Wrap-Up
Africa Another African debt crisis is looking likely again, as announced on Wednesday. Falling commodity prices and a slowing Chinese economy have once again led to unsustainable borrowing, hence increasing Africa’s sovereign debt to around 44% of GDP. Economists fear that if this continues and risk of default increases, lending interest rates will be increased to levels that are unaffordable for most African countries, consequently halting development. It will also put a strain on the social spending budget, thus restricting services for the public and causing social unrest. Whilst one solution would be increasing inflation across the continent, as the debt’s value would decrease relative to the currency’s value, this would erode away the wages and savings of civilians, thereby reducing consumption. This solution would also require augmented Government spending, which would increase the debt further. In Algeria, over-reliance on oil exports and falling oil prices has meant the country is reforming its market in order to avoid bankruptcy. Oil exports formerly provided 60% of revenues, hence there is now a great pressure on spending and the trade deficit, which has ballooned from $4.09bn to $10.33bn. Subsequently Algeria is investing heavily in its industries and local businesses, whilst also
introducing import licenses and custom duties on imported goods. Whilst trade protection is not ideal, it is necessary if Algeria wishes to protect its infant industries. It will inevitably increase prices and lower standards of living, however by increasing efficiency in the longterm, it is hoped that wages and employment will increase, whilst costs fall. Red tape, state control of businesses and business taxes are also going to be reduced, consequently making the economy more attractive for commerce. With Zambia’s rate of inflation soaring from 7.7% to 14.3% in under a month (see graph), interest rates have increased even further from 12.5% to 15.5%. The high inflation rate is due to the falling price of copper, thus halving the value of Zambia’s kwacha against the dollar. Accordingly, exports have increased, leading to demand-pull inflation. Severely high rates of inflation are bad for an economy, with the greatest danger being a wage spiral, brought about by the expectation of prices continuing to rise. Fortunately as goods get more expensive, trade becomes uncompetitive, leading to an eventual decline in exports and disinflation. However to end the inflation promptly, Zambia’s interest rate has been increased in order to curb spending and encourage saving. Charlotte Alder
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South East Asia After 5 years of negotiating with some of the biggest economies in the world such as Japan and the USA, many of South East Asia’s economies, including Indonesia, Singapore and rapidly growing Vietnam, are finally ready to reap the rewards of joining the Trans-Pacific Partnership. With a month gone after successful negotiations, all 12 participating countries, one also being Malaysia, released the agreement of more than a thousand pages of detail, which is no surprise considering this trade deal will have countries representing 40% of the global economy. This makes it the largest regional trade agreement in history. The deal will reduce trade barriers on everything from beef to textiles, with new and bright ideas for environmental protection and ambitious ideas of state-owned enterprises competing with private companies in trade and investment. It is estimated that joining the TPP would boost Vietnam’s economy by more than a fifth of its 2014 GDP if the membership reaches 17 countries by 2025, shown in the chart below. This would be huge for one of the fastest developing economies and a hotspot for foreign direct investment.
enough to win over the critics, even after Obama’s prediction of removing tariffs of more than 18,000 goods. The TPP will have longwinded, incremental and slow benefits on economic growth, unemployment and their balance of payments position. For example, mentioned in Vietnam’s appendix in the agreement text, it will take 21 years before they have fully eliminated their quota on imported unmanufactured tobacco, which will have an effect on its neighbour countries such as Malaysia and Singapore. This is worrying, particularly for countries such as Singapore, whose GDP for this quarter was 0.1%, narrowly avoiding recession. With participating countries representing 40% of the global economy, this trade deal seems to worth the wait in the long-term, especially with hints that South Korea and even China may join in the future. With the El Nino Phenomenon spiking food prices this week, it remains to be seen whether Indonesia, Malaysia, Singapore and Vietnam can survive the economic challenges ahead for the next decade. Alex Lam
However, the TPP has come under a fair amount of criticism, not being progressive
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NEFS Market Wrap-Up
EQUITIES Retail The retail sector has remained relatively flat this week, with the Dow Jones Consumer Index exhibiting a mere 1% fall, however a number of firms’ share prices have exhibited considerable fluctuations, and it is these equities which could potentially be strong indications as to the future of the sector. One of these stocks is Stamps.com, a NASDAQ listed company with revenues of just under $200 million per annum. Stamps soared by more than 35% in a single day, driven largely by third quarter results which vastly outstripped analyst predictions, with the online retailer not only improving its revenues relative to Q3 2014, but also augmenting it’s EBIT and EPS. Stamps is interesting and revealing with regards to the future of retail equities for a plethora of reasons. As the name alludes, Stamps.com is an online retailer, a sector which has shown 15% year on year growth since 2001, and which is responsible for an even greater share of retail growth within the US economy, for example. However, this is not the most interesting or revealing aspect of Stamps’ business model, for Stamps is one of many relatively young online retailers which aim to shift traditional brick and mortar business models to the online
arena. In Stamps’ case, this is postage, with individuals and businesses alike now being afforded the ability to print United States Postal Service (USPS) labels with merely a home printer, giving a vast array of time and cost benefits relative to the traditional post office model of sending mail. It is perhaps these benefits which have resulted in Stamps’ remarkable growth since its 1996 inception, and which are responsible for the company’s unprecedented 135% share price increase since the start of 2015. In much the same vein, several other retail equities have also attempted to transfer traditional business into the online realm, and have also demonstrated strong growth or prospects this week, with Amazon rebounding from its October difficulties. As aforementioned, however, retail equities as a whole have remained relatively flat this month, with a lack of strong yet pertinent information giving a resultant lack of fluctuation. Only time will tell whether consumer spending can increase enough to breathe life into a flat lined sector. Jack Blake
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Oil and Gas This week, oil prices turned lower on Friday due to the stronger-than-expected US October jobs growth, leading to expectations of an interest rate hike by the Federal Reserve in December. “The prospect of higher interest rates will propel the U.S. dollar higher, providing headwinds for a crude rally: hence, as the U.S. dollar rips higher after the surprisingly strong unemployment report, crude is sinking once more” said Matt Smith, a commodity analyst at ClipperData. Following news, Crude (CLZ5: NYMEX) traded at $44.29 a barrel, down 91 cents or 2%, while Brent crude (LCOZ5:ICE EU) lost 64 cents, or 1.3%, to $47.34. I talked about ExxonMobil (XOM: NYSE) as one of the few winners as far as energy stocks went last week, but this week the company has been investigated by the New York state attorneygeneral in relation to whether it misled investors and the public about climate change risks and how it could affect the company. The subpoena issued on Wednesday has already affected its stock value, which fell by $1.16, or 1.38%, to $83.65 as of Friday, as highlighted by the graph below. Having digested third quarter earnings from companies such as BP, Royal Dutch Shell and Total, analysts at Energy Aspects estimate megaprojects expected to produce 5.2m
barrels a day of oil between 2016 and 2019 have either been postponed or delayed. 60 is the magic number in the oil sector right now: this number has been circulating the news and reports all over in the past few weeks. But what does it stand for? $60 is the price at which crude oil will be in the next 2 years, at least according to investor’s beliefs. As a result, any new project requiring an oil price of more than $60 a barrel – almost 50% below last year’s peak – is now either being scrapped or deferred until industry costs have come down sufficiently. But does this mean that $60 is the actual new long-term oil price? Not necessarily. Big oil companies appear to have as little idea as anyone what the price of Brent crude will be this time next year – let alone 5 or 10 years from now. None of them were able to predict last year’s plunge, which was caused by a US supply glut and OPEC’s decision not to curb production. Nevertheless, there are reasons why $60 is, for now, a sensible assumption. Although higher than the current spot price of $47, it is the price where investors believe oil will be in two years from now. Andrea Di Francia
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NEFS Market Wrap-Up
Financial Equities This week again saw companies release Q3 results, as well as large developments in the interdealer broking market. UBS [UBS: NYQ] was not able to meet its profit targets for 2015, causing its share price to fall 6% on Tuesday. However, it was able to record an increase in revenues in the fixed income and equities trading division, bucking the industry trend and showing that their business model is working. ING bank [ING: NYQ] exceeded expectations with pre-tax profits increasing to $1.63bn in Q3, mainly due to fewer bank loans being provided. Furthermore, insurance company, Allianz [ALVX: GER] announced profits had dropped 15.4% to €1.36bn causing its share price to fall 2.5% on Friday. Inter-dealer broker ICAP announced that it would be selling its voice broking business to market competitor Tullett Prebon. At the end of 2014 there were 1573 voice brokers at ICAP, all of which will move to Tullett Prebon. The deal comes at a time when ICAP is undergoing large structural changes, due to the changing face of the industry. As voice broking has declined ICAP has focused on the more profitable business areas, e-broking and post trade risk mitigation services. On the contrary, Tullett Prebon is looking to specialise in industries
which still require voice broking, such as oil. Both companies’ share prices increased, with ICAP being favoured by the market, seeing a price rise of 10% on Friday. With growth in demand for technology based broking and increased financial regulations increasing the necessity of post trade services, I expect ICAP to prosper in the future. Standard Chartered announced on Monday that they made a loss of $139 million, which came as unexpected news. The company blamed divestment initiatives, depressed commodity prices and China’s global slowdown for the disappointing figures. Furthermore, they announced £3.3bn would be raised from investors to be used during their reconstruction process, which involves delivering new technology and updating regulatory systems. The reaction to this was poor, as the market was not convinced that Bill Winter’s strategy is working. Fitch credit rating agency downgraded Standard Chartered’s default rating from AA- to A+, while the share price has fallen 14% throughout the week. With so much uncertainty around the business I doubt it will be a sound investment decision. Sam Ewing
(ICAP’s share price since Monday. Source: Yahoo! Finance)
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Week Ending 8th November 2015
Technology This week we saw the global information technology company Hewlett-Packard Inc. experience a rise from $13.21 to $13.95. Whilst HP’s rival, Lenovo Group Ltd, a Chinese multinational computer technology company, also saw a growth in share prices by 4.4% to $7.58. Facebook recently experienced a boost in mobile-ad revenue, as a result of a 72% yearon-year growth in advertising on smartphones and tablets. Mobile advertising is a huge contributor to the social media group’s ad revenue, where it accounts for three quarters of the total - a value that has increased by twothirds over a yearly period, driven by a 23% increase in monthly active mobile users to 1.39 billion people. Facebook stock prices were greatly influenced by this growth in mobile advertising, with share prices already being up by a third since the start of the year. As a result of ongoing successful performance, the online social networking service has boosted its market capitalisation to a new all-time high of $300 billion. On top of, this they have recently announced their plan to launch a news app, called Notify, sometime next week. This will branch out Facebook’s stance within the market in a hope to reach the smartphone generation, allowing it to compete
with the likes of Snapchat and Twitter, whilst contesting new publishing ventures from Google and Apple. This standalone app alerts users to new stories from numerous media outlets that Facebook has linked up with, with the likes of Vogue, CNN, and Comedy Central being involved. With share prices being up from $102.53 to $106.29 – a 3.7% increase this week upon the announcement – investors will be pleased with the development being made. Particularly following a successful 3rd quarter, where net profits grew 11%, with the total reaching $896 million. As a result, earnings per share were $0.32, an increase of $0.01 since last year – a small but progressive rise. Even with costs growing at a faster rate than sales this year, where they were up 68% to more than $3 billion partly due to the addition of 1,000 new employees to the staff, it’s safe to say that Facebook is expanding successfully with an ever increasing market coverage. This adaptable nature that the company instigates ensures they are a huge competitor amongst the likes of Twitter and Apple; safeguarding what is a great share value and ultimately, a great investment. Daniel Land
Facebook’s weekly growth in share price
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NEFS Market Wrap-Up
Pharmaceuticals Apart from major developments related to specific Pharmaceutical companies, equity movements in this sector remained relatively stable last week. The FTSE 350 Pharmaceuticals & Biotechnology Index fell by only 0.23% by the end of last week and this trend was echoed by the NYSE Pharmaceutical Index which fell by 0.82% over the course of the week.
shares in the company as collateral for the loan and news about the company's practices in August has greatly impacted the personal wealth of Mr Pearson. Despite rising more than 900% from 2010 up to its peak at the end of July, huge volumes of shares were dumped last Thursday sending the share price tumbling by 14% at the end of the day and 20.3% in the first hour of trading, as shown by the graph below.
Of particular concern is that Pharmaceutical giant, Valeant Pharmaceuticals, which tumbled even further last week after Goldman Sachs was forced to dump a block of about 1.3 million shares. This development came amidst a storm of controversy related to the Canadian drugmakers reliance on borrowing, aggressive sales techniques and high prices. Recent losses resulted from a margin call by Goldman Sachs after they were forced to sell off shares which were owned by Michael Pearson, Valeant's chief executive. A margin call occurs when the equity held by an investor falls below a certain criteria in proportion to the loan made by the broker. Mr Pearson borrowed money from Goldman in 2013 by using his nine million
Further news affecting Valeant and the industry in general reveals that Republicans are blocking the ability for the Democrats to investigate drug price hikes. Even though the senate has started probing companies such as Valeant and Turing, there would have to be a wider bipartisan push, especially in the House. Last Wednesday the Republican chairman of the House Oversight Committee, Jason Chaffetz from Utah, had rebuffed any efforts to investigate this matter. In the meantime, Pharma companies can continue profiteering and hence investors should remain confident in the face of this political neglect. Sam Hillman
Valeant Pharmaceuticals Intl Inc
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Week Ending 8th November 2015
Industrials & Basic Materials The benchmark 30-member Philadelphia Stock Exchange Gold and Silver Index, which includes mining companies such as Barrick Gold Corp and Newmont Mining Corp, fell to its lowest since September 2000. Gold’s 42% slump from a record set four years ago is cutting profits and stressing balance sheets for mining companies, with the largest producers weighed down by debt loads totalling almost $35 billion. Randgold Resources Ltd., the best-performing producer of the metal in the past decade, says that the biggest gold miners, weighed down by record debt and prices near a five-year low, will have to merge with others to survive in such a climate. Randgold, which has advanced more than fourfold in London trading over the past 10 years, has so far avoided the worst of the turmoil that’s forced producers to reduce asset values and raise cash. Barrick on the other hand is seeking to sell its mines to cut its debt and they have discussed with Randgold on the possibility of combining their operations several times over the past two decades. Both companies blamed each other for the breakdown in the latest merger talks in April last year. Randgold is also currently examining AngloGold Ashanti Ltd.’s Obuasimine in Ghana, with the option to revive if the company
thinks it can become profitable. This redevelopment would cost Randgold about $500 million, which could be paid for without raising debts or selling of shares. The strong financial position of Randgold is evident where they can build a new mine on their own comfortably. With such a strong financial standing, Randgold is on the lookout for other projects to buy, but has been frustrated by companies excessively pricing assets. As the price of gold weakens, profit margins of miners similarly contract. Moreover, higher lending rates in coming months should similarly keep the commodity in check, leading to further weakness among miners. Also, the falling operating margins of producers give investors fundamental reason for not owning the sector. Furthermore, as lending rates should support the dollar, gold prices will be capped in the near future. Gold also dropped for the sixth straight session and one-month low on Wednesday, as the dollar shot to a three-month high after US Federal Reserve Chair Janet Yellen raised expectations for a December interest rate increase. Erwin Low
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NEFS Market Wrap-Up
COMMODITIES Energy It’s been another tough week for energy prices as markets still attempt to adjust to the current supply conditions. WTI Crude Oil has fallen 2.4% after some initial price growth earlier in the week, while Gasoline has not been faring any better, dropping a similar 2.5%. This has come as better-than-expected monthly data on US employment helped to strengthen the US dollar. In addition, Ethanol – a commodity commonly used as a fuel when mixed with Gasoline – also fell sharply by 4.3% over the past 7 days as a reaction to the drop in Gasoline has reduced aggregate demand for Ethanol in the economy. In complete contrast, there was an unlikely shining light amid the gloom this week - Natural Gas. Natural Gas prices have increased this week, as shown in the graph below. After prices rallied on Thursday they have finished +1.7% for the week after data showed a smaller-thanexpected weekly climb in US inventories. But what makes this even more unlikely is the fact that total supplies are matching a record level set three years ago. Total supplies now stand at 3.929 trillion cubic feet - tying the record reached for the week ended Nov. 2, 2012, according to data by the US Energy Information Administration (EIA).
At first look this price rise seems confusing, but the key lies in the current time of year. To understand this correctly I believe an analogy is needed; Gandalf the White in the “Lord of the Rings” novels remarks to Pippin, his companion, of the great battle ahead; “It’s the deep breath before the plunge” he warns darkly as they stare at the bleak lands of Mordor. This situation is comparable to what is happening in the Natural Gas market. The market refers to the period as “injection season”, the period during which natural-gas supplies build up in preparation for a winter-related spike in heating demand over the coming months. It is, as Gandalf would have said, the “deep breath” of increased demand to have a reserve of Gas “before the plunge” of winter. Do not expect these price rises to last however. With supplies at a record level, Gas inventories will soon fill up and demand will ebb away until winter hits the northern hemisphere (and its biggest consumer, the US). In the future, the extent of supply must surely result in price falls, but for now at least, Natural Gas is looking bright. Harry Butterworth
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Week Ending 8th November 2015
Precious Metals This week we have seen Janet Yellen’s remarks on the increased chances of a Federal Reserve interest rate from 46% to 58% this December which played a significant role in the global economy as the dollar strengthens against the emerging market currencies. Gold prices have hit a seven week low as it has fallen from 1146.77 USD/oz. to 1103.99USD/oz., a 3.7% drop this week. The gold prices this week have been pushed down further as the Fed signalled a possible December interest rate hike, but this fluctuation and guessing game of when the Fed would actually make this decision have hampered gold’s ability to gain any traction. The prospect of a stronger dollar as seen from the Dollar Spot Index (See chart below), which is inversely related to the prices of gold, has also added to the sell-off of gold and perhaps not until the Fed is satisfied with the inflation and unemployment rate that the actual decision of the raise in interest rate would be made. Silver has also plunged dramatically this week as it posts a 2 month dip by just under a 6% drop in prices. The two metals Gold and Silver have been pressured greatly by the speculation of the Fed’s decision, and Silver being the more volatile metal, would take a greater hit and is
currently under a higher risk. Copper prices have also fallen this week from 2.36 USD to 2.25 USD this week and this can be attributed to the drop in demand from the top consumer, China, whose growth has slowed in recent times. In other news, investors have dumped a significant amount of platinum and palladium from funds backed by the metals last month on concern that demand will ease in the aftermath of the Volkswagen AG emissions scandal. Platinum has fallen from 989.40 USD to 947.99 USD this week and Palladium has also fallen from 672.99 USD to 605.37 USD. The two metals have a combined drop of over 14% this week. Given that the Feds seem to be hawkish, the increase in headwinds to the global economy, and the decrease in demand for precious metals by one of the world’s largest consumer, China, there is a bearish outlook towards the precious metals sector. Look out for the Fed’s meetings, the US dollar index and the global economy this week to make a more informed decision on the prices this week. Samuel Tan
Dollar Spot Index
Gold Price Trend
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NEFS Market Wrap-Up
Agriculturals Over the last couple of weeks, agricultural industry proved to be heavily dependent on relatively poor weather conditions. Low rainfall in California and South Africa remains an important issue to global markets but, this this week we look at the causes behind the price depreciation in rubber and milk produce. Rubber prices are steadily slumping down. The Tokyo and Thailand rubber industries experienced a steady decrease in demand in the last 6 years, closely followed by declines in prices. From the maximum value of $1743/bu in 2011 rubber prices depreciated to $505/bu by 4th November. This effect came as China, the main buyer of the good, slowed the demand for the good, alongside a number of other purchasers. According to Geofin Research, Kochi, the national Thailand Rubber Policy Committee concluded that the government will try to increase local consumption and expect prices to rise gradually. This Wednesday’s overview by Janet Yellen, Federal Reserve Chair, is expecting a slow price recovery in December. Similarly, milk and related goods industry is still expanding and the surplus of the produced goods is significantly exceeding demand. Even though New Zealand is producing much less milk in 2015 (and is expected remain producing less in 2016), the decline in regional supply is still compensated by the growing supply from
Europe. This year the cooler weather from June to September was provided unfavourable conditions to grow the feed for the ruminants in New Zealand. Furthermore, excessive supply from European countries lowered the profitability of production in New Zealand and, consequently, discouraged many farmers from producing the same level. As evident in the Figure below, recent milk prices peaked on the 20th June to $17.70/bu and shrank to $15.31/bu by the beginning of November. For the time being, the revenue accumulated from sold goods just covers the cost of production. However, the graph below also shows a slight increase in the price to $15.63/bu since 1 st November. This Monday Dairy Today’s Elite Producer Business conference was hosted in Las Vegas with Tim Hunt, a respected dairy strategist, being the guest speaker. He reflected on today’s milk prices and forecasted sustained growth in appreciation of the good by summer 2016. The explanation provided by the economist relies on the assumption that low current prices may ‘unlock additional consumption, eroding those international stocks’. While this opinion remains questionable, the pattern for the future (due to dependency on interrelated factors, e.g. weather, global demand and production in neighbouring regions) is difficult to spot yet. Goda Paulauskaite
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Week Ending 8th November 2015
CURRENCIES Major Currencies Despite manufacturing activity in the US expanding at the slowest rate in more than 2 years in October, casting doubt over the strength of the economy, EUR/USD largely traded flat in the beginning of the week. Better than forecast US employment change (182k v 180k) helped push the Euro to new lows on Wednesday afternoon, which was further damaged when the non-manufacturing composite was released 2 hours later. Service sector activity in the US grew ahead of forecast, coming in at 59.1 (compared to the 56.5 forecast). This erased fears established earlier in the week and saw the bears battle back as the market continued to sell off the euro, pushing it down to the 1.085 level. With Non-farm payrolls forecast to increase by 40k, and unemployment to remain flat, I believe the market is poised for a further major sell off, which will continue to push the currency down to levels not seen since 2003. This week I have used technical analysis to support my fundamental view on EUR/USD; using Bollinger Bands and a 30/20/10 period simple moving average. Both are useful for identifying trends in markets. It is clear from the SMA analysis in chart 1 that EUR/USD appears
to be in a downward trend; as even the 30 day and 20 day averages (the slowest to react to price changes) are now entering a downward curve. Chart 2, depicting the Bollinger bands, gives further support to this view. The price has remained below the 10 day SMA for 15 trading days now, so we can be confident that EUR/USD is trending downwards. Furthermore, the price has just crossed over the lower band today (5th November); this is an extreme event that happens rarely, I believe this is a continuation signal which indicates strength in the trend. If you look at October 22nd when this last happened, you can see the price rapidly dropped over the next week. With non-farm payrolls and unemployment figures released we will certainly see a spike of volatility in EUR/USD, and if the results come in as forecast there will be a further sell off in the pair. The technical analysis supports this view and indicates that the pair is currently on a downward trend – combining these factors together I believe they will be pushed down to new lows and will most likely find support at the 1.07 level. Strong short recommendation. Adam Nelson
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NEFS Market Wrap-Up
Minor Currencies The New Zealand dollar performed poorly this week against all major currencies; most markedly against the US dollar, falling just over 4% from the week’s opening price to the week’s close. The Kiwi US dollar pair (NZD/USD) started trading this week around the top of the 0.665, 0.680 range, but this changed early on in Tuesday’s trading as New Zealand’s GDT Price Index was released. The GDT Price Index is the weighted average of the 9 dairy products that are sold at auction. Dairy prices fell 7.4% over the last 2 weeks after dropping 3.1% in the 2 weeks previous to this. Dairy exports are a relatively large proportion of New Zealand’s exports, and so, if dairy products fall in value, demand for Kiwi dollar reduces, as less of the currency is needed to buy the products. The downtrend in the NZD was continued later on on Tuesday when poor employment data was released. Unemployment remained constant at 6.0% but employment fell 0.4% from the previous quarter. The news caused the currency to continue falling into Wednesday where it managed to break through the previous significant resistance line at 0.665. The pair
then became a lot less volatile and traded within a tight range with NZD attempting to stage a rally mid Thursday that was quickly crushed. The sharp down candle on Friday was due to the strong US non-farm payrolls report but the pair failed to decline any further, meeting heavy resistance at the 0.650 price. Next week there is no major news to come out of New Zealand. Consequently, the pair should trade within a range where 0.650 will be a highly significant support price as it has been in previous weeks. Resistance should be found around the 0.660 level. Elsewhere in Australasia, the Reserve Bank of Australia held its monetary policy meeting. The RBA decided to keep interest rates at record lows of 2%. The reason for not cutting rates any further was given as the ‘firming’ economic conditions. Prior to the meeting, the market had odds of further rate cuts at 45%. The meeting caused the Australian dollar to strengthen by around 1% but these gains were lost later on in the week. Will Norcliffe-Brown
NZD/USD 1 hour candlestick (Source: OANDA)
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Week Ending 8th November 2015
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. 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.
About the Research Division
For any queries, please contact Jack Millar at jmillar@nefs.org.uk The Research Sincerely Yours, Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Market Wrap-Up.& Finance Society Research Division Jack Millar, Director of theWeekly Nottingham Economics 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 Josh Martin at jmartin@nefs.org.uk. Sincerely Yours, Josh Martin, Director of the Nottingham Economics & Finance Society Research Division
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