Week Ending 14th February 2016
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 Middle East
Equities 15 Financials Retail Technology Pharmaceuticals Oil & Gas
Commodities 20 Energy Precious Metals Agriculturals
Currencies 23 EUR, USD, GBP
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Week Ending 14th February 2016
MACRO REVIEW United Kingdom Latest figures show that in December 2015, industrial output in the UK fell by 1.1%, which is the largest monthly fall the index has seen in over three years. A combination of factors have led to this, including the fall in oil prices, warmer weather that reduced the demand for heating, and weak manufacturing output. This adds to ongoing concern about the UK’s reliance on services, and helps to explain why the trade gap has reached a new record - a £125 billion deficit in goods and a £90.3 billion surplus in services, as seen on the graph below. David Kern, Chief Economist at the British Chambers of Commerce, said that to improve trade, the government needs to place more emphasis on helping small businesses to export, and to assist companies to enter new markets. The trade deficit is also acting as a drag on economic growth. The Confederation of British Industry (CBI) lowered their GDP forecasts to 2.3% in 2016 and 2.1% in 2017, down from 2.6% and 2.4% respectively. This follows last week’s downward revisions to the growth forecasts in the Bank of England’s Inflation Report. Despite this, the Director General of the CBI said that “the UK is likely to remain among
the fastest-growing advanced economies”, as the UK’s direct exposure to some of the major global headwinds are limited. For instance, stock market investment in the UK tends to be done via pension funds or insurance companies, so there is not much of a direct effect on households from share price volatility. Furthermore, China is not one of the UK’s primary export destinations, so the slowdown in growth over there may not have much of an impact on the UK’s exports. Weak UK growth could delay a rise in interest rates, or even lead to a decrease. Although markets expect a rate rise in 2017 or 2018, the Economist Intelligence Unit predict a rise only after at least 2020. They believe this will be prolonged due to unresolved structural weaknesses in the UK economy such as low productivity and slow wage growth, alongside weak global growth and unstable global markets. Stock market volatility means investors are looking for alternative places to keep their cash, with government bonds and precious metals high in demand. The UK’s 10year government debt is at a record high, with the yield falling to just 1.29% on Thursday. Shamima Manzoor
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NEFS Market Wrap-Up
United States The once unimaginable scenario to most economists, may soon be seen, with the US following the footsteps of Japan and Switzerland to produce negative interest rates. The US Federal Reserve will need to play an astonishingly canny hand in the coming weeks amidst the bolstering speculation around an interest cut. Janet Yellen, chair of Federal Reserve, has stressed that such a move is hypothetical but “remains on the table”. The largest US banks were recently demanded to produce models examining how their balance sheets would perform under the event of negative stress tests, an “adverse market scenario” where the three month treasury bills falls to minus 0.5% for a long period. Such actions carried out by authorities certainly help to harness the speculation into a reality. The negative interest rate may be implemented by charging banks to hold reserves at the Central Bank, which would encourage banks to earn a positive return by instead creating loans for consumers and businesses. Overall, this may spur spending within the economy, as borrowing becomes more affordable. However, there are several reasons to be sceptical here. The fed reacting in a way knee-jerk motion
following the recent hike in interest rates could destabilise expectations. This holds true specifically for the private sector which is already facing uncertain conditions given volatility from oil exporting countries abroad. A hit to the hard earned credibility is the last thing the Fed would want right now. Despite the ambiguity, the week was generally a positive for the American consumers. As shown on the graph below, US import prices fell by 1.1% in January for a seventh straight month since reaching the annual peak in mid-2015. The US Labour Department has attributed the considerable decline to the decreasing cost of petroleum products alongside a strong dollar which undercut prices for a range of goods. The US commerce department on Thursday reported a 0.6% increase in US retail sales excluding automobiles, gasoline, building materials and food services after an unrevised 0.3% decline in December. Such macroeconomic conditions point to periods of weak inflation in the near term. The rebound in retail sales brings optimism but households remain cautious given the uncertain economic outlook. Vimanyu Sachdeva
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Week Ending 14th February 2016
Eurozone The Eurozone economy notched up modest growth in the final three months of last year, showing that the bloc has little muscle to shrug off the globe's mounting economic problems. Recovery remains disappointingly weak after Greece fell back into recession and Italy slowed to near stagnation. After a week where stock markets around the world plunged, the 19 countries using the Euro failed to lift the gloom with data showing that growth of its gross domestic product was just 0.3% in each of the final two quarters of 2015. On an annual basis, the Eurozone expanded by 1.5%, down from 1.6% three months earlier, suggesting growth remains weak despite the European Central Bank’s stimulus measures and the positive impact of cheap oil. Greece was the worst performing member of the Eurozone, with GDP falling by 0.6% in the last three months of last year. That followed a steep contraction of 1.4% between July and September, when capital controls were imposed and its banks were shut. Germany, the Eurozone’s largest economy, grew by 0.3% in the last quarter. Domestic demand was solid, but foreign trade had a negative impact on growth with exports falling faster than imports. Italy was the big disappointment, with expansion slowing to just 0.1% against
predictions of 0.3% growth. Italian growth has slowed steadily through 2015, since managing growth of 0.4% in the first three months. This will add to pressure on the European Central Bank to ramp up its 1.5-trillion-euro money printing scheme to buy chiefly government bonds when governors meet in March. Having spent much of their firepower, however, options are limited. The data painted a bleaker picture for European industry, from car-making to mining. Industrial output fell 1% month-on-month in December - a 1.3% year-on-year fall. This was worse than expected by economists who had predicted a 0.3% monthly rise and a 0.8% annual increase in production. Relative calm returned to world markets on Friday after a hurricane-force week that wiped billions off share prices and saw investors dash for shelter in top-rated government bonds and gold. European stock markets rallied on Friday morning, after days of heavy losses. The Stoxx 600 index has shed 15% of its value this year, with bank shares hitting their lowest levels since the 2008 financial crisis. Erwin Low
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NEFS Market Wrap-Up
Japan One of the ways in which the BoJ hoped that cutting interest rates into negative territory would improve Japan’s inflationary prospects was by weakening the value of the yen and, therefore, making exports cheaper and increasing firms’ overseas profits. Due to global market turbulence, however, many investors, who see the yen as a ‘safe haven’ currency, have been moving their money out of relatively more risky economies and into Japan. As a result, the yen has appreciated and the BoJ’s credibility has been called into question. Another reason which may be responsible for the paltry performance of the BoJ’s negative interest rates policy is that interest rates around the world are also extremely low or negative. In this respect, the effectiveness of the policy may be further compromised if the Federal Reserve pauses its December rate rise. Last Sunday the figures for average cash earnings in December were released; they showed that average cash earnings in Japan, which were forecasted to rise by 0.7%, rose by 0.1% in December, reflecting, as we can see in the graph (shown below), a long term trend. Figures for the producer price index, which were expected to show it falling by 2.8%, were released on Tuesday and showed that it had
actually fallen by 3.1% in December. The producer price index is a leading indicator of consumer inflation and, therefore, it is unlikely that consumers will feel significantly worse off in the short to medium term, however, this will be distressing news for the BoJ as it only worsens fears about contraction in the Japanese economy. We will, mostly probably, have to wait until the BoJ hold their next monetary policy meeting, which is scheduled to take place in March, to see how they react to recent events, however, short of intervening in the setting of the exchange rate, as some have suggested they may do, it is hard to see what options they have left; cutting interest rates further would be unlikely to have a meaningful effect and would increase the pressure on bank’s profit margins, while quantitative easing seems to have been pushed to its limit. Although authorities in Japan may be able to take specific measures to relieve the desultory economic prospects facing its economy, when their situation is viewed in the context of the global economy it seems that it is merely a symptom of a wider problem. Daniel Nash
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Week Ending 14th February 2016
Australia & New Zealand There was a remarkable improvement in Australia’s Westpac Consumer Sentiment, also known as Australia’s Consumer Confidence Index, this week. From -3.5% last month to a 4.2% result this month, the optimists came out on top. The indicator is based on the responses from 1200 adults across Australia and the survey is carried out the week before the results are released. There are five sub-indices which compose the index, family finances versus a year ago, family finances in the next 12 months, economic conditions in the next 12 months, economic conditions in the next 5 years and whether it a good or a bad time to buy major household items. The -3.2% figure from last month owed to the respondents’ “concerns with the sharp falls in share markets and the oil price from the beginning of the year”, as stated by Bill Evans, Chief Economist at Westpac. Oil prices had been down 20% and Australia’s share price index had fallen by 8% since the beginning of 2016 to the last day the survey was taken. The recovery this month is a result of the respondents’ relief not to have witnessed a continuation of such steep declines.
In New Zealand, the Business NZ Performance of Manufacturing Index came to a 15-month high. The index was revised upwards from 57.0 in December 2015 to 57.9 in January, as shown by the graph below. Production was up at 60.3, employment in the sector increased to 54.9 and deliveries grew to 58.4. New orders grew at around the same pace whilst finished stocks growth slowed down, an overall improvement across three of the five sub-sectors of the index. New Zealand’s manufacturing sector has been expanding since October 2012 and is still going strong. In December 2015, manufacturing sales increased by 3.2% and the Manufacturing Index grew by 1.5 points in December 2015. However Craig Ebert, Senior economist at the Bank of New Zealand stated that manufacturing was not running at the same speed in every sector, evidently printing, publishing and recorded media are lagging behind those seen as more “robust industries”, such as food and beverages. Meera Jadeja
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NEFS Market Wrap-Up
Canada This week the Bank of Montreal announced its assessment on several economic aspects of the Canadian economy. The senior economist at the Bank of Montreal, Sal Guatieri, revealed his prediction that the provinces of Newfoundland, Alberta and Labrador will remain in a recession at least until December 2016. He has a slightly more optimistic outlook for 2017, where he believes these provinces will record low but positive GDP growth rates, mainly due to oil revenues being larger for next year. He also predicted that the provinces of British Columbia and Ontario will record moderate GDP growth rates in 2016. In the announcement, the Bank of Montreal stated that they also believe that the Bank of Canada will cut its interest rate within the next few months, the Canadian interest rate is currently at 0.5%. The senior economist at the Bank of Montreal stated “The Canadian economy remains weak due to sharp reductions in investment and income in the oilproducing regions and further declines in the mining sector”. Canada’s unemployment rate is currently at 7.2% and it has been predicted that it will not decrease below 7.0% in 2016 due to the energy sector cutting jobs. It has been forecasted that 100,000 jobs were lost throughout 2015 in the energy sector, this was mainly due to the low price of crude oil and policy uncertainties.
In other news this week, the Canadian Prime Minister Justin Trudeau announced that his government may fail to meet his Liberal party’s pledge to eradicate the Canadian budget deficit by 2019-2020. He stated that “If we look at the growth projections for the next three or four years, it will be difficult (to return to balance)”. Moreover, the Liberals have failed to meet the promise of a $10 billion shortfall cap for its 2016 budget (during the Canadian election the Liberal party promised to keep the budget deficit below $10 billion). He insisted that they would still meet the target of reducing the debt to GDP ratio in every year that his party are in power. In a separate statement, the National Bank of Canada reported that the current government could generate a budget deficit of over $90 billion over the four years it has been voted into power for. This prediction has been made due to the poor performance of the Canadian economy over the last year and the Liberal government’s promise to spend billions in expansionary fiscal policy. During the election campaign the Liberals promised to spend $38 billion over the next four years. A large proportion ($17.4 billion) has been allocated to infrastructure to help growth rates and create jobs. Kelly Wiles
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Week Ending 14th February 2016
EMERGING MARKETS China The first day of the Chinese New Year fell on Monday earlier this week, with bank holidays declared for the entire week. It is customary for family members to return home for the New Year, especially for a reunion dinner on the eve of the first day of Chinese New Year. The 40day New Year travel rush began late last month and is often described as the greatest annual human migration on earth. It is expected that Chinese travellers will make more than 2.91 billion journeys this year. Many are moving from the manufacturing heartlands to their rural roots. The effects of the halt in trade and production reach far beyond Chinese shores and can affect weeks of business globally. Many workers also use this time to look for new jobs, further disrupting production as new workers have to be trained. The only economic data out this week came from the People’s Bank of China (PBOC). The PBOC reported that foreign exchange reserves shrank less than expected by US$99.5 billion to US$3.23 trillion in the first month of the new year, as shown in the graph below. This was slightly lower than the previous month’s decline of US$107.9 billion, the highest ever recorded. Reserves in China reached an all-time high of
US$3.99 trillion in June 2014. Policymakers have been depleting foreign exchange reserves, by selling US dollar holdings, to stem currency depreciation pressure. The Chinese currency hit a 5-year low in January amid slowing economic growth, tumbling stocks and rising outflows. The lack of a counter-balancing force of capital inflows against outflows, due to barriers to entry into the Chinese markets, have hastened the decline in foreign exchange reserves. Data released from China, or from other nations that are heavily dependent on the Chinese economy, over the first two months of the year should be taken lightly due to the large disruptions that occur during this period. The closure of financial markets has also presented Chinese officials with an opportune moment to release expectedly bad economic data to limit panic in the markets. It remains to be seen whether the PBOC can maintain the rapid rate of foreign exchange reserve declines should the currency continue to fall. Political reform may be a more effective antidote. Sai Ming Liew
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NEFS Market Wrap-Up
India This week saw India consolidate its position as the world’s fastest growing economy, recording a growth rate of 7.3% for the final quarter of 2015, as shown below. Coupled with the impressive full year average rate of 7.5%, the figures are good news for Prime Minister Narendra Modi who has aggressively pursued an agenda focussed largely on development. Other figures however are not so flattering, with manufacturing and industrial production both contracting and, inflation unexpectedly accelerating to a 17 month high of 5.69%. The growth rate finally allows us to now confirm that India is comfortably outpacing China, which most recently recorded its lowest growth rate in 25 years. However, whilst the data paints a rosy picture for India during a difficult time for most emerging markets, there is also scepticism surrounding the validity of the numbers. Many analysts have argued that imbalances within the economy contradict the healthy growth rate being publicised by ministers. Dire export figures in particular, as discussed in previous weeks, do not support what the figures are saying. Growth is also being primarily driven by consumer demand and debt-fuelled public spending, which is worrying given the steadily rising inflation rate, which is now dangerously close to the RBI’s 6% target. Despite attempts at a revival by the government, private capital investment promises to remain dormant and output in both manufacturing and infrastructure declined 2.4% and 1.3% respectively.
There is also uncertainty surrounding the recent changes made to the method through which data is measured. This alteration resulted in sharp increases in the recorded rates for Q1 and Q2 from 7% to 7.6% and 7.4% to 7.7% respectively and although the revisions may be a valid outcome of the new approach, the extent of revisions combined with a lack of understanding of the new method does make the task of interpreting the data more difficult than usual. We must also remember that growth is not all encompassing, and closer analysis of the data shows that the consumer spending, which drove growth in the last quarter, was made up extensively of urban consumer spending, more than compensating for rural spending, which was very subdued. Given that the majority of India lives in the rural areas, their exclusion from the growth process erodes its success. If the figures are taken at face value, then India looks to be in a strong position, but deeper analysis merely reiterates what is already apparent: reforms need to be implemented rather than just advertised, and further private investment must be encouraged. Publishing a flashy growth rate is not enough to convince the world that India is the bright spot that it wants to be. Homairah Ginwalla
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Week Ending 14th February 2016
Russia and Eastern Europe Whilst many countries in Western and Central Europe are facing increasing unemployment rates and calling for an end to the Schengen Plan, Eastern European states are making a plea for ‘any able-bodied’ workers to enter their depleted labour force. Over the past few years, millions of young workers have left Eastern Europe in search of higher wages, causing a surge in job vacancies and a substantial brain drain. Poland, for example, is struggling greatly to meet employment demands, with unfulfilled job vacancies increasing over 20% last year. As seen in the graph below, job vacancies have continued to grow, year-on-year, since 2011. Whilst some argue that border controls will reduce Eastern Europe’s shortage of labour and increase the quality of labour available, many fear the detrimental impact it will have on Western European economic growth. Another solution would be to import labour from countries outside the EU, such as the Ukraine, however this will merely spread the problem. Wages in Eastern Europe could also be forced to rise, however as has been seen in Poland (where wages have doubled to $8,222 since EU membership), this has driven up production costs, leading to reduced investment and poor trade. Consequently, any solution to Eastern Europe’s labour shortage will doubtlessly call
into question some of the most basic principles of the EU’s founding. As Russia’s economy continues to worsen as the year progresses, the Kremlin this week has hence devised various new strategies to support its ailing industries. Whilst all ministers are still expected to cut their spending by 0.9% of GDP, the government will now issue various types of government grants and contracts to companies (especially in the industrial sector), instead of bank loans. Subsequently, the Government can decide who receives the money and the enterprise will receive the money directly. Additionally, the Kremlin wishes to put into action a stimulus plan for Russia, which will include spending 828 billion Rubbles on the car, railway, construction and agriculture industries. Whilst this plan is highly feasible considering Russia’s extremely low debt, which currently stands at 12% of GDP, international sanctions prevent Russia from borrowing this money. Nonetheless it can be hoped that if the Kremlin wishes to see a flourishing economy that can be borrow money, by having the sanctions removed, then Russia may be incentivised to abide by European conditions. Charlotte Alder
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NEFS Market Wrap-Up
Latin America As discussed in a previous article, China has been heavily involved in Latin America, with the majority of all Chinese finance going into infrastructure and manufacturing. In said article China was funding a $15bn scheme to build two nuclear power plants. Chinese development bank finance couldn’t come at a better time for Latin America, as the region is experiencing a significant downturn and other sources of finance are drying up. China’s two development banks, the China Development Bank and the Export-Import Bank of China, have provided upwards of $29bn to Latin American governments in 2015, according to new estimates published by Boston University. Western-backed development banks and the private sector are on the retreat from Latin America, so China’s development banks are coming to the rescue, at least for now. This is highlighted by the fact that both the World Bank and Inter-American Development Bank cut lending in 2015 by 5% and 14% respectively. It is estimated that Latin America needs $170bn to $260bn per year in infrastructure finance so these cuts could not be coming at a worse time. In contrast, most economists would agree that such downturns more than justify an uptick in development bank finance.
witnessed. What’s more, China’s 2015 finance to Latin America was more than the World Bank, Inter-American Development Bank, and the Development Bank of Latin America combined. The majority of the loans went to Venezuela, Ecuador and Brazil - the countries facing the harshest downturns in the region. Barbados, Costa Rica, and Bolivia also join the list. However, this borrowing comes at a price, and the onus is on Latin American governments to translate this new finance into economic growth that is socially inclusive and environmentally sustainable. If they don’t, they will be left with ever more debt to the Chinese, to their own people, and future generations. In other news, Argentina’s bid to end the country’s financial blockade was slammed by its hedge fund nemeses. On Thursday, Argentina requested the removal of an injunction that prevents it from paying its creditors without also paying the “holdouts” who refused debt restructurings following its 2001 default. As expected, at least four of the biggest holdouts were not happy, and chairman of Aurelius Capital Management went as far as saying, "This is a baffling continuation of the failed strategy of the past”, so this jousting match will be an interesting one to follow in the coming months. Max Brewer
It is astonishing, as a three-fold increase of Chinese lending from 2014 has been
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Week Ending 14th February 2016
Middle East Pressure for a currency devaluation is mounting in Egypt as foreign currency shortages are hitting local businesses relying on imported inputs. Egyptian foreign currency reserves have dropped from $36bn on the eve of the anniversary of the 2011 revolution that overthrew former president Hosni Mubarak, to $16.48bn at the end of January this year. As seen in the graph below, it has also sharply declined in last year, falling to $16.36bn from $20.55bn in the space of 6 months. The reason behind Egypt’s diminishing foreign currency reserves lies in five years of political turmoil, which has seen foreign investment and tourism plummet, curtailing the inflow of dollars. Moreover, declining receipts from the Suez Canal - as a result of slow global trade - have further worsened the currency shortage. Egyptian businesses complain that the dollar shortages have been compounded by central bank measures to shore up the value of the Egyptian pound, as it attempts to conserve currency reserve levels while it destroys the black market in foreign currency. These parallel markets undermine the Central Bank’s fixed exchange rates by selling in a free market, allowing for changes in the exchange rate outside of the their control.
One such sector to have been deeply affected is the pharmaceuticals industry. Osama Rostom, deputy head of the chamber of pharmaceuticals industries, said the need to source dollars on the parallel market to pay for imported inputs has increased the cost of some medicines beyond the sale prices fixed by the government. Hamdy Abdel Aziz, head of the engineering industries chambers, said a devaluation of the pound would be beneficial as it “provides relief [to local businesses] and at least increases our exports”. Furthermore, since mid-2013 the Egyptian pound has strengthened against the euro, the currency of one of Egypt’s main export markets. A devaluation of the currency will ensure a drop against the euro, thus making Egyptian exports attractive again. However, many analysts have argued that Egypt would in fact gain little from a currency devaluation since there will still be no demand for its products. Therefore, any devaluation would do little more than widen the current account deficit. Harry Butterworth
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NEFS Market Wrap-Up
EQUITIES Financials This Thursday saw global financial markets enduring another period of turmoil with announcements that more central banks are to impose negative borrowing rates on banks, resulting in greater costs. Only two weeks on from the BoJ reducing its interest rate to negative, we see others following suit, with Sweden’s Riksbank cutting its main overnight borrowing rate to minus 0.5% (from its previous rate of minus 0.1%) in an attempt to stimulate what has been a poorly performing economy amongst the debt-embedded European Union. But it seems apparent that the BoJ’s demise into the negative territory will not stop there, with investors anticipating a further drop in rates from both them and the ECB, in hopes of higher inflation. This uncertainty within the investment world is continually intensifying as more unfavourable news is announced, and this creates concern surrounding equities. As a result, investors sold off shares sharply, with the FTSE All-World stock index down 20% from last year’s peak. Additionally, the Stoxx 600 European banks index fell 6.5% to its lowest level since 2010 (at the midst of the Eurozone Debt Crisis), with the S&P 500 also encountering a sharp decline due to broad losses for US companies.
light in the form of some EU banks with both Deutsche Bank and UniCredit posting sharp gains, sparking a rebound in shares. This rally in EU banking shares arose as Deutsche Bank announced that they will consider buying back several billion euros of its own debt, whilst assurance from senior bankers and politicians provided forward-guidance on the European banking sector, stating that it is far healthier than the media implies. Indeed, as shown by the figure below, this boost in investors’ confidence saw shares in Deutsche Bank jump 14%, whilst UniCredit rose 10%. Even Credit Suisse had temporarily bounced back 4%, but it seemed that the fall in their revenue over the previous quarter imposed a greater severity than initially thought, with shares closing the week at a lower 13 Swiss Francs. With more rates becoming negative in a hope to stimulate greater inflation and to boost global economic performance, a recession seems increasingly probable, and it’s a fear amongst investors of such an occurrence that is driving down the equity markets across the world, and so for now, the financial world sits in a fragile state. Daniel Land
But with the financial world seemingly collapsing, risking another recession, we see
Figure: Deutsche Bank (Orange), Credit Suisse (Blue), UniCredit (Red)
UniCredit DB
CS
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Week Ending 14th February 2016
Retail Unsurprisingly, Retail shares have dipped slightly in the past week, given that investors are fearful of a widespread recession. Nevertheless, they have not fallen by as much as they did over Christmas, as the FTSE 350 Index was down by only 0.7% by the end of the week. The index had been uplifted towards the end of the week by some rather promising retail data indicating that spending growth surprisingly hit a four-month high in January. The report by the British Retail Consortium indicated a spending increase of 3.3% in January compared to a year ago, suggesting that consumers are taking more of an advantage of post-Christmas sales. FTSE 100 retailers such as DIY chain Kingfisher and clothing giant Next were up 3% and 2.5% respectively, following the promising data. This comes as a surprise to many, especially considering that the price of a Next share was previously down since Christmas by almost 11%. That dip reflected its lagging online investments which US hedge fund Lone Pine Capital had this week cited as a reason to bet ÂŁ60 million against the retailer. Steve Mandel, the billionaire who controls the fund, explained that his 2016 investment strategy is based around the growing influence of the internet
continuing to significantly dismantle the conventional retail sector that companies like Next rely on. Sainsbury's has also recently been in the news. It plans on acquiring the retail group that owns Argos, although the graph below shows that investors remain sceptical, so much so that the share had fallen from Tuesdays peak following the positive data. It also suggested that it will no longer offer promotions in store due to changing consumer behaviour. This approach assumes that consumers are now more interested in attaining goods at lower regular prices rather than buying promotional items in larger quantities. In fact this is nothing new, as Asda did the same in 2012, regarding the alternative approach as better suited to the British habits of strict budgeting. Overall, this week could've been a lot worse for retailers considering huge losses experienced throughout the markets as a whole. Stronger than expected retail data somewhat improved retail equities but wider economic sentiments still prevailed in the end by dragging them down back down. Sam Hillman
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Technology The NASDAQ 100 fell almost 3% midweek due to the announcement from the head of the Federal Reserve, Janet Yellen, that the US economic outlook is not as strong as they had hoped. Technology news was also dominated by the UK government’s enquiry into Google, regarding tax evasion. After a six-year audit of the company’s accounts, the government negotiated a £130 million deal with the technology firm. However, following public uproar, the UK government has begun further interviews with executives of the company. Elsewhere, Nokia’s shares began to slide further after it announced that it expected future profits will be lower than previously thought this year. The Finnish company has pointed to the Chinese slowdown as a reason for these predictions. The Chinese middle-class has been growing for decades, due to large increases in wealth, thus there has been greater demand for telecoms. However, as there are signs that the economy may not be as healthy as predicted, such as the stock market crash, Nokia expect the roll-out of a 4G network
to slow. This news caused the company’s share price to fall 6% on Thursday to 5.11p. This reflects the company’s struggles in recent years, after it has been all but pushed out of the mobile telephone network and is in the process of becoming a telecoms equipment maker. The electronic car maker, Tesla, on Thursday brought a halt to its share price slump after announcing it expected sales to improve in the coming year. As the chart shows below, since the beginning of the year, shares have fallen 37%, mainly due to sales expectations not being hit. However, the company has said it will be launching its first mass market car this year, the Model 3, which they expect will increase car sales this year to 80,000-90,000, up from 50,658 in 2015. Having said this, in my opinion, with oil prices remaining low and the globally economy in uncertainty, I doubt many consumers will look to purchase the luxury of an electric car. Therefore, I would be cautious when investing in Tesla. Sam Ewing
(Chart showing the decline on Tesla’s share price since December 2015. Source: Yahoo! Finance)
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Pharmaceuticals This week we have seen the FTSE 350 Index Pharmaceutical & Biotechnology fall further by 3.56% and the NASDAQ Biotechnology Index fall by 3.13%. There is a bearish trend reflected over the outlook of equities of the past two weeks and is coincident with the S&P 500 Index and the NASDAQ. In other news, President Obama has requested for $1.8bn in funds from Congress to help tackle the prevalent Zika virus in the US and around the world. The World Health Organization has declared the virus as a global emergency after a huge increase in reported cases of birth defects suspected to be linked to the disease. Although the Zika virus has not erupted all over the world, there are potential repercussions similar to the Ebola virus if not properly handled and the already weak global economy may be further affected. Early trials of an AstraZeneca cancer drug have indicated the potential to widen the range of patients who can benefit from new breakthroughs in oncology. AstraZeneca is one of the leading companies in the field of cancer immunotherapy treatments that aids the body’s immune system in combating against tumours. Although AstraZeneca’s immunotherapy is still a work in progress, they have been heralded as the biggest advance against cancer for decades. AstraZeneca’s share prices have fallen 11.51% from 4499.00GBP to 3981.50GBP in the last 2 weeks but this is in line with the NASDAQ Biotech Index and is also due to the reduction in future earnings estimate.
This week we have seen two new biotech companies go public, increasing the total count to four for the year. The new companies that went public are Proteostasis Therapeutics Inc., a company working on treatments for patients with protein-processing diseases and AveXis Inc., a gene-therapy company. Also, the two IPOs I mentioned last week, Beigene Ltd. and Edittas Medicine have both fallen by 2.90% and 3.49% respectively. Shares on Beigene have fallen 29% on the week and Editas have fallen 10% this week. In other news, Mylan, the Netherlands-based pharmaceuticals group has agreed to acquire Sweden’s Meda for $9.9bn. Mylan is one of the world’s largest makers of copycat generic drugs and its shares fell 9.4% to $45.78 after the company reported earnings that fell short of analyst’s expectations. This takeover of Meda would be the latest in a series of deals that have led to a consolidation of the copycat drug industry. On the other hand, GlaxoSmithKline has been fined £37m for illegally stifling the launch of a cheap rival drug, making this the highest penalty paid so far by the UK’s new competition policy. As a whole, the Pharmaceutical & Biotech sector is still poised to maintain its reputation against other sectors and one should not worry about the drop in share prices of the Pharmaceutical sector as this is line with the general market consensus as reflected in the 2.5% drop in the S&P 500 this week. Samuel Tan
NASDAQ Biotechnology Index (NBI) Credits: Yahoo Finance
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NEFS Market Wrap-Up
Oil and Gas Shareholders have been questioning the dividend policy of oil majors this week, amid speculation that large international oil companies are steering towards a cut in dividend prices in light of the crude plunge over the last 3 months. Even well known giants such as Chevron and Royal Dutch Shell are failing to cover payments from cash flows and, consequently, are facing huge liquidity barriers – something that cutting dividend payments would resolve. Of course the matter is prone to dispute; investors have warned against the cuts, in fear of an exodus. This is only natural; especially considering that oil giants are typically well known for offering out dividend payments considerably higher than other large-scale companies. Shares, for example, in Shell and BP offer more than an 8% yield, placing it amongst the 10 top payers in the FTSE100. In addition, the five largest Western oil companies, Exxon Mobil, Chevron, Shell, BP and Total, paid out approximately $46bn. in dividends last year. Matthew Beesley, global head of equity at Henderson and investor in BP, Total and BG (soon to be a part of RDS) has hinted that the “cuts would not be welcomed by investors.” Most majors have been increasing output only slowly, if at all, subsequently garnering premature attention
from shareholders; by extension, Eric Oudest of BCG says that cutting dividends “could be the last decision they (oil majors) would make in that job.” Volatility in the market for oil has been rife for a substantial period of time, however, it peaked on February 12th as US crude was on track for the biggest 1-day percentage gain since 2008/09. Traders scrambled to close bearish bets as the WTI (shown below) hit the 13-year low of $26.05/barrel in the previous session and then proceeded to jump more than 12% to $29.56/barrel in volatile trading. Across the pond, NSB also moved sharply higher, gaining more than 10% to $33.19/barrel. Energy Aspects analysts have gone so far as to say that volatility has been the market hallmark of 2016, thus far. In light of this, we can be positive about the simple fact that oil prices are not just decreasing now. While volatility can be just as debilitating as uncomplicated downward trends, it at least suggests some sort of hope for the current state of the market. All ears are now pricked in the direction of OPEC with their expected announcement of a production limit. Tom Dooner
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Week Ending 14th February 2016
COMMODITIES Energy Oil made headlines again this week, with the Brent benchmark sliding over 10% from Monday to Thursday. However, oil bounced back on Friday due to comments made by United Arab Emirates energy minister that insinuated potential OPEC (Organisation of Petroleum Exporting Countries) production cuts. Earlier in the week oil steadily declined after news came out detailing the slowdown in oil demand. Economic slowdowns in Europe, US and China have caused forecasters to revise their estimates of oil demand growth for 2016. In 2015, oil demand growth reached a 5year high of 1.6 million barrels per day (mb/d), in 2016 this figure is now expected to fall to 1.2mb/d. These projected figures were not good for the oil price, as traders were expecting further increases in the demand growth for oil during the year to accelerate the closing of the oil output gap. WTI (West Texas Intermediate), and Brent to a lesser extent, had a poor day on Thursday. WTI dropped nearly 5.1% to $26.05, a new 12-yearlow, as storage facilities begin to reach maximum capacity causing traders to sell off
excess oil. Brent declined 2%. Stocks at ‘the pipeline crossroads of the world’, an oil hub, are at 90%, causing the WTI March discount spread – the discount of its front month contract to second month - to rise to $2.50, the highest spread in 5 years. The disparity between the falls in prices can in part be attributed to the higher flexibility of Brent crude whose March discount spread stands at 70 cents. Oil jumped back by 6% on Friday following comments from the UAE energy minister. He stated that low prices were already forcing some output reductions, which should help stabilise the market. However, more importantly he said that he is willing to negotiate with other OPEC members with regard to a coordinated output cut. Although, Hans van Cleef, senior economist at ABN AMRO, claimed that the news was merely speculative in the sense that nothing fundamental has changed among OPEC members and it merely indicated a period of higher volatility is on the horizon, as price movement is no longer one-way. William Norcliffe-Brown
Brent Crude Price Chart (Source: MoneyAM)
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NEFS Market Wrap-Up
Precious Metals Similar to last week, the trend in the prices of Gold remains unchanged. Although the metal has been appreciating for the last 3 months, a positive shock of +16.2% added to the metal’s value since the beginning of the year. The increase seems to see no slowing down as the appreciation increase by around 7% from 1173,40 USD/t oz. to 1238.87 USD/t oz. from 5th to 12th February. Silver continues to be regaining a stronger position as well, due to close linkage to Gold market, climbing up by +6.0% to 15.67 USD/t oz. over the same period. With the inflation rate remaining low, the Federal Reserve is not changing its tactic, and is going to hold on to relatively low interest rates for the rest of February, which is likely to contribute to the increasing precious metals prices. According to Janet Yellen, the Chairwoman of the Fed, recent findings support the idea that the interest rate on financial markets should be raised in March. The decision is not definite yet, provided that March only promises yet another scheduled meeting in order to confirm future plans. The economist delivered the report in the meeting to Senate Banking Committee on the 5th February, raising concerns for the potential investors. On the other hand, the change in
interest rates should be significant enough to affect Gold’s value in global markets. As mentioned last week, the uncertainty in the financial markets is not retreating yet, urging investors to invest in gold. Even though today’s economy is far from certain and steadily strong, Janet Yellen concluded that increasing the interest rates should have a positive effect on the sustainable economic growth. Provided the projected US dollar appreciation (as shown below) remains its steady recent trend in the near future, the affordability of physical commodities would relatively decrease. In turn, this effect would be reflected in lower demand, shortly followed by shrinking prices of gold and silver. Similarly to Gold, other precious metals show a regaining strength in the global market. Platinum has gained +5.53% from 5th to 12th February, rising from 908.00 USD/t oz. to 958.20 USD/t oz. This is the first lasting positive shock since 31st December, 2015, when it peaked at 889.90 USD/t oz. Trading Economics forecasts suggests that the price is likely to depreciate to 829.00 USD/t oz. by the end of March. Goda Paulauskaite
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Week Ending 14th February 2016
Agriculturals Amidst the expansive world of commodities, in which both macro and micro economic data cause constant fluctuations, this week agricultural commodities exhibited no changes of significant note. The Chicago Board of Trade index for corn, wheat, and soybean all moved less than 2% amidst relatively light trade volumes, as a direct result of a lack of pertinent data affecting the markets. Interesting developments came, however, from Egypt, the world’s largest importer of wheat. Egypt imports wheat so as to provide its poorest citizens with bread, and Egyptian developments often have significant impact on the world wheat market. Egypt this week purchased a 60 thousand tonne delivery of Romanian Wheat, the current cheapest on the market, having cancelled orders from France due to the presence of a fungus, ergot. Egypt has previously caused fluctuations in the global wheat market as a result of uncertainty and internal contradiction over whether or not it would accept wheat with said fungus present. One of the aforementioned cancellations has prompted legal action from Bunge, a leading commodities trading house, demonstrating the inextricable links between market making
financial firms and world governments, in addition to their influence on global commodity prices. Egypt’s purchase is the first since January 21st and analysts have speculated as to the motives behind it, aside from the obvious demand for bread. Given the aforementioned fiasco regarding the Bunge purchase, traders, such as commodities trading houses, have hesitated to offer contracts to Egypt, much less at typical prices. Egypt, for example, received only five tender offers for the previously mentioned purchase, atypical given the typical 10-20 offers received. Egypt also overpaid by around 5.5% relative to Tunisia’s 75000 tonne purchase earlier this month, at $190.88 per metric ton as opposed to the $179.21 paid by Tunisia. As such, some analysts believe that Egypt may have made its recent purchase simply to reassure world markets and add a degree of stability. Only time will tell whether Egypt suffers long term price and availability ramifications over the ergot issues, and the author looks forward to reporting on it. Jack Blake
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NEFS Market Wrap-Up
CURRENCIES Major Currencies The EUR/USD spot exchange rate’s performance this week has been relatively stable compared to last week. After it appreciated slowly over the weekend to 1.1193 on Monday, the pair rose at a faster pace from Monday to Tuesday, with the day’s high-point at 1.1293 before settling down at 1.1269 this Friday. However, the USD has generally dropped down against all but one of the 16 major currencies in February. Traders place the possibility of an interest-rate increase by the Fed at 30% while analysts are already examining the chance of the US adopting negative interest rates like the Euro area or Japan if the economy declines. Chair Yellen testified on Wednesday, the 10th of February, to the Congress, ensuring that “monetary policy is by no means on a preset course.” However, Yellen also stated that “the FOMC anticipated continuing this policy until normalization of the level of the federal funds rate is well under way”. By squeezing some breath out of the enthusiasm for negative interest rates, the chair is actually trying to support the USD. The Euro fell to $1.1259 this Friday after reaching an almost four-month high of $1.1338 on Tuesday. At the same time, the Euro lost 7%
to sterling, now trending in the region of 0.7754 after the economic growth rate of the Eurozone remained stable in the fourth quarter of 2015. Eurostat published data today estimating that output climbed 0.3% sequentially, the same growth rate as in the previous quarter. As for the yearly basis, the annual growth rates slowed marginally form 1.6% to 1.5% matching with economists’ expectations. Additionally, stock markets are doing badly at the moment, with bank shares taking one heavy hit after the other in the Eurozone. China has had to use its currency reserves to be able to keep the Yuan in line and the Bank of Japan has implemented negative interest rates. Hence, investors are pushing the value of the common currency up by turning to Euro-denominated assets. The Pound Sterling has been has had a volatile week, as shown by the graph below. The GBP performed quite well on Friday, despite Wednesday’s huge drop after bad news from the manufacturing sector, which failed to meet forecasts by 0.5%, has been published. The GBP/EUR exchange rate is currently trading between 0.7755 and 0.7874. Alexander Baxmann
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Week Ending 14th February 2016 gested in our NEFS Weekly Market Wrap-Up.
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