Week Ending 28th 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 8 China India Russia and Eastern Europe Latin America Africa Middle East
Equities 14 Financials Pharmaceuticals Oil & Gas Retail
Commodities 18 Precious Metals Agriculturals
Currencies 20
2
Week Ending 28th February 2016
MACRO REVIEW United Kingdom The International Monetary Fund (IMF) has called on national governments, including the UK, to relax austerity measures and to increase spending, particularly on infrastructure. It warned of downside risks to UK growth from ongoing weak productivity; the balance of payments deficit; the upcoming referendum on EU membership; and high levels of household debt. Recently, the Organisation for Economic Co-operation and Development (OECD) has also called for the UK to reduce austerity and spend more. The organisations believe that this will help to calm financial markets and to increase confidence in the economy. This follows latest figures that business investment fell by 2.1% in the last quarter of 2015, the sharpest fall the UK has seen since 2014, implying a loss in business confidence. Firms seem to be delaying their spending due to concerns around global growth, the EU referendum, and rising costs primarily from the introduction of the National Living Wage in April. The slump in business investment was offset by consumer spending, which rose by 0.7% between October and December, and grew by 3.1% in 2015 overall. This increase has been helped by low inflation alongside steady, albeit
weak, wage growth. Retail sales in particular showed strong growth, growing by 2.3% (excluding petrol) between December and January, which has been the biggest rise since 2013. Chris Williamson, chief economist at Markit, said this paints "a picture of an unbalanced economy that is once again reliant on consumer spending to drive growth as business shows increased signs of risk aversion". Samuel Tombs of Pantheon Macroeconomics adds that “the recovery’s reliance on consumers is worrying, because growth in households’ real incomes looks set to slow this year as the fiscal squeeze intensifies, employment growth fades and inflation revives”. On Thursday the Office for National Statistics (ONS) revealed that GDP grew by 0.5% in the last quarter of 2015, making it the UK’s 12 th consecutive quarter of positive growth, as shown on the chart below. The UK grew by 2.2% on an annual basis in 2015, down from 2.9% in 2014. Despite disappointing growth rates, the UK economy remains one of the fastest growing of the developed nations. In the same quarter, Eurozone GDP increased by 0.3%, and US GDP increased by 0.2%. Shamima Manzoor
3
NEFS Market Wrap-Up
United States The Federal Reserve’s preferred measure of US inflation has hit the highest level in more than three years as personal income rose. This development has been anticipated to increase further as a strong jobs market will contribute to higher prices in the economy. The personal consumption expenditures price index, excluding food and energy components, jumped 1.7% on a year-on-year basis in January, up from the 1.4% pace in December 2015. The glimpse of such positive economic news could give Federal Reserve officials the confidence it needs to continue raising interest rates this year after the first rate rise in nearly a decade, which took place in December. In other economic news, the number of Americans filing for unemployment benefits rose last week, but remained below levels consistent with a tightening labour market. Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 272,000 for the week ending February 20th, the US Labour Department said on Thursday. The US labour market remains strong despite worries about both the domestic and global economies, which have manifested themselves in a world-wide stock market selloff that has tightened financial market
conditions. Though bets for a March interest rate hike from the Federal Reserve have been wiped out, further monetary policy tightening later in the year remains a possibility because of the resilience of the job market. US President Barack Obama is set to leave office for the final time later this year. Anger over a halting US economic recovery has emerged as a key political theme of the 2016 election, fuelling the surge of populist candidates such as Donald Trump and Bernie Sanders. But it is one that President Obama has strongly resisted. In his annual economic report to Congress on Monday the president portrayed an economy that was in relatively “rude health after weathering one of the most brutal financial crises in its history”. Mr Obama went on to reassure that the US is now in the middle of the longest streak of private-sector job creation in its history and declared that the economy is now “less reliant on foreign oil than at any point in the previous four decades”. It will be interesting to see how to consumer confidence of the US population fares amidst such dynamic times. Vimanyu Sachdeva
4
Week Ending 28th February 2016
Eurozone The second consecutive month of declining confidence in the Eurozone suggests the turmoil in financial markets may take a toll on economic growth in the currency area. With consumer confidence also in decline, domestic demand within the Eurozone appears set to weaken just as the appetite for its exports falls in large developing economies such as China. Data from across the 19-member currency bloc on Friday will put pressure on the ECB to take strong additional policy actions at its meeting in March on top of the unprecedented stimulus it is already giving. Reports of falling prices in Germany, France and Spain along with an array of weak sentiment surveys for the bloc as a whole will also provide ammunition to those arguing that governments must now loosen their budgets to stimulate growth. The consumer confidence index, meanwhile, dropped to -8.8 from -6.3 in January, down from -5.7 in December - a poor harbinger for future spending, last year's bright spot. Sarah Hewin, chief economist at Standard Chartered, said that some of the decline may have come from a belief that improvements in
growth and employment may be waning. But she also cited falling stock markets and broader concerns about how the European Union manages the hundreds of thousands of migrants and refugees entering its borders. The biggest blow from Friday's Eurozone data may have been to the ECB, which is already buying assets to the tune of 60 billion euros ($66 billion) a month and effectively charging banks to deposit money. Both are attempts to push money out into the economy to boost inflation, which it wants at just below 2%. But inflation, dragged down in part by falling oil and commodity prices, is not playing ball. Without a weakening of growth, ECB policy makers already face an uphill struggle to raise the annual rate of inflation to their target of just under 2% from 0.3% in January. Economists estimate that the inflation rate fell in February, and may even show that consumer prices were lower than a year earlier. Spain's statistics agency said its measure for the month fell to -0.8% from -0.3% in January, while France's statistics agency said its measure dropped to -0.1% from 0.3%. Erwin Low
5
NEFS Market Wrap-Up
Japan New census figures, which were released this week, show that the population of Japan shrank by nearly one million in the past five years. This drop, which is the first since 1920, has been long expected by demographers, who cite a falling birth rate and low immigration as its cause, and will add weight to negative sentiment concerning the long term prospects of Japan’s economy, which is going to face numerous challenges in the coming decades, not limited to those presented by an aging population. The short-term prospects facing Japan’s economy aren’t much better than the long-term ones; inflation figures released this week suggest that the BoJ’s decision, made at the end of January, to cut interest rates was justified. There are various measures used to gauge inflation in Japan (see graph below); one of these is the Tokyo core CPI, which measures inflation solely in Tokyo, and another one is the National Core CPI, which measures inflation for the whole of Japan. The former, which was forecasted to stay the same, shrank by 0.1% year-on-year in January, and the latter, which was forecasted to shrink by 0.2%, stayed the same year-on-year in January. These figures reflect weakness in the global economy, which
has pushed up the price of the yen and, subsequently, caused demand for Japan’s exports and the price of its imports to fall. As aforementioned, the decision to cut interest rates was taken at the end of January. Therefore, we will have to wait another month to see if this policy has an effect. However, given the fact that, regardless of the cut in interest rates, the yen has strengthened considerably this month and that the services index, which reflects changes in the price of services purchased by corporations and is a leading indicator of consumer inflation, grew by only 0.2% in January, it seems unlikely that significant inflation will return to Japan in the near future. Some encouragement does, however, come from the figure for the BoJ Core CPI, which measures inflation excluding energy, which grew by 1.1% year-on-year in January, and shows that energy, which is one of Japan’s largest imports, may be responsible for weak inflation. With this in mind, it is unclear exactly how the BoJ will act when it comes to their next meeting in March, however there is a strong possibility that they will cut interest rates further. Daniel Nash
6
Week Ending 28th February 2016
Australia & New Zealand Australia’s housing market made the headlines this week after UK based economist, Jonathan Tepper, claimed that Australia is going to experience “one of the biggest housing bubbles in history”. Using six graphs, he showed that the housing bubble is out of control and likened it to his forecasts on Spain’s experience. After predicting a 50% drop in house prices, Tepper blamed the “irresponsible loaning of large sums of money” by the Australian banking system to be behind it. His evidence shows that over 40% of all new mortgages have been interest-only, and that easy financing is aiding a “disaster waiting to happen”. House prices keep rising but other factors of the economy like GDP, wages and rental income are relatively stagnant. But Tepper isn’t alone. In 2014, Lindsay David, a macroeconomic researcher, predicted there would be a “bloodbath” in the future housing market. Similarly to Tepper, he expected that there could be a catastrophe as the housing bubble and mining boom go down together. Economist, Steve Keen also predicted house prices would drop by 40% within a few years. In fact, research by CoreLogic and Moody’s found that slower growth in household income put brakes on the property market in Sydney. They claim this is because household income isn’t
growing as fast as before and new apartments coming onto the market, in the inner city areas, are “taking some of the heat out of the market”. However, these analysts believe only a large shock in the economy would cause the bubble to burst, and not excessive borrowing. Australia has one of the highest household debts in the world, and time will tell what the consequences will be. In other news, forecasters in New Zealand were shocked when their 250 million trade deficit prediction turned into an 8 million trade surplus. The graph below shows the dramatic change from its 53 million deficit in December 2015. The total value of exports grew by 5.9% to $3.9billion, led by milk powder, butter and cheese, pushing China ahead of Australia as New Zealand’s top export destination. The value and quantity of cherry exports were also at a record high, rising by 30%. Imports also rose, by 7.2%, mainly in intermediate goods and consumption goods. However the rise in intermediate goods was offset by the 7.9% fall in crude oil imports and capital goods imports, which fell by 4.4%. Meera Jadeja
7
NEFS Market Wrap-Up
Canada The IMF announced its growth forecast for the Canadian economy this week: it was greater, at 1.7% for 2016, than many expected. Meanwhile, the Canadian government and the OECD are predicting that GDP growth will be 1.4% for 2016, and some economists’ forecasts are as low as 1.0% for GDP growth in Canada. In a report released by the IMF this week, Canada’s economy is predicted to grow at a faster rate than Japan and some major European economies such as Italy and France. In their report the IMF noted that “bold multilateral actions” were needed to bolster the economic performance of the global economy. They called for the G20 countries to implement expansionary fiscal policy to increase investment and growth. The report also stated that many G20 countries have an over reliance on monetary policy and advised that they should shift this focus. This week a G20 summit of finance ministers and central bankers is convening in Shanghai for a two day meeting. On the agenda for this G20 meeting is oil, terrorism and tackling tax evasion. The Canadian finance minister Bill Morneau’s focus is believed to be on to get other nations to fulfil their promises of the November 2014 G20 summit in Brisbane. At this meeting the G20 countries agreed to create a 2% increase in global GDP growth and promised to invest US$2 trillion to boost the growth prospects of the world and to generate more jobs. Global GDP growth was 3.7% in
2014 when the pledge was made, in 2015 it was 3.1% and it is predicted to be 3.4% this year. Therefore, since the G20 agreement to boost world GDP growth rates was forged they have declined. According to the IMF Canada has the 15th largest share of world GDP, and the Canadian economy represents 3% of the world economy. This means that if the G20 agree to fulfil earlier promises at the G20 meeting this week then the Canadian GDP figures could receive a significant boost, as the Canadian economy is an important globally trading country. The Conference Board of Canada economist Craig Alexander stated that “the weakness we’re experiencing in the Canadian economy is Canada importing the weakness from abroad…. we’re a major trading nation. … One of the biggest stimulus programs Canada could have would be if international policy makers actually managed to lift the growth rates in their regions”. In other importance news for the Canadian economy this week, the Saudi Arabian oil minister Ali al-Naimi announced this week that there will be no decreases in the production of oil and the price of oil will remain low. He advised that high cost producers in North America should leave the market if they couldn’t compete. Kelly Wiles
8
Week Ending 28th February 2016
EMERGING MARKETS China Much of the recent news surrounding China has concerned the flow of money, such as the recent capital outflows and central bank injections, and this theme is of particular focus this week. Stock prices in China plunged on Thursday amid rising money-market rates in a bid to reverse possibly excessive previous injections. Both the Shanghai and Shenzhen Composite Indices fell by approximately 7%, with many stocks falling by 10% - the maximum daily decline that Chinese authorities allow for an individual stock. The overnight repurchase rate, the rate at which commercial banks lend to each other in China, rose to 2.11%, an increase of 11 basis points. The value of new loans provided by Chinese banks surged to CNY2,510 billion in January compared to just CNY597.8 billion in December, as shown in the graph below. The figure beat the median estimate of CNY1.9 trillion, and was the largest on record, supported by the seasonal lending spike before the Lunar New Year. The growth can be partially attributed to the shift to onshore borrowing with the cheaper Yuan. Whether these loans translate into economic growth will be of significance to Chinese authorities. The destination sectors and uses of these loans are plausible indicators of how this strategy might pan out in the real economy.
From a policy perspective, the People’s Bank of China (PBOC) used interest rate cuts and required reserve ratio (RRR) reductions as forms of monetary stimulus last year. However, this year, the PBOC has switched to cash injections because of growing fears of further capital outflow should the PBOC cut interest rates further. Net injections over the month beginning in mid-January have equated to a one percentage point reduction in the RRR. Though traditional, a cut in the RRR is more permanent compared to injections which provide flexibility in a volatile environment. On a more global scale, the G20 finance ministers and central bankers meet in Shanghai for a two-day meeting this week. Zhu Guangyao, a vice minister of finance, said that Premier Li Keqiang would unveil a government budget over the coming weeks that would include economic stimulus through an increase in deficit spending, just 2.3% of economic output last year. He added that “countries with room to make fiscal expansion should take action”. These comments echo the IMF’s call for greater fiscal stimulus, where possible, in order to avoid an over-reliance on monetary policy. Sai Ming Liew
9
NEFS Market Wrap-Up
India The eyes of the world have been firmly placed on India during the past week, with Delhi continuing to be crippled with social unrest and the budget session for the forthcoming fiscal year beginning on Tuesday. There is much speculation surrounding the proposal, with the focus being on the GST bill and the government’s fiscal deficit, which could be stretched by Finance Minister Arun Jaitley in order to stimulate demand through further public spending. However, this could compromise the RBI’s campaign to keep inflation below target, as well as influencing its decision on the interest rate. Ahead of the Federal Budget, which will be announced on the 29th, the Railway Budget for the world’s fourth largest rail network was revealed on Thursday, with the Railway Minister promising to increase capital outlay by 21% to $17.63bn. The government have also proposed the setup of two locomotive factories at a cost of around $6bn, as it looks to transform the Indian railway system into an engine of economic growth, creating employment and generating revenue growth of over 10%. Alongside this, 44 new projects valued at $13.47bn are to be implemented, although the
importance of completing ongoing projects was also emphasised. However, not everyone was pleased with the government’s plans, as the budget was termed as ‘lacklustre’, failing to inspire investors and cheer market sentiment. Railway sector-related stocks plunged, the BSE Sensex ended the day 113 points down, and Nifty, of the National Stock Exchange, closed at a twenty-month low, below the psychologically important level of 7,000 points. This was the third consecutive session in which the Sensex has fallen (as shown below), and nervousness ahead of the Union Budget, along with a realistic yet somewhat boring rail budget, are much to blame for disappointing performances all round. The rupee has also failed to impress in recent weeks and remains weak as outflows from bond and equity markets by the foreign institutional investors continue. On Thursday the rupee closed just 14 paise off a record low of 68.85 against the US dollar. Whether it reaches that figure does in part depend on the forthcoming announcement, as traders look for government policy direction. Homairah Ginwalla
10
Week Ending 28th February 2016
Russia and Eastern Europe The Vice-President of the European Energy Union has stated concern over sustaining the future growth of the Eastern European economy. Many economists view the recent successes of the Eastern European economies as too good to be true, and the recent turmoil of oil prices is certainly highlighting the weaknesses. Numerous states in Eastern Europe, although evolving, can still be largely characterised by dominant past-Soviet habits, high levels of state-owned enterprises and aging, inefficient industries. Yet with oil production becoming more limited, in order to increase producer’s profits, many Eastern European countries are seeing large disruptions in the unsecure supply of their oil from Russia. In turn, this is causing unstable oil prices and fluctuating production costs. Whilst it can be argued that Eastern European countries facing this issue should find an alternative energy source, this would be very costly and would create tension with Russia. Additionally, many Western European countries already claim principal access to the more easily accessible oil sources (including Russia), hence reducing available options. Another factor that is causing concern and was raised by the Energy Union are the high levels of corruption that still remain. Heavy state controls and weak corporate government practises are severely limiting future growth and enterprise creation. Unfortunately, changing these factors in economies so familiar with them will prove
highly difficult, especially those most affected, namely Slovenia, Romania, Bulgaria and Hungary. Yet this week has also seen many achievements throughout Eastern Europe. The Belarusian President signed an agreement intended to improve the effectiveness of Belarus’ social and economic conditions by advocating quality management of state enterprises, export diversification, accelerated development of small and medium business, and a gradual decrease in interest rates. The agreement also includes additional support for low-income citizens and families with children. Bulgaria is focusing greatly on increasing its trade revenues by securing trade deals with China, Israel and Uzbekistan, following the recent trade successes with Russia. Finally, with Hungary continuing to suffer from disinflation (see graph below), the government has agreed to fewer state controls in the hope of initiating greater consumption and employment rates. By generating economic growth, it is hoped inflation with rise. Nonetheless, in a period of great uncertainty for Eastern Europe, which still suffers from high levels of state control and corruption, this is fantastic decision that may act to promote freemarket economics throughout Eastern Europe. Charlotte Alder
11
NEFS Market Wrap-Up
Latin America Macri, after winning a historic victory in a decade-long battle with a group of US hedge funds in a New York court, now switches his attention to Argentina’s congress. On Friday, Judge Thomas Griesa said that he would lift a controversial financial blockade preventing Argentina’s access to the international capital markets. The ruling was made on the condition that Argentina repeals laws stopping it from paying “holdout” creditors that refused debt restructurings after its 2001 default on $100bn. The second condition is that Argentina then pays in full those holdouts that reach an agreement with Buenos Aires before the end of February. The injunction was put in place after the holdouts won a legal victory in 2012 in which Judge Griesa ordered Argentina to pay them in full. The refusal to pay the holdouts by former president Cristina Fernández precipitated the eighth default in Argentina’s history in 2014. Argentina’s approach to the situation has undergone radical change since Macri’s has come to power. Whereas Fernández refused to pay the holdouts, Macri has so far been very proactive, especially in negotiations and earlier an offer to pay $6.5bn for claims of $9bn was made to the holdouts. Many point Macri’s proactivity towards his mission to attract muchneeded foreign investment, however he must now convince Argentina’s congress to revoke
the laws currently preventing payouts to holdouts, as requested. Many have commented, such as Daniel Marx, former finance secretary, who said that ‘untangling this decade long conflict is vital as doing so will allow Argentina to return to the international stage after a long period of isolation.’ This will therefore enable the country to borrow at lower interest rates and finance the economic transition that is under way after a decade of populist and interventionist policies. Analysts state that access to the foreign capital market will also help to bring down inflation, which is currently at around 30% and is seen as one of Macri’s toughest challenges to deal with. Furthermore, the Brazilian CPI inflation rate rose to 10.71% year-on-year in January, accelerating for the fourth straight month and reaching a fresh 12-year high. Figures came slightly above market expectations mainly due to a rise in food prices. The country is has struggled with stubbornly high inflation since mid-2014 after the government imposed several tax increases aiming at balancing overall budget, while a weak Brazilian real pushes import prices up. Inflation for February is projected to keep increasing. Max Brewer
12
Week Ending 28th February 2016
Middle East An announcement that value added tax will be introduced to the UAE by the end of 2018 at a rate of 5% comes after a press conference with the IMF’s head Christine Lagarde on Tuesday. A final agreement is expected in June this year, Minister of State for Financial Affairs Humaid Obaid Al Tayer explained. This comes as the UAE’s fiscal deficit is estimated to stand at 4% of GDP last year and is likely to widen to double digits as a result of worsening oil prices. The UAE is also weighing the introduction of corporation tax and is currently looking at the “social and economic impact” of a levy on businesses, as well as its impact on the UAE’s international competitiveness Mr Al Tayer said. Despite the zero-tax environment acting as a significant draw for companies looking to the UAE, Ms Lagarde has stated that this tax incentive is not the main driver of foreign companies into the nation, and that it was the right time for the UAE to raise taxes to reduce the impact of the collapse in oil revenues on government finances. In other news, Egyptians have taken to social media to poke fun at President Abdul Fattah al-
Sisi after he said he would sell himself to help the country's economy. "If it were possible for me to be sold, I would sell myself,'' he said in a speech on state television. A joke page on Ebay "selling" Mr Sisi was created and bids passed $100,000 within hours, with the page later being removed. Mr Sisi also asked Egyptians to make donations to the country by text, asking them to donate 10 LE ($1.28) each – a considerable amount for a population with a rising poverty rate, hitting over 25% during 2012. There has been a sharp decline in foreign investment and tourism revenues amidst years of social unrest. The country also pays large amounts to cover fuel subsidies and servicing its domestic debt, and has suffered from high inflation and unemployment. This latest event has showed that President Sisi and the Egyptian government has yet to instil faith into its population over its management of the economy along with last week’s bread import fiasco; a scenario which is still ongoing. Harry Butterworth
13
NEFS Market Wrap-Up
Africa South Africa's Finance minister, Pravin Gordhan, presented the National Budget in the parliament on Wednesday. Given the recent deterioration in the economic outlook, the government has proposed fiscal policy adjustments to reduce the budget deficit and stabilise debt. The projected deficits in each of the next three years forecast were lower than estimates set out in October 2015. According to the Budget Review, a consolidated primary surplus could be achieved in 2016-17, when revenue would exceed non-interest spending. The expenditure ceiling had been reduced and tax adjustments are expected to yield gross revenue increases over the next three years. In addition, national debt was projected to stabilise at 46.2% of GDP in 2017-18, and to decline thereafter. To achieve its fiscal goals, government has proposed to increase revenue through tax policy measures that would raise an additional R18.1bn in 2016-17, and R30bn in the subsequent two years. Fiscal consolidation is expected to lead to gross tax revenue increase by 1.5% points of the GDP, and a main budget non-interest expenditure fall by 0.5% points of GDP between 2015-16 and 2018-19. Stimulating investment is key to keeping South Africa's economy in a good state and government has announced the opening of
Invest SA, a one-stop-shop aimed at removing bottlenecks to make doing business easy for investors. While there are global pressures, including a slump in commodity prices that has affected emerging markets, President Zuma urged all sectors of the economy to focus on addressing domestic constraints like energy. However, as rightly warned by some economists bland growth expectations, characterised by lacklustre growth in domestic demand, tepid global trade activity, labour unrest and stuttering electricity supply, will likely put hurdles in government's ability to meet the tax revenue collection targets. Leaders of Nigeria and the Kingdom of Saudi Arabia have expressed commitment to a "stable oil market" and a "rebound of oil price." At a bilateral meeting between Nigeria and Saudi Arabia in Riyadh, both committed themselves to doing all that is possible to stabilise the market and rebound the oil price as their two economies are tied to oil and all cannot be well with both countries when the world oil market is unstable. The leaders also focused on trade between their states and agreed to give fresh impetus to the joint commission previously established in order to boost commercial and other activities to unify their peoples. Sreya Ram
14
Week Ending 28th February 2016
EQUITIES Financials Moving on from last week’s review, we see that scepticism continues surrounding the financial markets. A recent report showed that European and Japanese financial equities are significantly lagging behind their developed rivals, generating concern about the regions’ financial capability at this current time. The figure below shows the performance, since the 1st February, amongst four major indices: Euro Stoxx 600, S&P 500, Topix, and the FTSE 100. Europe’s Stoxx 600 index has fallen 4.9%, whilst Japan’s Topix declined a massive 9.8%. These are huge downfalls for the two regions, especially when compared to the performance of the S&P Index, which represents North America’s shares, and the FTSE 100 – based in London. The S&P dropped only 0.5%, whilst the FTSE 100 fell 1.3% - considerable amounts lower than both Europe’s and Japan’s performance. These indices – led by the financial sector – have tumbled throughout 2016 as a result of slower global economic growth, which arose from a huge loss in confidence for central banks and financial companies over the past few months. Whilst the FTSE 100 has seemingly coped well, a company report this week revealed that the Royal Bank of Scotland encountered its eighth consecutive annual loss, with the bank announcing a £2 billion net loss for 2015. This
impact arose from a £6.4 billion hit from restructuring costs last year. Whilst the net loss was an improvement from the previous year’s £3.5 billion loss, it seemed that investor’s confidence in RBS vanished instantly, with huge sell-offs of shares seeing a 12% fall. As a result of their company report, stock prices rapidly fell from 245.79p to 215.9p on Friday 26th February. Moving over to the Asia region, we find that it’s not only Japan’s financial markets suffering, but China’s too, with them facing their biggest oneday drop in the past month on the 25th February. The Shanghai Composite dropped 6.8% in the final 15 minutes of trading on Thursday – a direct result of poor global financial performance, since China’s financial market is increasingly correlated with the global financial markets. With the two-day meeting of G20 finance ministers and central bankers happening over the weekend, hopes remain high for improvement plans focussing on the financial sector. But with financial markets still adapting to changes in last year’s Central Bank’s policies and with banks implementing huge restructuring efforts, the financial world remains fragile. Daniel Land
15
NEFS Market Wrap-Up
Pharmaceuticals This week we have seen the FTSE 350 Index Pharmaceutical & Biotechnology rally by 2.68% and the NASDAQ Biotechnology Index fall by 1.24%. There were no real surprises this week, as the sector remained at a steady level. Valeant Pharmaceuticals International has said to have delays in filing its 10-K, pending the completion of an investigation into the company’s alleged accounting fraud that has already identified $58 million in adjustments. It is said that the error was the result of a misreported statement regarding the sales to Philidor, a specialty pharmacy that Valeant revealed it had control over only after being exposed. Valeant shares rallied 8.5% over the week but are still down 69% from its 52 week high. Allergen PLC beat its profit expectations amidst a gloomy sales outlook. The pharmaceutical company reported a fourth-quarter loss of $700.5 million, or $1.78 a share, from $732.9 million, or $3.34 a share, in the same period a year ago. Excluding non-recurring items, such as acquisition costs, adjusted earnings per share amounted to $3.41, beating analyst’s consensus of $3.34. Allergen expects the revenue for 2016 to be approximately $17 billion compared with the analysts’ consensus of $17.7 billion. The share has lost 12% so far
this year and is at $295.50, but it is poised to bounce back. In other news, Pharmaceutical companies are looking into using video games for healthcare. Neurological conditions such as autism, ADHD and depression may benefit from these type of ‘digital therapies’. Akili Interactive Labs, a Boston-based company that develops mobile video games to treat ADHD and other neurological conditions have created a product called Project: Evo. The company raised $30.5m of equity investment last month to fund a large-scale clinical trial. PTC Therapeutics Inc., a pharmaceutical company focused on the development of small molecules, fell more than 35% following news of the company’s refusal to file a letter from the US Food and Drug Administration. It was another stable week for the Pharmaceutical & Biotechnology sector as share prices remained in line with the general market consensus. We will expect to see more advances in the sector and the emergence of newer technologies as well as the increased in mergers between the technology and healthcare sector. Samuel Tan
NASDAQ Biotechnology Index (NBI)
16
Week Ending 28th February 2016
Oil and Gas Oil and gas news this week has been dampened by the announcement by the Saudi oil minister, Ali al-Nani, that a deal by major producers to cut output was simply not on the cards. Such a bathetic announcement was received poorly, and the price of Brent crude subsequently fell $1.33 down to $33.35; the minister cited “mistrust” as the reason behind his decision. In addition, Spanish giant Repsol became the next oil major to announce a dividend cut, which decreased to €0.30/share from €0.50/share. While this has been opposed by its shareholders, the news is hardly surprising when we note the €1.2 billion net loss in 2015. Across the pond in the US, Chesapeake (the 2nd largest gas producer in the US) made clear the effect that the slump has had on them, with a swing in profits from the 2014 level of $1.3 billion to a $14.9 billion loss last year. Consequently, the giant aims to cut capital spending this year by 69%. These are steps that perhaps should be taken by one of the UK’s largest independent gas firms, Premier Oil, which is allegedly in discussions over its banking practices; it is suspected that they are close to confirming a refinancing deal. As we move into the medium term, macro indicators are starting to flounder. Investment,
particularly in new offshore oil and gas projects, has lurched. Industry Body Oil and Gas UK announced this week that less than £1 billion is to be spent on new projects as opposed to the £8 billion that has been spent each of the last five years. This is a cut back of immense magnitude and comes despite the cost-cutting initiatives many companies are taking. To put this into perspective, take the case of Petroceltic, Dublin-based oil and gas explorer, which just received a bid of £6.4 million from a unit of its biggest shareholder. This amount is 84% of its previous valuation; Sunnyhill (a unit of WorldView), made a 3p/share offer, a great deal smaller than the 18.4p/share level that the company was trading at a day earlier. Evident, then, is the parlous nature of oil and gas giants at the moment. Moving East however, oil rose on Friday for the first time in 8 weeks following supply disruptions that affected Northern Iraq and Nigeria; Brent Crude futures rose by as much as 5% (as shown in the graph below), as did West Texas Intermediate which reached a high of $34.69. This reaction to a supply disruption shows the potential benefits of a production freeze, should the Saudi minister come on board. Tom Dooner
17
NEFS Market Wrap-Up
Retail British Retail and Consumer goods equities ended slightly lower this week as Brexit referendum fears mounted, with knock-on effects to the pound. The FTSE 350 Retail index fell by 0.74% over the course of the week, yet the Dow Jones Consumer Goods Index rose by 1.02%. The sector hasn't been the stage for much volatility last week, although over the past month there were some major developments worth noting in greater detail. It is obvious that online trade will continue to soak up demand from traditional high street retailers. However, the spearhead of this main disruption, Amazon, again recently suggested that it's still finding it difficult to remain profitable, making it worthwhile to analyse. Its share price tumbled by 13% after it released weaker than expected profits for the 4th quarter at the end of January, despite the fact that sales surged by over 26%. Profits were a third lower than Wall Street expectations, even though it performed better than brick-and-mortar retail department stores such as Macy's and Best Buy. The main reason for its downbeat profits is that in order to maintain sales, its sales margins are pushed so close to zero that its aggregate profits appear flat when compared to sales, as shown by the graph below. In addition, its operating costs have been rising, but Amazon does have a reputation for focussing on growth
and investment instead of profits, so it doesn't come as a huge surprise. Yet, Investors are still optimistic about its diversified portfolio. The bounce in its share price last April has been underpinned by growth in its fastest growing and highest margin cloud computing business, Amazon Web Services, which uplifted profits. Amazon was not the only company to have billions wiped off its share price recently though. Particularly over the past three months Apple has been tumbling and the stock closed 6.6% down after investors reacted over its poor results. Since hitting a record high last year, investors have grown increasingly concerned over its cooling sales growth as its share price has plummeted by over 20% since the start of November. Evidently, huge conglomerates such as Amazon and Apple put a strong emphasis on sales momentum, yet underlying profitability factors do make it difficult to justify their book value. It will be interesting to see how investors respond over the coming months to the possible realisation that these stocks may be maturing and that moving money to newer markets with bigger growth potential could be worthwhile. Sam Hillman
18
Week Ending 28th February 2016
COMMODITIES
Agriculturals This week marked the end of last week’s rally in corn and Soybean futures, as increased supply of each respective commodity resulted in futures dropping slightly. For Soybeans in particular, analysts noted that forecasted Brazilian crops put significant pressure on future pricing. Whilst the nominal sizes of the decreases were very small and ultimately insignificant as elucidated below, the importance of the decrease is simply the aforementioned end of the rally. According to Business Insider: “The most active corn contract for May delivery lost 2.25 cents, or 0.61%, to close at 3.645 dollars per bushel. May wheat delivery fell 4.5 cents, or 0.99%, to close at 4.5125 dollars per bushel. May soybeans decline 0.75 cents, or 0.09%, to close at 8.7225 dollars per bushel.” In much the same vein, Wheat declined significantly on Wednesday, with some analysts noting that expectations of bigger wheat inventory from the USDA pushing down prices, despite last week’s news of Egyptian purchasing resumptions. Not only this, but other analysts noted concurrent demand concerns, with the European Union holding a great deal of inventory and struggling to find sales.
It is also worth noting that agricultural commodities futures are inextricably linked to other major financial indices, such as equities and other commodities, given the diversified portfolios held by many investors. For example, this week saw notable increases in many stock markets, and a rise in the price of crude oil, making many speculators switch their asset allocations accordingly. As such, crude oil and stock purchases will have resulted in not only less purchasing of agricultural commodities, but also potential sell-offs; lowering the price level of agricultural commodities in a plethora of ways. This is interesting and significant as it demonstrates the dual nature of agricultural commodities, both as instruments for investment and speculation, in addition to basic necessities for human consumption. This results in an abundance of ways in which prices can fluctuate, and amidst a global backdrop of economic uncertainty aligned with major movements in other asset classes as previously mentioned, many agricultural commodities could exhibit significant price changes in the coming weeks and months. Jack Blake
19
NEFS Market Wrap-Up
Precious Metals Following a slight appreciation of silver and gold in the period of Wednesday to Friday of the previous week, the prices peaked on the 18th and 19th respectively, ending up in a slight dip on the 22nd February. Nevertheless, both values strengthened since then, up to 24th February. The continuous slight increasing value of gold has been affected by strengthening equities. US dollar appreciation among weakening other major currencies (except the Japanese yen) has had an additional effect on precious metals prices. For instance, the depreciation of GBP resulted mainly due to increasing concerns of Britain leaving the EU. Furthermore, slightly increasing inflation rates in the US contributed to the outcome and was observed as combined result of increasing rents and healthcare costs. These factors allow for the inflation rate to return closer to target 2% in a shorter term (currently at around 1.7%) and for the Federal Reserve to increase interest rates after a delay since January. Developments in China’s foreign exchange rate policy resulted in slow although continued
depreciation of the currency (decreasing by 5% since January 2015), and the G20 summit in Shanghai on 26th-27th February will allow a discussion on stabilising the volatility of China’s markets. The meeting on 26th suggests that, despite the negative impact on its exporters, China is likely to slow the depreciation of Renminbi to improve competitiveness of the global market. However, a changing trend in yuan stability might result in a depreciation of gold. In the metals markets only gold appreciated, increasing by 2.31% from 1210.10 USD/t. oz. from 22nd to 26th February. In the period 18th – 22nd Silver depreciated by 1.55%, regaining its position slightly on the 24th to 15.33 USD/t. oz. Platinum followed a similar trend to Silver, declining over the same period by 1.76% and appreciating on the 23rd to 944.50 USD/t. oz. (Figure 2). Appreciation was followed by a decline, with Silver ending at 15.165 USD/t. and Platinum at 919.98 USD/t. on the 26th February. Goda Paulauskaite
Gold
Platinum
20
Week Ending 28th February 2016
CURRENCIES Currencies This week Bloomberg experts forecasted a stagnation of the inflation rate in the Euro-area, slipping back to zero. Additionally, further price decreases of oil could lead to further deterioration. The euro-wide downturn will follow disappointing numbers from Germany, France and Spain, where the readings were worse than expected. To confront this backdrop, the ECB is expected to ease its monetary policy again. Actually, the ECB has already started pumping additional money into the economy. It dropped its deposit rate to 0.3% and purchased assets in the worth of 60 billion Euro. Consequently, EUR/USD dropped to 1.0938 on Friday. Accordingly, San Francisco’s Fed President John Williams stated on Thursday that “it just makes sense” to continue policy tightening looking at the GDP growth of 1% exceeding the forecasts. However, the USD can’t be considered safe yet, as consumers in the United States are finally infected with insecurity about the future performance of the US economy. The Consumer Confidence Index has shown a drastic decline in February after the consumers gained confidence in January. The fading confidence finally is indicating a more conservative spending behaviour which could affect the inflation rate in the US. This is
probably the response to the current state of the global economic situation. Hence Williams acknowledged that “there are big movements going around in the global economy and inflation that we have to adjust to”. At the G20 Meeting, starting Friday the 26th of February, Zhou Xiaochuan, governor of the People’s Bank of China, said that the USD is still the most important currency in the basket of currencies against which China’s central bank pegs the Yuan. By stating this, Xiaochuan explained why China can assert that the Yuan is pegged against a currency basket while it sets the daily reference rate against the USD. With this message, he is able to manage markets expectations and keep the currency stable. The other major Asian currency, the Japanese Yen, has been highly volatile against the USD this week, as shown in the graph below, as the recently released Tokyo Core CPI, which is the most important consumer inflation release in Japan, illustrates a deflationary trend. This has led to the expectation of further QE resulting in a depreciation of the Yen on today’s Friday with a day’s high at 113,97506. Alexander Baxmann
21
NEFS Market Wrap-Up
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. Division was the formed in early 2011 is a part of theskills Nottingham Economics TheThe goalResearch of the division is both development of theand analysts’ writing and market and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of knowledge, as well as providing NEFS members with quality analysis, keeping them up teams to dateofwith analysts closely monitoring particular markets and providing insights into their developments, the most important financial news. digested in our NEFS Weekly Market Wrap-Up. We would appreciate any feedback you may have as we strive to grow the quality and usefulness The goal of the division is both the development of the analysts’ writing skills and market of weekly market wrap-ups. knowledge, as well as providing NEFS members with quality analysis, keeping them up to with the most important financial news. For date any queries, please contact Jack Millar at jmillar@nefs.org.uk We would appreciate any feedback you may have as we strive to grow the quality and Sincerely Yours, usefulness of weekly market wrap-ups. Jack Millar, Director please of the Nottingham Economics & Finance Society Research Division For any queries, contact Josh Martin at jmartin@nefs.org.uk. Sincerely Yours, Josh Martin, Director of the Nottingham Economics & Finance Society Research Division
As featured on: Sponsors: Platinum:
Gold:
This Publication has been prepared solely for informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, product, 22 service or investment. The opinions expressed in this Publication do not constitute investment advice and independent advice should be sought where appropriate. Whilst reasonable effort has been made to ensure the accuracy of the information contained in this Publication, this cannot be guaranteed and neither NEFS nor any other related entity shall have any liability to any person or entity which relies on the information contained in this Publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at the user’s risk.