Week Ending 6th December 2015
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 2 United Kingdom United States Eurozone Japan Australia & New Zealand Canada
Emerging Markets 9 China India Russia and Eastern Europe Latin America Africa South East Asia
Equities 15 Oil & Gas Retail Technology Pharmaceuticals Industrials & Basic Materials
Commodities 20 Energy Precious Metals Agriculturals
Currencies 23 EUR, USD, GBP
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Week Ending 6th December 2015
MACRO REVIEW United Kingdom This week saw the release of the Purchasing Managers’ Indices (PMI), for manufacturing and services. The PMI are an indicator of economic activity, derived from monthly surveys of businesses, and therefore are a useful measure of current economic performance in different sectors. The services index rose to 55.9 in November from 54.9 in October. In contrast, the construction index fell to a seven month low from 58.8 to 55.3 and manufacturing also fell from 55.2 to 52.7. While these are still above the 50 mark, which separates expansion from contraction, it is clear that there is a significant slowdown in these sectors. Therefore it is likely that construction and manufacturing output will be stagnant or contract in the final quarter. However, services is maintaining a healthy rate of growth and as a result, the economy is set to grow for the final quarter despite weak data from other sectors, due to the dominance of services in the UK economy.
further shift towards services, despite the government’s plan to rebalance the economy. Nevertheless, with manufacturing and exports currently struggling, domestic consumption must be reinforced as the sole driver of economic growth, benefitted by consumer confidence remaining high, as illustrated below. However, the surge in consumer spending puts into question how long inflation, and therefore interest rates, will remain low. Falling energy and oil costs are offsetting wage growth to keep inflation low but 2016 could finally see the Bank of England raise the current base rate above 0.5%. Matteo Graziosi
Following Chancellor Osborne’s spending cuts last week, the government aims to be on track for its target to wipe out the public sector deficit by 2020. However this is mainly the result of the Office for Budget Responsibility, OBR, announcing a £27 billion windfall due to expectations for higher tax receipts and lower interest payments on government debt. Nevertheless the government is following a plan of short term pain for long term gain. Looking towards the economic outlook for the UK in 2016 it is likely to be positive, yet onesided. Domestic consumption seems likely to remain the main driver of growth well into 2016 due to high wage growth coupled with low inflation. Inherent problems in manufacturing and exports will likely mean the economy will
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NEFS Market Wrap-Up
United States Three key releases of labour market data from the US this week have all but cemented the Fed’s interest rate decision at its next meeting on the 15th and 16th of December. It could be argued that the decision was already certain prior to this and that this week’s data was just a quality check. A report from the Bureau of Labour Statistics showed that the change in non-farm payrolls beat forecasts by 10,000 to reach 211,000 for the month of November. Last month’s report of growth of 271,000 jobs was also revised upwards to 298,000, another positive sign for the consumer-driven economy. The unemployment rate remained at its 5.0% level, in line with forecasts. Month-on-month growth in average hourly earnings did not match last month’s growth of 0.4% but still remained positive and in line with forecasts of 0.2%. This represented year-on-year growth of 2.3%. The Fed is close to achieving its dual mandate of maximum employment and stable prices as the unemployment rate continually lowers and inflation rises to its 2% target.
funds futures prices, is shown in the graph below (as of 5pm on Friday). From her midweek speech to the Economic Club of Washington, Janet Yellen’s conservative outlook on the US economy suggests to me that the Fed is likely to remain cautious not to raise rates too quickly in order to avoid an early recession, which would probably be followed by a rate cut. I believe that we will see a rate rise in December and another one in March or April as this gives the economy some time to react to the change, but also the Fed some time to analyse the effects of its decision. Sai Ming Liew
Over the next month, the Fed will decide on whether it should raise the Federal funds rate for the first time since 2006. Currently between 0.00% and 0.25%, the rate will likely be raised to the range of 0.25% to 0.50%. The real question that needs answering now is how quickly the Fed will tighten monetary policy over the course of 2016. Some economists have suggested two rate hikes while others have suggested up to four, depending on predictions for inflation and unemployment rates. An overview of the probabilities of the Fed funds rate over the next six months, based on Fed
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Week Ending 6th December 2015
Eurozone The unemployment rate of the Eurozone decreased slightly from 10.8% to 10.7% in October 2015. This is the lowest jobless rate recorded in the Euro area since January 2012. 17.240 million people living in the Euro zone were unemployed in October 2015, with the number of unemployed Eurozone citizens declining by 13,000 in October of this year. The unemployment rates of many Eurozone countries were released this week. Amongst the countries with the lowest unemployment rates was Germany and the Czech Republic. They recorded rates of 4.5% and 4.7% respectively. The German unemployment rate has remained constant for August, September and October 2015, while Spain possesses one of the largest unemployment rates in the Eurozone with 21.6% unemployed. In other news, as we can see on the below graph the EU inflation rate has remained constant with the 0.1% in October and November 2015, while markets had predicted an inflation rate of 0.2%. Food, alcohol and tobacco experienced the largest increases in prices of all goods in the Euro area, rising by 1.5%. Energy prices are expected to decline by
7.3% in November 2015. Whilst this is significant for the Eurozone, the fall in energy prices in November is smaller than the decline in October; energy prices fell by 8.5% in October 2015. Energy price deflation is having a notable impact upon the EU inflation rate, if we exclude energy prices from the inflation rate calculations then consumer prices would have increased by 1.0% in November 2015 - this is below the ECB’s target of 2.0%. Moreover, the ECB held a meeting on 3rd December to discuss interest rates and stimulus within Euro area countries. They announced that they are going to decrease the interest rate on the deposit facility (the deposit facility allows financial institutions to make overnight deposits with the ECB) by 10 percentage points to -0.30%, while the ECB refinancing rate will stay at 0.05%. The ECB stated that in order to achieve the target of 2% inflation in the Euro area, their asset purchasing programme, involving the spending of ₏60 billion a month will be extended until March 2017. Kelly Wiles
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NEFS Market Wrap-Up
Japan This week’s headline purchasing managers’ index reading shows that the rate of output growth in Japanese manufacturing has accelerated to a 20-month high. Given the speed with which firms react to market conditions, this is a positive sign that managers seem to consider Japan’s economy to be healthy. Contributing to this boost has been the increase in new business orders, which has been due to an increase in new customers, particularly from Asian countries. This shows Japanese manufacturing has remained resilient in shaking off the emerging market slowdown currently sending ripples through the global economy. November saw manufacturers hire additional workers to deal with the additional international demand, but the rate of job creation in the sector remains about the same as for October – the fastest pace in 18 months. However, the further tightening of Japan’s labour market does also increase its exposure to some risks. With low unemployment, high participation rates and an ageing population Japan has few idle resources. This means the scope of fiscal policy, and monetary policy in particular, are rather limited in boosting an economy which is at full employment. The current rate of population decline mean that even optimistic forecasts predict the trend rate of growth is at most 1%.
Having run a budget deficit of around 8% since the financial crisis, as shown on the graph below, a trend growth at 1% puts the sustainability of the nation’s public debt into question. While this has not caused any issues so far, and will have prevented a prolonged deflationary era, the current ‘liquidity trap’ conditions mean monetary policy has reached saturation and will not be able to offset fiscal retrenchment. Reflating the economy would be one way to make fiscal adjustment more feasible, but the success so far has been mixed. Speaking on Wednesday, Bank of Japan Deputy Governor Kikuo Iwata said the slowdown in China and emerging markets still remains as the greatest threat to the bank reaching its 2017 inflation target of 2%. More intervention will certainly follow in the future but with analysts divided on whether further quantitative easing will be announced in the New Year, its timing cannot be easily predicted. The policy decisions made at the start of the New Year will therefore signal the future direction Prime Minister Shinzo Abe intends to follow, and ultimately, shape the legacy of his Abenomics programme. Loy Chen
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Week Ending 6th December 2015
Australia & New Zealand Data on Australia’s trade balance in October was disappointing, as the trade deficit widened to AUD -3.30 billion, a shock to economists who forecasted a AUD 2.61 billion deficit. As shown by the graph below, this 38% increase (from AUD -2.40 billion) was attributed to a 3% fall in exports, as non-rural goods fell by 3% and rural goods by 4%. In addition imports rose significantly from AUD 74 million to AUD 29,900 million. There has been much speculation in Australia’s economy over the past year. Economists were adamant that the economy was in trouble. Following a rise in variable home loan rates, large trade deficits and consistent speculations over the cash rate, many contemplated whether a recession was possible. However, strong employment provided a light at the end of the tunnel. In addition, this week we learnt that the economy grew by 0.9% in the third quarter. So Australia has managed to battle off some of the economic blues, but how will it cope over the holidays? In other news, as New Zealand enters the holiday period there are expectations for a preChristmas interest rate cut. Despite the fact that the economy has started to pick up, the head of
the Reserve Bank, Graeme Wheeler, may lower the 2.75% rate through a 25 point cut, making it the fourth cut in 2015. The last review the bank makes this year will be held on the 10th of December. The ASB stated it was “a done deal” that the Reserve Bank would reduce interest rates as the failure to do so would result in an appreciation in the dollar, making NZ goods less competitive in international trade. Westpac and BNZ, two of the Big 4 banks in NZ, both predicted a cut in rates, however there are still sceptics. Chief economist at ANZ, Cameron Bagrie, believes that the Bank should wait until January to cut rates. The reason being because the housing market is “really starting to pick up”, especially in cities such as Auckland. An even lower interest rate will make borrowing cheaper and increase the number of buyers in the housing market, tempting a potential housing bubble. Bagrie stated that waiting until January is the “most sensible approach” to see how inflation acts. So we could still expect significant changes in New Zealand’s economy over the last few days of 2015. Meera Jadeja
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NEFS Market Wrap-Up
Canada On Wednesday the Bank of Canada (BoC) made the decision to keep the target for the overnight rate of interest, otherwise known as its key policy interest rate, unchanged at 0.5%. Some Economists anticipate that the rate will be cut further, perhaps to 0.25%, despite having already been lowered twice since January 2015. Further stimulus may be required as the economy still struggles to adapt to the fall in oil prices, alongside weak domestic demand and business investment. Other Economists, such as Diana Petramala of Toronto-Dominion bank, anticipate that rates will remain unchanged until mid-2017 as “the economic impact of lower oil prices is likely to prove longer lasting and further reaching than was originally expected.” Correspondingly, Stephen Poloz, the Governor of the Bank of Canada, has stated that inflation may only reach the 2% target in mid-2017 due to excess capacity, or slack, in the economy – therefore strengthening the case to hold interest rates steady. Inflation currently stands at 1.0%. Statistics Canada revealed this week that the economy grew by 2.3% to 1.77 trillion CAD in Q3, close to the BoC’s forecast of 2.5%. This marks Canada’s official exit from recession, following two quarters of negative growth, as
shown in the graph below. This has been due to an increase in consumer spending, a buoyant housing market, and moreover a 9.4% increase in exports. Exports were primarily in the automobiles and consumer goods market, helped by growth in the US, a weak currency, and accommodative monetary policy. However, there was in fact a non-annualised drop in growth of 0.5% in September. This signals that the growth rebound may not be robust. Avery Shenfield of Canadian Imperial Bank of Commerce described Q3 GDP as “coming in like a lion and out like a lamb”. The BoC have already forecast lower growth of 1.5% for Q4 in their recent monetary policy report. As the outlook for Canada’s economy is uncertain, with no strong influences for either a rate rise or cut, the BoC’s governing council will wait for some convincing evidence before considering a rate change. They meet again on the 20th of January to make their decision. It is likely that there will again be no change, making Canada another of the many advanced economies who have adopted extended periods of monetary easing. Shamima Manzoor
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Week Ending 6th December 2015
EMERGING MARKETS China This week there were two major news stories regarding China’s economy: there has been the vote of the IMF to decide if China is to be included into the SDR basket. Furthermore, the monthly Purchasing Managers Index (PMI) which provides early indication of China’s manufacturing sector has been published. To put it briefly, there is good and bad news for China. Starting with the bad news, the industrial sector has seemed to stagnate. The monthly PMI (see graphic) fell from 49.9 in October to 49.6 in November, meaning that the PMI has been under the critical 50-mark for four consecutive months. In 2015, China’s biggest 101 steel companies, which have been the driving fuel of China’s enormous economic aggrandisement, lost a combined RMB 72bn in the first 10 months of 2015. Additionally, the government’s efforts to stabilize the domestic steel industry have obviously failed and thereby led to new debts. China’s largest state-owned steel company, Sinosteel, defaulted on a bond repayment due in October. Also, Beijing’s stimulus actions led to an excess supply of steel, resulting in deflationary pressures. However, there are many who expect further action of the government. Contrarily, services PMI rose to 53.6 in the last month, which shows that further fiscal boosts are not absolutely
necessary. China’s government stated several years ago that it wanted to pursue a change in its economic growth strategy by focusing more on domestic consumption, in other words, a switch from manufacturing to services. Historically, it has proved that this is impossible without a relative slowdown in manufacturing. It will be interesting to see whether China’s government try to further stimulate its manufacturing sector or if there really is structural change over the next weeks and months. Meanwhile, the good news is that, on Monday 28th November 2015, the IMF finally decided to include the RMB into the SDR basket. This decision comes at a crucial time for China as it has suffered deep falls in financial markets this year as it is highly questionable that Beijing is actually willing to stick to reforms. Furthermore, this decision proves how much the IMF actually needs China and that the Fund was actually drastically forced to bend its own rules. Accordingly, it is not far-fetched to say that it is a political decision as the SDR would lack legitimacy if the world’s largest economy, measured by purchasing power parity, would not be included. Alexander Baxmann
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NEFS Market Wrap-Up
India Finance Minister Arun Jaitley breathed a sigh of relief this week as news regarding India’s growth rate was released. The world’s fastest growing economy maintained its position, growing at a satisfying rate of 7.4%. This is fractionally higher than what was expected by forecasters and higher than the 7.0% clocked in the previous quarter. Reflecting fairly stable growth and inflation, the RBI chose to end the year with an unchanged interest rate of 6.75%, leaving room for further monetary easing in the coming months. Driven primarily by a strong revival in manufacturing, which grew by 9.3% along with increased domestic demand, India is now outperforming China by half a percentage point. Investments also increased, growing 6.8% from a year earlier, compared with 4.9% in AprilJune. This is a reflection of India’s expansionary fiscal policy through which the government has boosted investment in infrastructure, complementing private investment. Further investment has been promised by the government but more privatesector capital expenditure will also be required in order to sustain investment levels. However, whilst investment in infrastructure has proved beneficial for growth, India must also lay robust foundations for development by investing in health and education, creating room for social mobility and pulling people out of poverty. If not, we may see growth quickly
peter out. Moreover, when looking at other sectors the figures are less impressive, with exports still acting as a lag on economic growth, along with sluggish agricultural performance, which stood at 2.2% after a rainfall shortage for the second year in a row. Slow progress in terms of reform is also an issue, as discussed in previous weeks. Another consideration is the environmental implication of India’s accelerating growth, with some experts warning that India’s growth addiction is deadly for the planet. They have cautioned that pursuing aggressive expansion of industry and energy production will have hefty global consequences. The government instead argues that half of the India of 2030 is yet to be built and expansion is necessary in order to lift 300 million people out of poverty. Clearly a balance between seriously addressing climate change whilst also maintaining growth needs to be found. Whilst there are concerns about a rate hike by the Federal Reserve within the next few weeks, many hope that a positive outlook, coupled with strong economic growth, will negate any potential volatility, which has been predicted for emerging markets. It is difficult to say for sure, but when looking at the global scheme of things, India is looking very attractive in relative terms. Homairah Ginwalla
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Week Ending 6th December 2015
Russia and Eastern Europe There was controversy on the roads of Russia this week, as long-distance truckers blocked a lengthy section of the Moscow ring road to protest against a national toll. The alleged target of demurral was the planned fee to be imposed on truckers travelling on federal highways. This comes in the form of a GPSbased system of which Igor Rosenberg – oligarch and close confidant of Vladmir Putin – owns a 50% stake. It is likely, however, that this anger was more deeply-rooted and actually primarily aimed at attacking Putin himself. Of late, concern has arisen that the Russian upper class are attempting to create revenue streams that advance their own position at the expense of the lower and middle classes. Nikolai Petrov, a professor at Moscow’s higher school of economics, analogises the idea, suggesting that the “[oligarch] clans are trying to keep their portion [of the pie] or even cut a bigger slice.” This comes with the discovery that an 800-mile round trip between Moscow and St Petersburg now costs an extra $33 at the current exchange rate and is scheduled to rise to $66 next month. Lumped with truckers’ already dear transportation taxes, it is estimated to have reduced their monthly wages by around $500600 – a significant amount when we consider the current inflation level of 15%. A blow like this
is likely to give rise to a serious drop in the standard of living of the lower classes. Maxim Y Sokolov, transportation minister, has dismissed the issue completely, drawing attention to the expected generation of $700bn a year as a result. While he says that “this is how a transportation system functions worldwide,” the truckers complain that “we live like hell, [while the rest of] the country is very rich.” Perhaps what we are beginning seeing here is something that is untoward of the Russian people: a disillusionment of their government. This all comes in tandem with Putin’s speech to the federal assembly where he described his country’s economic situation as “complicated but not critical.” He made clear that Russia needs to explore export revenue from products that aren’t to do with energy. It seems that the government is coming to terms with the ailments of its primary product dependency which, until now, has served them well. Russia’s future success depends on finding new, profitable revenue streams and to maintain public confidence while driving down inflation. The new target is to knock 11 percentage points off the 15% mark to reach 4% by 2017. Tom Dooner
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NEFS Market Wrap-Up
Latin America Fears are deepening in Brazil, as on Tuesday third quarter figures showed that the largest economy in Latin America is on track for its worst recession since the great depression. The figures mark three consecutive quarters of contraction as Brazil saw its economy shrink by 4.5% year-on- year in Q3. Many have blamed weak commodity prices, fiscal contraction and a fading consumer credit boom. The poor Q3 figures reflects that almost every sector of the economy facing continuous pressure. This even includes exports, which had been expected to come to the rescue after the country’s currency, the real, lost circa 52% of its value against the dollar this year. Further disappointing factors that add to Brazil’s woes are that, although President Rousseff is trying to implement austerity measures, the budget deficit is currently at 9.5% of GDP. The austerity comes at a time when Rousseff is witnessing appalling approval ratings, with the WSJ quoting ‘only 10% of the country think the government is doing a good job’. On the upside, National debt is at 66% of GDP – a relatively low level in comparison to other troubled countries (Greece’s national debt is 177% for example). However the cost of servicing Brazil’s debt is at about 20% a year, which is
astronomical. What’s worse, last month figures showed that Brazil’s inflation rate was at its highest for 12 years, at 10.28%. In my opinion the key event to watch over the Christmas break is the Fed’s interest rate decision on the 16th December. The predicted rise may have adverse effects on Latin America, causing possible capital flight and pushing dwindling equities even lower. This may quash any hopes of investment, as emerging markets, especially in Latin America are not looking like sound investments, so a more stable return in the US could signal that low investment is here to stay. Furthermore Chile, Mexico and many others face interest rate decisions but all look set to keep them constant. Meanwhile, on the 6th December the Venezuela Parliamentary elections will be held. The ruling socialist party currently holds a majority, but polls indicate that if the election were held today, the opposition coalition would win in a landslide. The 29-party coalition is benefiting from widespread discontent with President Nicolás Maduro, driven by mounting shortages, high inflation and rampant crime as highlighted in last week’s article. Max Brewer
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Week Ending 6th December 2015
Africa In the south of Africa, the worst drought since 1992 is increasing food prices dramatically. The price of corn, a staple food for cattle, has increased by 55% since the beginning of 2015, due to crop failures. To avoid paying higher cattle food prices, farmers will kill nearly 36% more cattle this year than normal. With low crop and meat availability, food inflation is expected to rise more than 10% by mid-2016, double the rate of normal food inflation. Economies throughout southern Africa have struggled greatly this year with reduced investment from China and the appreciation of the US dollar. Higher food prices will worsen this situation, with lower consumption, export levels and standards of living. Many economists and social activists are criticising the governments of Africa’s southern regions, who have been discussing the prospect of designating more farming land to solar panels and growing biofuels. This is extremely popular in Europe and the US, and would hence help trade, however it does threaten the availability of food. Following the Paris Climate Summit from earlier this week, great global focus has been placed on African economies. Many worry that if current levels of pollution continue, economies that are too reliant on primary good trading will be most vulnerable to its effects, as seen greatly in Africa. Moreover, many African
economies lack the systems necessary to deal with Supply Shocks and the resources to help the population after disaster. Whilst it is therefore essential carbon-emissions are reduced, some argue that African economies will see limited growth and prolonged poverty levels if prevented from accessing cheap, carbon fuels. To face this issue, the World Bank has created the Africa Climate Business Plan, which will issue USD 16bn investment over the next 4 years. It will also include the restoration of arable land lost due to desertification, and the creation of systems that warn of extreme weather. Business confidence in South Africa has fallen even further in the final quarter of 2015 to 36, (see graph), its lowest in 5 years. This is due to great uncertainty about the impact of the US dollar appreciation, the prospect of future recession, the depreciation of the South African Rand and the timing of US interest rate hikes. With a falling business confidence rate, investors and businesses are looking unfavourably on South Africa for future growth prospects. Policies are subsequently urgently needed for recovery, to help boost business confidence. Charlotte Alder
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NEFS Market Wrap-Up
South East Asia As China’s growth slows and India’s future remains unpredictable, businesses are looking to ASEAN countries and their combined population of 625 million to pick up the slack. The aim of the ASEAN is to integrate the ten Southeast Asian economies, ranging from economically deprived Laos to the region’s biggest economy, Indonesia, who retain their top 3 position as the manufacturing destination in Asia and have a population of more than 250 million. ASEAN’s population expects to grow by approximately 120 million by 2030, adding to an abundant pool of labour that businesses are already taking advantage of, with many firms moving from China to Southeast Asian countries such as Vietnam, Asia’s fastest growing foreign direct investment location. In addition to this, Singapore is currently suffering from all-time productivity lows and aims to put their services sector as the driving force behind their economic growth starting with closer ASEAN markets integration. Singapore’s financial regulator has said that stock markets in Singapore, Malaysia and Thailand should develop trade systems allowing companies to connect with their clients more easily, to improve cross-border transactions to aid growth.
a disproportionate chunk of its economic growth, highlighting an unbalanced economy which their neighbour Singapore has been guilty of similarly. Almost all the recent boom in tourism has come from the overwhelming demand from China in recent years. However, with China seeking to make the transition from manufacturing to services and their slowdown in growth, a better integrated trading bloc such as ASEAN will therefore provide more opportunities for Thailand to reach out to Southeast Asia’s fastest growing economy, Vietnam, which is now experiencing 6.8% annual GDP growth, as shown in the graph below. However, there is a lack of administrative capacity within ASEAN; the staff in charge of implementing policies had a worrying budget of only $17m in 2014. The major concern is that ASEAN only accounts for 3% of global GDP although it consists of 9% of the world’s population. Therefore, the greatest challenge for ASEAN members is whether they can make progress of increasing integration between the ten Southeast Asian nations, or whether the underachievement continues and the focus shifts towards the Trans-Pacific Partnership. Alex Lam
In relation to services, Thailand sees little prospect of economic pickup due to a slowdown in the country’s vibrant tourism industry. For many years, Thailand has relied on tourism for
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Week Ending 6th December 2015
EQUITIES Retail Following on from last week’s black Monday centric report, retailers have posted relatively disappointing results from not only Black Friday, but also the following “Cyber Monday”. Whilst Black Friday and Cyber Monday have little bearing on a retailer’s yearly financial results, and even less on long term share price prospects, analysis of sales figures from retailers could provide an insight into the decision-making of consumers and the performance of retailers over the holiday period. The first notable fact about black Monday and cyber Friday is the continued prevalence of shifting consumer tastes in favour of online shopping. Matt Boss, a JP Morgan retail analyst, stated that “online clearly stole the show over the weekend”, a statement supported by most sales figures. For example, around 25% of sales on Black Friday, a day focused on physical retail sales, were online, with a total of 103 million US customers choosing to shop online, significantly more than in retail stores. This is congruent with general trends in the retail sector, for post-2000 online sales growth has been around 15% YoY, vastly outstripping both inflation and physical sales.
Online growth did not, however, translate into particularly impressive results for the retail sector as a whole on both Black Friday and Cyber Monday. Analytics firm RetailNext stated that combined online and in-store sales fell 1.4% relative to last year, adjusted for inflation. Whilst 1.4% is not necessarily statistically significant, and is not indicative of any particular changes in the retail industry, it is in line with retail equities as a whole in the year to date, in which sales have been “perfectly average” according to Dana Telsey, a retail analyst writing for CNBC. As such, it is difficult to predict any significant or notable changes over the holiday period, as the retail sector has been devoid of any significant structural changes throughout the year, with the exception of adjustments post-Walmart slump. As such, it is the author’s opinion that the holiday period shall retain the same unremarkable tint, and 2016 shall potentially hold more exciting news in this venerable sector. Jack Blake
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NEFS Market Wrap-Up
Oil and Gas After this week’s meeting in Vienna, OPEC raised its production ceiling to 31.5 million barrels of oil a day, which led to crude oil prices to fall more than 3%, to below $40 a barrel. Following the news, the UK’s benchmark stock index closed at its lowest level in more than two weeks on Friday, capitalised by the slump of all major heavyweight European oil companies. Shares of Royal Dutch Shell PLC (RDSA: LSE), for example, dropped 1.8% to $48.13 while BP PLC (BP: LSE) also gave up 2.4%. Among oil producers, Tullow Oil PLC (TLW: LSE) fell massively with a 5.4% decrease in its stock price, while Norway’s Statoil ASA (STL: OSL) dropped 4.6% and France’s Total SA (FP: PAR) declined 2.3%. Meanwhile, Sweden’s Lundin Petroleum AB (LUPE: STO) also slumped 2.8%, as it was under the additional pressure of a ratings downgrade from RBC Capital Markets, from sector outperform to perform. Oil equipment and services groups were also hit substantially, with Norway’s Subsea 7 SA (SUBC: OSL) decline of 5% and Seadrill Ltd.’s (SDRL: OSL) 5.6% drop. Petrofac Ltd (PFC: LSE), another provider of oilfield services, also lost 2.5%. All in all, the STOXX Europe 600 Oil & Gas Index (SXEP: INDEXSTOXX), a benchmark that offers exposure to large, mid and small
capitalisation energy stocks from European developed countries, declined by 1.98%, closing at 275 Euros, as can also be seen by the graph below. Passing onto more specifics, RWE (RWEX: GER) announced a radical action this week to adapt to Germany’s shift to renewable energy. As the second largest utility company in the country, RWE followed EON (EOAX.N: GER) in unveiling plans on Tuesday to divide renewables, electricity distribution and retail sales into a new company altogether, with a 10% stake due to be to sold to investors in an initial public offering next year. Analysts estimate that RWE can secure up to 2.5bn euros in proceeds from an IPO of its renewables business, and the company plans to invest half of this in wind and solar energy. By separating out the assets that have good prospects for growth, both RWE and EON, which is decentralising its fossil fuel and energy trading businesses into a separate company called Uniper, hope to be in a better position to raise money from investors. With this move, RWE is fighting to upturn a difficult year, with its shares losing more than half their value since January. Eon’s stock has also fallen 37% since the beginning of the year. Andrea Di Francia
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Week Ending 6th December 2015
Pharmaceuticals The NASDAQ Biotechnology Index fell by 2.4% and the FTSE 350 Pharmaceuticals and Biotechnology Index fell by 2.6% this week. Yet, on Wednesday, Morgan Stanley had upgraded a number of stocks in the industry, citing European equities as 'fairly priced'. Off the back of this news UK Pharmaceutical equities including GlaxoSmithKline, Shire and AstraZeneca rose by an average of 2.1%, but they had all subsequently resumed a negative position by the end of the week, as illustrated by GlaxoSmithKline's graph below. The industry lost out to investor uncertainty as most analysts remain cautious about pharmaceutical equities, despite the fact that some major analysts including Barclays and JPMorgan are becoming more confident. Star fund manager, Neil Woodford, had also expressed his belief that recent issues are only 'bumps in the road' by investing ÂŁ120million in Northwest Biotherapeutics. As speculated last week, it is apparent that the recent agreement between Pfizer and Allergan will negatively impact R&D. Despite highlighting its commitment to R&D in the UK when it proposed a bid for AstraZeneca in 2014, Pfizer has announced that it will close an early-stage
pain therapy research and development facility in Cambridge, leading to a loss of up to 120 jobs. This is perhaps more evidence to suggest that big Pharma will slowly curtail research led, organic growth by instead snapping up smaller companies and slashing costs such as R&D to ultimately increase profit. Yet, it is not all bad news on the development front. Astrazeneca updated investors on a late-stage drug pipeline during the middle of last week which helped to assure Morgan Stanley of its double upgrade of the stock. Morgan Stanley justified the upgrade by citing Astra's heavy investment into developing new drugs to offset its expiring patents, for which it is likely to soon reap rewards from. Given the fact that there are numerous restructuring headwinds facing the Pharmaceuticals sector in the short term, I predict that pharmaceutical equities, especially in the US, will fall slightly in the next few months. Investor sentiment and confidence remains shrouded because of certain deceptive tactics (most obviously price hikes and deceitful accounting practises), so I would assume that short-term growth will not yet emerge. Sam Hillman
GlaxoSmithKline PLC Share Price
Morgan Stanley upgrades GSK
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NEFS Market Wrap-Up
Technology Last Tuesday, Samsung announced that it has replaced the head of its mobile business for the first time in six years. The action arose as a result of falling smartphone sales, and the huge tech-firm is aiming to reverse this downwards trend, with the previous head of mobile research and development, Koh Dong-Jin, taking the former head’s position. Whilst being the leading producer of smartphones by sales, Samsung’s handset profits fell in the first half of 2014, which came a result of losing its shares in the low-end of the market to Chinese competitors, and facing a resurgence in Apple at the high-end. With competition high, and increasingly intensifying, it’s inevitable to see a shift in management at the South Korean company. Furthermore this is hugely understandable given that, whilst this year’s third quarter operating profits rose yearon-year, reaching $2.06 billion, Samsung’s global market share in smartphones has fallen from 33% to 24%.
market value and capitalisation, with a median target for the share price forecast of $790.50 within the next 12 months – a massive 43.86% increase on this week’s closing price of $549.50 as shown in the graph below Indeed, with this year now coming to a close, it seems appropriate to predict and forecast the future trends of more of these technological firms. Through evaluation of this year’s performance and analysis of upcoming product releases, we can review the best predicted performances over the next 12 months. Facebook has experienced a yearly rise of 39.88% in their share prices, and this progress is projected to continue with a forecasted median price target of $125, which is an increase in the current value of $105.25 by 18.26%. Meanwhile, Apple possesses a median estimate representing a 30.21% increase from the current $115 to the predicted $200. These two companies, alongside Samsung, are the top technological companies regarding future performance, and so each create opportunity for a great investment and for what is ultimately an excellent return through dividends in addition to the future sale of these greater-valued shares.
Looking at next year we can see no significant driver for sales in Samsung’s smartphone division, but with a hugely anticipated launch of phones that feature flexible screens (most certainly to be released in 2017) Samsung remains the competitive tech-giant that it is. As a result we should, given a lack of negative shocks, expect steady growth in the company’s Samsung’s Forecasted Growth
Daniel Land
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Week Ending 6th December 2015
Industrials & Basic Materials Ball Corporation has announced that it is planning to sell around ₏1.5 billion worth of bonds as it seeks to raise funds to complete its takeover of UK can maker Rexam. The threetranche notes offering have maturities in 2020, 2023 and have a Fitch rating of 'BB+'. The merger would create synergies, better manage capital spending and cut costs. The European Commission, however, fears that this deal would push up prices for companies and consumers. The creation of the world’s biggest drinks can manufacturer, with $15bn in annual revenues and 60% of the beverage can market in North America, 69% in Europe and 74% in Brazil, would raise regulatory issues and likely require disposals in some regions.
massive company after the merger. Thus, this merger will improve Ball's competitive position to better optimise beverage can prices to customers relative to other alternative packaging substrates. The merger will also allow the company to tap onto additional geographies and new customers, increasing Ball's exposure to growing beverage segments along with the ability to take advantage of specialty package technology and efficiencies. The financial standing of the company would be immense, with approximately $15 billion in revenue and $2.4 billion in adjusted EBITDA. Analysts also believes Ball should have opportunities to exceed the net synergy target of $300 million on an annual basis.
Ball is prepared to divest four factories in Germany, three in the UK, one each in Spain, France, the Netherlands and Austria. Nine of the plants make cans and two of them can ends. This offer was submitted to the Commission last week.
Ball's shareholders has approved the transaction in July 2015 and the transaction is expected to close in the first half of 2016 and is subject to approval from Rexam shareholders, regulatory approvals and customary closing conditions.
Ball will be able to materially improve its risk profile, profitability and financial flexibility and strength, owing to the combined capabilities, production efficiencies and scale of this
Rexam’s share price has been slowly creeping up since news of the merger and closed at 597.07 on Thursday closing. Erwin Low
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NEFS Market Wrap-Up
COMMODITIES Energy Energy Prices have slipped slightly this week as OPEC agreed to keep pumping near to current production levels, despite a global oil glut. Oil futures dropped on Friday, with the US benchmark briefly falling back below $40 a barrel and 1.4% for the week. The other main oil benchmark - Brent crude futures – fell similarly over the week at 1.6%, while both Natural Gas and Heating Oil dropped 1.5% and 0.4% respectively. Cartel members meeting in Vienna on Friday 4th December made no mention of a production target in the final stages of their meeting. OPEC President Mr. Kachikwu told reporters that “members saw no need to mention a hard figure but that there had been agreement to maintain a ceiling that reflects current actual production.” This roll-over policy adopted by OPEC had been widely expected, even though there was pressure from poorer members of the cartel for a cut in output to prop up the price of oil. Despite this expectation, there was a strong market reaction to the news, with WTI Oil falling 3.5% for the day, by far its biggest tumble this week. While the official OPEC ceiling is 30 million barrels a day, the number is largely symbolic, as the organization has been overshooting it for months. In September, OPEC produced 31.57
million barrels a day, according to its own data. Anticipate this trend to continue over the coming months as OPEC won’t meet again until June 2, 2016 to reassess policy. With the purpose behind OPEC’s policy being the preservation of their market share, the main reason behind this continuation of policy stems from evidence that it’s working. Data recently showed that the number of active US oil-drilling rigs fell by 10 to 545 as of Friday. Furthermore, they’re down by 1,030 compared with last year. In other news, Gasoline plummeted 8.5% for the week as a re-stabilisation from last week’s dramatic price increase due to limited supplies in North-eastern America ahead of Thanksgiving. Falling to pre-limited supply levels, Gasoline has equilibrated back with the rest of the market and general trend. Over the coming month there is an expectation that prices of oil will thus remain relatively low due to this policy roll-over. However, I believe that Natural Gas and Heating Oil prices will increase since consumers will generally stay indoors for the festive period and winter weather typically intensifies. Harry Butterworth
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Week Ending 6th December 2015
Precious Metals This week we have seen the same trend looming over the precious metals sector as investors around the world await the upcoming meeting of Janet Yellen’s decision. Gold in particular has seen some short term fluctuations this week due to the strength of the US Dollar but still remain at its lowest levels since early 2010. Gold prices hit multi-year lows and yet bounced back on Thursday 3rd December after the hawkish comments from the Federal Reserve chairwoman Janet Yellen and positive US economic data lifted the US dollar against major currencies. Spot Gold was last at 1,050.50 USD/oz., down $3.30 from Wednesday’s closing price but bounced to 1063.33 USD/oz. (See Fig. 2 between 2nd Dec and 3rd Dec) This can be attributed to the announcement made after this Thursday morning, 3rd December news published that the European Central Bank would lower interest rates to historic lows to further stimulate the region’s economy. Another reason can be attributed to the speculation of the strength of US Dollar by investors, as seen from the Dollar Index (Fig. 1). A fall in the Dollar Index pushed Gold prices higher due to the
correlation between stronger US economic data and the likelihood of an interest rate hike. Silver prices have followed the same trend as Gold prices, dropping significantly before bouncing back, fluctuating between the 14.16 USD to 13.90 USD range. On the other hand, prices of Platinum and Palladium have dipped this week: Platinum fell from 852.8 USD to 831 USD and Palladium fell from 557.1 USD to 528.6 USD. Some of the precious metals have seen a short term decline, and this can be attributed to the investor’s speculation over the key decisions made by both the Federal Reserve and the European Central Bank. It is unlikely that Gold will continue to rally as we will have to wait for the FOMC meeting on the 17th and 18th of December 2015 for the long awaited decision of an interest rate increase. The dollar index is a strong indicator of how well US economy is doing and it would be critical to observe this trend. Samuel Tan
Dollar Index (Fig. 1)
Gold Price Trend (Fig. 2)
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NEFS Market Wrap-Up
Agriculturals As forecasted last week, the trend in cotton prices changed once the festival weekend ended. The reduced interest in buying by mills and spinners initiated a decline from the peak at $63.93/lb on the 27th November down to $60.43/lb on the 3rd December. The International Cotton Advisory Committee (ICAC) reported a slowing increase in global demand for cotton, irrespective of the global population growth. ICAC concludes that this tendency can potentially result in 2015/2016 imports decreasing by 3% relative to 2014/2015 cycle. As we are approaching the end of the year, this week I would like to provide an overview of the agricultural news in 2015 and the likely futures in January 2016. While dry weather usually is a factor shifting agricultural prices upwards, it had quite an opposite effect on lean hog (and meat in general). Figure A illustrates a steady devaluation since June, when the price reached $84.35/lb, up to 3rd December, signifying a sixmonth low at $56.275/lb. The identified cause includes rising animal feed costs, especially after sudden price jumps in June, October and November (Figure B). Persisting poor weather conditions resulted in lowered yields of animal feed.
slaughtering of animals instead and avoid extended unprofitability. According to Paul Makube, senior economist at FNB, this increase in supply will reduce prices not only over the festive season; it is also likely to reduce meat prices between 8 to 15% in December and January 2016. Kona Haque, head of research at ED&F Man, concluded that price fluctuations in agricultural goods such as wheat and soya beans were highly affected not only by the dynamic weather or the level of production. This time the explanation emphasises the impact of currency exchange rate stabilities on the prices. As the US dollar remained at a relatively strong position, the relative prices of these goods fell by an average of 28.3%. In contrast, the Brazilian Real weakened, and the outcome resulted in the respective price appreciation of 32.5%. This factor had a significant effect on redistribution of the agricultural market. US exports are already decreasing and, according to the Department of Agriculture, will continue to do so. Although the outcome in Brazil is more favourable for local farmers, Brazilians experience a sharp rise in input prices as well. Consequently, farmers’ profits will be reduced, forecasting yet another shift in the market distribution. Goda Paulauskaite
As the cost to feed the cattle still keeps steadily rising, farmers more often choose to increase
A
B
Rapid price jumps
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Week Ending 6th December 2015
CURRENCIES Major Currencies By Thursday morning, Ahead of the ECB policy meeting, EUR/USD was pushed further towards a 7 month low, where it hovered around the 1.0545 level, as investors digested further signals of divergence between central banks in the US and Europe. However, Euro short positions have built up to the point where there is little room left to sell into, unless the ECB comes out with action far exceeding market expectations. At 12.45pm the ECB policy meeting details were released; the decision was made to cut interest rates by a further 10 basis points to 0.3%, as the central bank attempts to inject life into the Eurozone’s struggling economy. It was also announced that ‘further policy measures’ would be released during a news conference later where Mario Draghi would speak; a reference to expected changes it might make to its 60bn euro quantitative easing measures. In the immediate trading following the 12.45pm release, the euro shot up to 1.0625, before meeting resistance at 1.0725. Later that day at 1.30pm, Draghi then announced in his speech that the ECB was to launch a new stimulus package to boost the Eurozone; the programme would be extended
by 6 months to March 2017, or ‘until the EBC council sees a sustained adjustment in the path of inflation’. He added that the ECB would reinvest the proceeds of the bonds it is holding as they mature; and would now be prepared to buy regional and local government debt from within the euro, as well as sovereign bonds. The ECB said it would leave other interest rates unchanged, including the key refinancing rate, which ripples out to borrowers across the economy. This rate has already been slashed to just 0.05%. Stephen Macklow-Smith, head of European equities strategy at JP Morgan Asset Management, said that the ECB was trying to “do three things: maintain euro weakness, keep interest rates lower for longer and boost liquidity with a view to stimulating credit”. GBP/USD continues its 7 month sideward trend, ranging in the 1.50-1.59 zone, although we are now seeing the pair test the 1.50 support level, as it was breached for the first time on Wednesday and Thursday. The greenback is facing a wave of selling across the board on the back of sudden Euro strength, despite the ECB’s decision to cut the deposit rate. Adam Nelson
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NEFS Market Wrap-Up
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