Week Ending 5th November 2017
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Macro Review 3 United Kingdom United States & Canada Europe Japan & South Korea Australia & New Zealand
Emerging Markets 8 Africa China Latin America Russia & Eastern Europe South Asia Middle East
Equity and Deals 14
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 18 Agriculture Energy
Currencies 20
EUR, USD, GBP AUD, JPY, Other Asian
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Week Ending 5th November 2017
MACRO REVIEW United Kingdom After last week’s attention on the interest rate rise, this week sees figures for the retail and housing sectors released. The European Commission (EC) also provided its outlook for UK growth in the run up to Brexit. The UK retail sector is faltering. The British Retail Consortium (BRC) announced on Tuesday that non-food sales rose by just 0.2%, the lowest since records began in 2011. The news comes as “consumers appear to have opted for outdoor experiences during half term, over visits to shops” according to BRC chief executive, Helen Dickinson. Other causes include the rise in inflation to 3% in October, acting as a deterrent for shoppers, and a longer term switch to online shopping by consumers. The BRC has also urged the Chancellor to deliver a “budget for shoppers”, by freezing income tax rates for most taxpayers in his budget announcement on November 22nd. Given that consumer spending accounts for roughly 60% of UK GDP, this suggestion by the BRC is reasonable, considering the wavering economy amidst Brexit uncertainty. In other news UK house prices are exhibiting strong growth, rising 4.5% in the year to October, according to Halifax. This is due to cheap mortgages and record low unemployment. However there is
considerable variation in the data, with Rightmove and Nationwide reporting just 0.2% and 0.8% growth respectively. Halifax do not expect last week’s interest rate rise to impact the housing market very much. Conversely, the BRC believes the rise could negatively affect the retail sector due to an increased cost of borrowing. This suggests that the rate hike is likely to have more of an impact on short term borrowing, for instance by making savings accounts more appealing than longer term options such as mortgages. Given that we have now entered the Christmas period, this is a morbid reality for retailers. Also this week, the EC has lowered the UK’s growth forecast to just 1.1% (current UK growth stands at 1.7%) for the year preceding Brexit (see graph below). The lacklustre forecast stems largely from uncertainty over the outcome of Brexit negotiations, which in turn is predicted to hit investment levels. Conversely, the EC predicts higher growth and lower inflation in the Eurozone. If these forecasts are realised, the UK will have to account for a divergence from the Eurozone in its macroeconomic indicators during the divorce period with the EU. Deevya Patel
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NEFS Market Wrap-Up
United States Following multi-week winning streaks, the major U.S benchmarks dropped this week. Dow Jones’ 8-week rally finally came to end, losing 109.86 points, or 0.5%, to 23422.21 on Friday. The S&P 500 also slumped, down 5.08 points to 2,582.39, a decline of 0.2%. This is its first losing week since early September. However, the tech-heavy Nasdaq Composite Index rose 0.89 points to 6,750.94, supported by the strength of semiconductor stocks. The movement of the major benchmarks still seem to be driven by the proposed tax reform, with concerns over a delay on tax reform apparent on the markets. This follows from the Senate’s unveiling of their version of a draft tax bill, which differed substantially from the house’s proposal. The main disagreement isn’t on the corporate tax cut itself, but the timing of it. President Trump’s preference of a cut in 2018 is what the House proposes, however the Senate would delay the historic tax cut until 2019. “The delay to the tax cut by one year is certainly a key one for the markets” said MUFG analyst Derek Halpenny. Another big discrepancy between the two draft bills is on local and state tax reductions. The Senate Finance Committee opted to eliminate the deduction for all state and local taxes, even property taxes. The Senate tax plan
also retains the hugely unpopular estate/death tax, “The Senate's current position is out of step with the President, the House, and 76% of the public who want the death tax repealed entirely,” says Palmer Schoening, president of the Family Business Coalition. There are further worries over the junkbond market. So-called Junk-bonds are named as such due to their higher default risk in relation to investment-grade bonds. These high yield bonds fell to their lowest price since March (see graph below), with huge trading volumes over the week. Uninspiring quarterly results from highyield bond issuers are inducing selling pressures: “There is a real pronounced weakness in a few sectors that [is] driving a lot of it,” said Jerry Cudzil, head of credit trading at TCW. Bitcoin’s sevenfold increase in value since the start of the year has bought with it an extreme feeling of a bubble that is due to burst. Bitcoin hit its all-time high of $7,888 on Wednesday, yet was followed by a huge drop of over $1000 by Friday. Traders were clearly dumping the cryptocurrency for a clone called Bitcoin Cash, sending its value up around a third. Edward Turner
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Week Ending 5th November 2017
Europe According to the European Commission (EC), Italy’s ratio of debt to GDP will increase to 132.1%, up by 0.01% from 2016. The 2017 target fall in debt to 131.6% forecasted by the Italian Government will not be achievable due to the slower pace of recovery for European countries. While the two institutions agree on the forecast of 1.5% economic expansion during this year, the EC expects the growth to continue at a lower rate due to the current strength of the euro. “It’s true that we have a more cautious forecast for 2018 and 2019, but the 2019 forecast has to be taken with a pinch of salt, because we are working on a non-policy-change assumption for that forecast” – the EU Economic and Monetary Commissioner Pierre Moscovici stated last week about Italy’s growth projections. In line with last weekend’s regional elections in Sicily, Mr Berlusconi and his centre-right party, Forza Italia, are destined to form a broad right-wing coalition for Italy's next parliament elections, which will be seemingly held in the first half of 2018. The Democratic Party (PD), which has governed Italy since 2013, appears unable to put together a broad alliance due to the highlyfragmented and divided presence of the Left in the country. However, with the new election law, Mr Berlusconi would require building an alliance with a left-wing party which will plausibly result in a wide and “confusing” coalition.
ECB’s policymaker Coeure suggests that the robust and positive growth of the Eurozone provides space for structural reforms that will be able to shield the region from future inevitable shocks. Coeure stated that: “The crisis will necessarily arrive because that is how the economic cycle works. We don’t know where it will come from; it might come from China, it might come from the U.S, or from within the Eurozone". A continued and prolonged stimulus will, in fact, support the economies of the Euro area while the demand for independent growth policies spread. Carbon Dioxide emissions will have to be cut by 30% by 2030 according to the new European anti-pollution target. Whilst the European Automobile Manufacturers' Association outlined the new rules as "overly challenging”, environmental campaigners hoped for more stringent objectives. The global race for hybrid and pure electric vehicles has just started (see figures below) and many of Europe’s carmakers, like Volkswagen and Daimler, are ready to strive for it with clear and ambitious goals. Giovanni Cafaro
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NEFS Market Wrap-Up
Japan & South Korea This week saw big South Korean game makers report strong quarterly profits on the back of growing overseas revenues. The net profit at NCSoft, the country’s biggest online game maker, jumped nearly six-fold year-on-year to a record Won275bn ($247.5m) in the JulySeptember period. Netmarble, the world’s third-largest mobile game publisher, saw its Q3 net profit double to Won84bn. The strong results are believed to be the result of mobile versions of existing online blockbusters expanding the market to fans in Japan and South-East Asia, especially for the popular mobile versions of Lineage. About 10m accounts have been created to play the mobile game, as stated by NCSoft, adding that it planned to launch Lineage M in Taiwan, Hong Kong and Macao, where the Lineage online franchise is well-known. Analysts expect the momentum to continue through next year as the big Korean game developers launch more role-playing games to target global gamers. Earlier this week, Netmarble said that overseas revenues accounted for more than two-thirds of its Q3 sales as “Lineage 2: Revolution” became the most popular game in Japan since its August launch. The games generate profit through the “freemium” business model, where games are free to play but charge for virtual items that give players advantages.
Deutsche Telekom; both sides however were unable to find mutually agreeable terms given that each wanted full control of the merged business. Shares in Sprint on Monday crashed as much as 12% to hit their lowest level since early 2016, while T-Mobile fell almost 6% (see graph below). Annual revenues at Sprint have been stagnant at $8bn for the past three years, with Sprint reporting a loss in almost every quarter since 2011. It only returned to profit this year after repeatedly cutting capital expenditure, from $4.5bn to $3bn, and then to as low as $2bn at the start of 2017. As Sprint was quick to detail a “Plan B”, Mr Son has hinted that he could look for a new partner, potentially Charter Communications, the US cable and communications group. Kannan Vankateshwar, an analyst with Barclays, stated that “If Charter does look at selling itself to Sprint, it would imply that Charter shareholders would implicitly be swapping out of Charter into Sprint stock”, yet it is not clear why major shareholders at Charter would consider this to be a better outcome. Hayati Sharir
On Monday, the merger of the US’s third and fourth largest mobile companies, Sprint and T-Mobile US, came to failure for the second attempt of the record. This was primarily due to management control issues regarding Masayoshi Son, the Japanese billionaire behind the SoftBank conglomerate. Sprint is controlled by SoftBank whilst T-Mobile is owned by
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Week Ending 5th November 2017
Australia & New Zealand Statistics released from the Reserve Bank of Australia (RBA) suggest that the medium term forecast for the Australian economy is positive, albeit slightly revised down from prior forecasts. The New Zealand Reserve bank also provided indications for the long term growth and expectations for the New Zealand economy under the new government.
2019, whereas previous expectations had been for a change in 2018. The RBA is hesitant to reduce interest rates as this generated a housing bubble crisis in 2016. Household debt is currently 190% of consumers’ disposable income and subsequently any reduction in interest rates is likely to worsen this issue and damage the economy further.
On Friday 10th, the RBA released their quarterly growth forecast, which stood at 2.5% GDP for December 2017. This was revised down from prior forecasts in August, which expected growth to stand at 2% to 3%. The RBA stated that inflation was unlikely to grow towards its 2-3% target, revising down its 2017-2018 forecasts from between 1.5% and 2.5%, as suggested in their August statement, to 1.75%. Forecasts for 2019 fell from between 2-3% down to 2%. The Governor of the RBA, Philip Lowe, remarked “inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing,".
Meanwhile, the New Zealand Reserve Bank announced on Thursday 9th that the official cash rate would remain at 1.75%. However, they have revised forecasts for a potential increase in rates from the third quarter of 2019 to the second quarter, as a result of an increase in inflation expectations. The Reserve Bank Governor, Grant Spencer, has attempted to downplay the impact of the new government and dampen expectations for a rate hike, aiming to induce confidence into an uncertain New Zealand economy.
Investors viewed this announcement negatively, hence causing the Australian Dollar to fall to 0.7662 compared to the USD, down from 0.7690. This is due to the lower inflation expectations indicating that the RBA will not change interest rates until
In a statement, Spencer remarked that “Even though that track moves up a bit we could just as well see the next policy move down as up”, suggesting that the market should revise expectations as the true impact of the new government on the economy in unknown. Nicholas Gladwin
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NEFS Market Wrap-Up
EMERGING MARKETS
Africa On Thursday 9th November, the World Bank signed a deal with Tanzania that offered the nation $150 million to invest in tourism in the south of the country. In the past, the Tanzanian government had often overlooked the south as a potential source of economic growth and instead diverted investments towards the north. The “REGROW project” hopes injecting money into infrastructure in the south and hence presenting the region as a tourism destination will boost the nation’s economic growth. Investing in roads and national parks, by building bridges and airstrips, will provide jobs in construction and in the new tourist markets. Tourism will also mean higher consumption of local products in the area and the possibility for new business ventures such as hotels. This project is just one of many economic accomplishments since Magufuli was sworn in as President in November 2015. From the beginning of his presidency, Magufuli has driven a hardline against corruption and government officials’ overexpenditure of public money. This includes diverting funds originally intended for Independence Day festivities into the fight against cholera, reforms in key economic institutions, like the Tanzania Revenue Authority and the Tanzania Port Authority, and cutting funding for overseas flights for government officials. Indeed, this nationwide battle against corruption
continues today. On Monday, almost two years since Magufuli’s first day as President, the Tanzanian leader dismissed two DEDs in Bukoba following the unexplained whereabouts of reserves they had put aside for roads in their regions. Having secured international investments and taken a hardline approach to eradicating deep-rooted corruption, the nation’s President seems like any other candidate. However, Quartz reported on Thursday 9th November that this fight against corruption had now extended to a “war on democracy”. Magafuli is clearly beginning to violate the basic human rights of freedom of speech through closing online social media platforms and undermining the nation’s democratic institutions. On Wednesday, the police confiscated the phone of Zitto Kabwe, one of Magafuli’s political opponents, and raided opposing political offices under the Cybercrime Act and Statistics Act. Falling confidence in the authorities of an area could dissuade potential investors, especially when political imbalance can have such woeful impacts on the economy and the potential for their investments. This is particularly important with Chinese firms who make up Tanzania’s largest overseas investors – and one of the main sources of investment in the future. Laura Leng 8
Week Ending 5th November 2017
China This weekend, China’s two ecommerce giants, Alibaba and JD.com, competed for business on the world’s largest online shopping day on 11/11, called Singles’ Day. As of Friday, the day was predicted to hold US$22 billion in gross merchandise volume, a 24% increase over last year. JD.com and Alibaba are both expanding the sale overseas in Southeast Asia, driving the increase in sales volume. Ecommerce is growing at a rapid pace in China, with Alibaba and JD.com’s New York listed stocks rising around 90% and 60% respectively this year. Concurrent with US President Trump’s state visit to China, the Chinese government announced that it would allow foreign companies to take majority ownership of domestic security companies by 2020. China’s financial sector remains opaque and vulnerable to external shocks, and this reform could modernise the sector by importing international best practices. The reform will increase the 49% cap on foreign ownership in security businesses to 51% within the next year, and the limit will be removed by 2020. Similar measures are being taken with the 25% ownership limit on stakes in local banks. This was announced while Mr Trump and President Xi Jinping shook hands over US$250 billion worth of investment and purchase agreements, including a contract over
Alaskan oil friends between a US oil company and the three Chinese stateowned companies (including the oil group Sinope). Although many of these deals are nonbinding, Mr Trump hopes they will help reduce the US$347 billion trade deficit in goods. The Alaskan deal alone, according to the American state, could reduce the trade deficit with Asia by US$10 billion annually. Trade with the US remains a strong source of Chinese growth. At a biannual trade fair on 4th November, foreign orders for Chinese goods rose to US$30.16 billion, an increase of 8.2% over last year. Yet in October, exports failed to meet expectations, rising only 6.9% year-onyear compared with 8.1% year-on-year in September. The trade balance rose to US$38.17 billion in October, but was still short of the US$48.42 billion notched last October (see graph below). Rising imports have contributed to the narrowing surplus. While consumer inflation rose by 1.9% in October, the manufacturing purchasing managers’ index, an indicator of business conditions, fell to 51.6 points. A reading below 50 points indicates contraction. While the overall growth picture for the economy appears mixed, the annual growth rate is likely to remain below 7%. Daniel Blaugher
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NEFS Market Wrap-Up
Latin America Venezuela continues to dominate headlines in Latin America this week. Brazil and Mexico have also seen their inflation rates rise, with the latter deciding to keep interest rates constant. Last week’s announcement by President Maduro to restructure Venezuela’s debt has been met with a variety of responses. This includes comments by the Argentine President, Mauricio Macri, which stated that the US should impose a full embargo on Venezuelan oil exports. Although he is the only Latin American leader to suggest an oil embargo, Macri claims that there would be “broad support” across the region. There has been mixed news whether Petroleos de Venezuela SA (PDVSA) has transferred the payment on its 2017 bond that matured last Friday. Investors have asked the International Swaps and Derivatives Association (ISDA) to decide if Venezuela has defaulted, in the hope of triggering credit default swaps. In addition, ONGC, India’s top oil producer, has confirmed that PDVSA is months behind on its debt payments and has previously used a state-owned Russian bank and another Indian energy firm as intermediaries. On Friday, a meeting was held by the ISDA to discuss whether the country is close to default. The outcome of the meeting is yet to be known.
As anticipated, the Mexican central bank unanimously decided to leave its interest rate unchanged at 7% on Thursday. The decision was based on the continuing uncertainty regarding the North American Free Trade Agreement and the economy’s high inflation rate, which rose against market expectations from 6.35% to 6.37% in October. The interest rate has been held steady since June this year, with this particular level being its highest since early 2009, due to a rapid growth in inflation since the end of 2015. The central bank expects inflation to converge towards its official target of 3% next year, however many economists believe this is optimistic. Brazil’s October inflation rate has risen to 2.70% from 2.54% the previous month. The rise is mostly attributed to a rise in electricity rates, which was needed to counteract reduced hydropower generation due to a reduced rainfall. The high inflation experienced last year, shown in the graph below, has caused Brazilian policymakers to dramatically cut interest rates, however it is unlikely that the Brazilian central bank will cut the interest rate further following the news. Jessica Murray
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Week Ending 5th November 2017
Russia & Eastern Europe This week saw economic expectations for 2018 growth in Eastern Europe increase due to overall development in the region. Eastern Europe has yet again surprised analysts with even higher growth forecasts than predicted earlier this year. While GDP Growth expectations for 2017 round off at 2.5%, the expected growth for 2018 grew to 2.6%, astounding many analysts. Countries such as Poland and Romania also experienced higher growth forecasts for this year, with Poland now expected to grow 4.1% as opposed to 3.2% in May, and Romania expected to grow by 5.3%, in contrast to its 4% prediction. There are a variety of reasons for this seemingly sudden expansion, but the most prominent reasons include strong external demand, a tighter labour market and easier financing conditions that are increasing Foreign Direct Investment (FDI). The increase in foreign demand is due largely to steady economic growth in the rest of Europe, which has increased aggregate demand in Europe for many imports from Eastern Europe. Furthermore, the labour markets in Poland, the Czech Republic and Romania, have been performing well. This is despite large amounts of emigration, which has reduced the amount of younger people in the workforce. Unemployment rates are lower in these countries despite
companies reporting labour shortages. This is a blessing in disguise, as companies are thus forced to raise their worker’s wages, thus leading to an increase in domestic consumption. Most notably, the labour costs in Eastern Europe compared to the rest of the European Union are lower. This has made the region more competitive than other areas in Europe and has therefore helped to increase FDI levels. Nearly half of the European Union’s FDI is directed at Eastern Europe, which considerably raises the outlook on the region. Overall, considering the surprising economic forecasts, Eastern Europe is turning out to be a very sound region to turn one’s attention to in the next couple of years. If the countries that make up Eastern Europe begin focusing more on immigration policies, exports and FDI, development will accelerate considerably further.
Mario Pucinelli Filho
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NEFS Market Wrap-Up
South Asia This week we explore President Trump’s diplomatic tour of Asia. The trip includes visits to 7 countries including the South Asian nations of Vietnam and the Philippines where Trump will meet with the Vietnamese President, Trần Đại Quang, as well as attending the US – ASEAN Summit and East Asia Summit. The trip began on Friday 3rd November, where Trump visited Japan in order to meet with the Japanese President, Shinzo Abe. During his time in Japan, the topics of discussion were largely dominated by North Korea. Following this, Trump headed to South Korea to meet with President Moon and speak at the South Korean National assembly. On the 4th November Trump headed to China for a three-day visit in Beijing. There he held talks with Chinese President Xi Jinping and later announced $250 billion worth of trade agreements between the two countries. On Friday 10th November, Trump attended the Asia-Pacific Economic Co-operation (APEC) meeting in Vietnam where his speech on future global trade significantly contrasted with President Xi Jinping’s predictions. However, the two disagree greatly on the topic of Globalisation and international trade, with Trump criticising the World Trade Organization.
Trump’s visit to Vietnam was much better received than other stops on the tour. According to a survey, 58% of Vietnamese people have confidence in the US President (compared with a global median of just 22%). However, his arrival in the Vietnamese city of Da Nang is somewhat ironic considering the city is currently facing heavy flooding and Trump’s views on climate change. The tour will end on Monday 13th with a final visit to Manila in the Philippines. In the run up to Trump’s arrival on Sunday 12th November, many Filipinos have shown their disapproval at the visit. This has included resorting to protests, labelling Trump a ‘fascist’, and displaying their condemnation of Trump’s approach to North Korea. Ultimately, Trump’s tour of Asia should shed some light on the future of America foreign policy as well as form closer ties with Asian countries. In addition to this, the trip hopes to “strengthen the international resolve to confront the North Korean threat”, in the words of the White House. Abigail Grierson
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Middle East This week will be focused on the Saudi Crown Prince’s crackdown on corruption through the arrests of leading figures within the Kingdom’s political and business elite. Last weekend, hours after being named the Head of an anti-corruption commission by King Salman, the Crown Prince Mohamed bin Salman ordered the arrests of dozens of princes and leading business tycoons on corruption charges, with the capital’s private airport being ordered to close on Saturday evening in order to prevent powerful individuals from fleeing the country. Since then, over 200 people have been arrested as part of an anticorruption clampdown into at least $100bn in corruption and embezzlement over the past decades Those arrested include some of the most influential people within the country, such as Prince Alwaleed bin Talal (the billionaire business tycoon), Prince Miteb bin Abdullah (Head of the National Guard), and Sheikh Waleed alIbrahim (billionaire media mogul whose MBC group owns Al Arabiya). The Crown Prince has been known to complain against the corruption that is present within the Saudi regime, through privileged insiders and ministers cheating the Kingdom of billions of dollars through rigged bids and corrupt contracts. Having been given unparalleled control over oil policy, economic strategy, foreign policy
and defence in 2015 by King Salman, the Crown Prince has been quoted saying “No one who got involved in a corruption case will escape, regardless if he was a minister or a prince” earlier this year. The prominent ministers and businessmen face accusations over money laundering, extortion, bribery and channelling government contracts to firms with links to the suspects arrested. The Kingdom’s attorney general has stated that he has asked the Saudi Arabia central bank to suspend the personal bank accounts of “persons of interest” within the investigation. A similar request was given to the UAE central bank, which now requires banks to provide information on accounts, deposits and transfers in relation to 19 of the individuals arrested. This anti-corruption purge has triggered uncertainty amongst investors as questions have been raised in regards to the country’s attitude towards business under the Crown Prince. The arrests have resulted in alarm for the executives working on the Crown Prince’s transformation plan along with sending shockwaves through the business community with these latest developments also speeding up the pace of outflows in capital flight. Abdul Akhtar
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EQUITY AND DEALS NEFS Market Wrap-Up
Financials In American markets the S&P 500 seemed to stumble this week just as it was set to break its 2600 point milestone. This is in part due to weakening tech shares, which are the single largest weighting in the S&P 500. Technology giants such as Apple, Amazon and Samsung experienced simultaneous falling share prices on Thursday after details emerged about the Republican tax reform plan. The proposed plan would delay slashing the corporate tax rate from 35% to 20% until 2019. After the news, the Dow Jones briefly fell by 250 points on Thursday but soon rebounded to close the day only 100 points lower. Despite the pullback, analysts don’t seem to be troubled by the sell-off and believe it is a natural reaction by markets to the current policy uncertainty.
The big winner in this week’s indices was undoubtedly the ASX 200 – Australia’s main securities exchange - as it reached its highest point since the 2007 crisis. Despite most other major indices experiencing market pullbacks with the possible end to their upward trend, the ASX 200 broke its 6000-point benchmark this week, a feat last achieved in January 2008. Most of the gains came as a result of surging commodity prices that boosted mining and energy sectors. However, Australia’s share markets tend to behave similarly to those of emerging economies as it is heavily exposed to resources and relatively not so exposed to tech stocks. This makes Australia’s markets a bit more volatile, which at the moment raises uncertainty over whether the impressive performance of the week will last.
It’s been an unfavourable week for the FTSE 100 as it fell over 120 points this week to close at its lowest point in over a month. Falling shares in Burberry, Bunzl and GlaxoSmithKline dragged the index down. This descent was compounded by a sharp rise in the pound against the dollar. A large proportion of profits for FTSE 100 companies are made in dollars, so as the pound strengthens dollar revenues are worth less. Currently approximately 71% of revenues generated by FTSE 100 companies come from outside the UK.
Changu Maundeni
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Week Ending 5th November 2017
Technology & Health In this week’s wrap-up, autonomous technology threatening the car industry, flying taxis, and success in stem cell technology. Waymo, a self-driving car firm belonging to Google’s parent company Alphabet, has launched an autonomous ride-hailing service. Having been tested on public roads in Arizona, members of the public can begin to ride in the cars in the coming months (initially under employee supervision). The success of service trials has given Waymo an edge against competitors including Uber, Tesla, and Apple. Google’s testing of self-driving technology has extended over more than 8 years, and Edison Investment Research ranks Waymo’s self-driving technology as 5,000 times better than Uber’s. In a remarkable move, however, Uber has signed a contract with NASA to develop flying taxi software. Whether groundbreaking or laughable, Uber has announced plans to test flights of the vehicles in LA in 2020. Partnering with NASA may give Uber a slim chance of attaining the exceptional levels of safety and efficiency needed to build the 200mph flying taxis. CPO Jeff Holden expects the vehicles to be “commercially available” and already in “heavy use” in Los Angeles in time for the 2028 LA Olympics. Striking news about automation and flying taxis come as Bob Lutz, former General Motors chairman, stated that the world is “approaching the end of the automotive era”, echoing the sentiment of many
autonomy-enthusiasts. Lutz claims people “will no longer drive cars in 20 years”, and think-tanks such as RethinkX believe autonomous vehicles will account for almost all road travel by 2030. However, at present, this does not seem truly possible, given the required degree of political and financial focus, and legislative pressure needed to overhaul traditional transportation infrastructure. This week, news hit headlines of an operation by Dr. Michele De Luca and Dr. Graziella Pellegrini, from the Center for Regenerative Medicine, successfully replacing 80% of a patient’s skin using pioneering stem cell technology. It essentially cured the patient’s ‘junctional epidermolysis bullosa’, a condition which causes the skin to be extremely prone to blistering and tearing and can be frequently fatal. Although risky and radically new, the treatment (which employed a combination of stem cell and gene therapy) was the only option. While the treatment approach only applies to this rare skin disorder as of right now, the success has been commended as a huge advancement in gene therapy and stem cell technology. This industry may be one to watch – Sangamo Therapeutics and Athersys stand as the two largest stem-cell oriented firms listed on the NASDAQ, with market caps of $1.17bn and $224.91bn respectively. They stand to grow immensely if this revolutionary technology takes off. Matthew Chapman
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NEFS Market Wrap-Up
Oil, Gas & Industry This week’s article will have a special focus on OPEC’s Saudi Arabia due to multiple industry developments in the area. At the end of last week, Bin Salman ordered the arrests of several princes, former and current ministers, and recognised businessmen (including an Aramco director) after receiving control over an anti-corruption committee. Although such rapid changes added uncertainty amongst investors, the situation is likely to stabilise due to the resulting increased support for the government from its citizens. The anti-corruption raid increased the price of oil immediately and “boosted the net worth of the world’s 21 largest oil tycoons by $1.4 billion”, according to Bloomberg. In addition to the arrests, continuing frictions between OPEC Saudi and Iran, including an “act of war” accusation directed at Iran, have also contributed towards increasing oil prices. With such changes in the geopolitical landscape, the oil market must prepare itself as the tensions could potentially test the OPEC Accord – the supply risk premium now becomes more relevant in the market. On Thursday 9th, Saudi Aramco signed contracts worth US$4.5 billion, involving different oil and gas development projects, with companies in Europe, the US, China and the UAE. These agreements will expand gas production over the next 20 years and will yield an extra 1 billion standard cubic feet daily, decreasing the country’s dependence on liquid fuels for power generation.
have “seen no real change in the past 18 months”, with “above-ground tanks…rising marginally over the same period” (FT’s David Sheppard noted) – a reality that diverges from the country’s recent reports of a decrease in stocks. Yet Orbital Insights’ data may have limitations – in particular, it omits records of Saudi Arabia’s overseas and underground oil reserves. If the reductions in inventories do not stem from these unmonitored sources, OPEC’s reports of declining inventories (which are a critical indicator of the market) may have been deliberately inaccurate, with the purpose of increasing oil prices. Prices settled at over $64 for ICE Brent Crude, whilst WTI (NYMEX) closed at $57.22. This is its highest level since June 2015, after both WTI and Brent increased more than 3% on Monday – their futures’ curves in backwardation. Natural gas recovered from its low 2 weeks ago and closed at $3.200 on Friday 10th, experiencing a 7.2% increase since last week. These recent oil-price increases come as a result of supply disruptions (tensions in northern Iraq and hurricanerelated) and geopolitical instability. Many analysts believe that these supply disruptions will be short-lived, considering the most recent weekly US government inventory (showing increased production) and OPEC’s forecast of “relatively flat” demand for their oil until 2025.
Felicia Bogdana Cornelia Ababii
Data collected this week by Orbital Insights, a satellite imaging company, indicate that Saudi Arabia’s oil inventories
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Deals The $85.4bn proposed merger between AT&T and Time Warner is one of the hottest deals right now – however the long-waited deal might turn out to be blocked by the anti-trust authority. AT&T is the world’s largest telecommunications company with a revenue of $163.8bn in 2016 and Time Warner is one of the largest entertainment and mass media conglomerates. The consequences of such a merger would be profound. Impacts to consumers range from increased product variety to higher prices resulting from the monopolistic power. On Wednesday the Department of Justice (DoJ) said they would give the merger a red light unless AT&T agrees to sell CNN, which is owned by Time Warner. Since then, the talk between AT&T and the DoJ has been publicly contentious. AT&T refuses to sell the asset, as Turner Broadcasting (parent company of CNN) generates a significant portion of Time Warner’s profit. President Trump has also slammed CNN for reporting ‘fake news’, and analysts anticipate that he is likely to oppose this deal as he once described the merger as ‘too much concentration of power in the hands of too few’ during his election campaign last year. Now the timing and outcome of this merger are very uncertain and in doubt.
AT&T has shown its determination to fight with the DoJ till the end. John Stephens, CFO of AT&T, says that the merger would be beneficial to the market, as well as expressing his bewilderment at the decision of the DoJ, as they have no blocked a vertical merger like this for 40 years. On the other hand, it is still not impossible for this merger to happen without CNN being sold. AT&T would in the end have no choice but to take this dispute to court. Some anti-trust experts believe however that it would be challenging for the regulators to win this case, as they appear to not be on the best legal ground to reject the deal. AT&T was a major donor to Trump’s inauguration and the organisation has already sent lobbyists to Mike Pence and others in the administration. Another issue with the merger is that, even if AT&T agreed to sell CNN, it is still not clear who would buy it. The drama has sent the share price of Time Warner down to $87.05 after market closed on Thursday, an 8% decrease compared to Tuesday’s closing price.
Ang Gao
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NEFS Market Wrap-Up
COMMODITIES
Agriculture For the second time this year, the world’s food import bill is expected to reach a new high, following a spike in shipping expenses coupled with increased meat and dairy prices. Globally, food importation is predicted to increase to $1.4tn, a rise of 6% and second only to costs in 2014, as suggested by the UN Food and Agricultural Organisation (FAO) as shown in Figure 1.
overall cost of wheat in the US by more than a third. A substantial increase in dairy and meat imports has stemmed from lower supply, higher demand and increased transportation fees. Similarly, the global meat import expenditure is expected to meet a new high of $176bn and dairy import expenditure is predicted to reach $180bn, both up from 2016 by 22% and 16% respectively.
Increased growth from countries such as China are driving growth in world trade and in turn international freight rates. The Baltic Dry Index rose by 55% this year after hitting a record low at the beginning of 2016. The FAO cautioned this week that demand for future agricultural commodities could be impacted if freight rates become more volatile, despite abundant harvests and reduced shipping fees. It is clear now that importers must take consideration of increased shipping costs. US wheat prices for example are currently $4.20 a bushel, slightly higher than $4.16 a bushel in 2016. However increased freight rates have driven the
Countries home to developing economies are more likely to be affected by the increasing costs due to their reliance on non-domestic purchases for agricultural commodities. The FAO mentioned “Expenditures by least-developed countries, low-income food deficit countries and those geographically situated in sub-Saharan Africa are set to climb considerably more than the global increase in 2017”. Low-income countries dependent on purchasing food are predicted to see their import bill surge by 12%. Sarren Sidhu
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Week Ending 5th November 2017
Energy While the latest crude oil headlines have been focusing on prices spiking to their highest levels since July 2015, the BrentWTI price spread (the price differential between Brent crude and WTI crude) has also grown to its widest level in more than two years (see graph below). This wide price differential could put US crude oil exports, which have already broken alltime highs, into overdrive. The price spread has recently widened to multi-year highs after Hurricane Harvey disrupted domestic crude supply chains to refiners on the US Gulf Coast. The result is a surge in US crude exports as oil refiners from all over the world, especially those from China, scrambled to book crude oil shipments from the US Gulf Coast. In the past, the West Texas Intermediate (WTI) crude would often trade at a significant discount to Brent, as a crude oil export ban in the US, implemented since 1975, prevented oil that was produced domestically from being exported overseas. The 40-year-old ban was created by the US to guarantee its own energy independence after the 1975 Arab oil embargo shocked the US economy. However, the shale oil boom prompted the US Congress to lift the crude export ban in early 2016. This shale oil boom resulted in US crude oil production rising steadily
from an average of 6 million barrels a day in 2011 to 9 million barrels in 2015. When the ban was lifted, the price spread disappeared as US crude oil producers found strong demand for their discounted oil in international markets. Over in Saudi Arabia, power struggles in the Saudi royal family intensified this week. The new anti-corruption commission helmed by the Crown Prince, Mohammed bin Salman (also commonly known as MBS), arrested several Saudi Arabian princes. This included, most notably, billionaire tycoon Prince Alwaleed bin Talal on charges of corruption and graft. MBS has been a key supporter of OPEC’s measured oil production cuts so his latest political maneuver, which consolidates his power base in the Kingdom, would mean that the output cuts are likely to be maintained and extended for the rest of 2018. As such, crude oil prices duly rose higher this week. Both Brent and WTI rallied for their fifth consecutive week and touched new 2017 highs of $64.62 and $57.89 respectively. Looking ahead, investors will be expecting solid EU GDP numbers and higher US CPI readings next week. Mingli Yong
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NEFS Market Wrap-Up
CURRENCIES Major Currencies Bitcoin is back at an all time high of $7882, up 8.75% from last week. Despite concerns over decentralisation measures sparked by the creation of Bitcoin Gold and other branches of the cryptocurrency, markets seem to have responded well. However Bitcoin is not out of its turbulent patch yet, as plans to increase the amount of information processed by the blocks underpinning Bitcoin’s blockchain network are now being called off by supporters, according to CoinDesk. This suspension could prevent the anticipated split of Bitcoin due this month, which is believed by some to have the potential to help Bitcoin scale faster. Without a doubt, this cryptocurrency is one to watch in coming weeks. Markets were in motion for the pound this week, with a 7% decline against the Euro. Retail sales were down -0.8% from the forecasted -0.1%, reflecting the growing imbalance in the UK’s trading position of a -£11.25 billion disparity between exports and imports. Coupled with Brexit uncertainty, as big names in British business publicly express frustration at the pace of negotiations, both factors are responsible for the continue of the pound’s decline. We notice that this imbalance is not reflected in a weaker pound as theory dictates because the outflow of sterling is compensated by FDI inflows. However
currency strategists at Swiss bank UBS claim that Brexit poses a huge risk to this compensation if the UK ceases to be attractive to investors. It has been suggested that the pound is almost 20% overvalued, suggesting that a large downwards correction in the exchange is both due and perhaps imminent – a big risk if Brexit negotiations are to progress. Another relatively quiet week in the European Economic calendar has kept US releases in the spotlight. Traders are focused on the US tax cut prospects due to its direct influence on Federal Reserve policy. Proposals to delay cuts for a year saw the dollar index slide after early to mid-week uncertainty from a high of 95.10 on Tuesday. Thursday’s release by the Department of Labour had the dollar plunging further to 94.66, detailing unemployment claims of 7,000 above forecasted results. Perhaps the dollar’s track record of positive performance since entering Q4 is in jeopardy given that the dollar closed lower last week than when it opened, deviating from its upward trend. Unless economic conditions improve and market outlook is brighter, the dollar could remain on this bearish path. Amelia Hacon
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Week Ending 5th November 2017
Minor Currencies On Friday, the Reserve Bank of Australia (RBA) reduced its inflation forecast in its Statement on Monetary Policy, hence suggesting that an interest rate rise remains unlikely. This comes as a surprise considering many other G10 central banks are looking to increase their respective benchmarks. However the main impact of this news from the RBA was the fall in the value of the Australian Dollar against the US Dollar. The AUD/USD rate fell by 0.26% to 0.7661, whilst the GBP/AUD rose 0.72% to 1.7293. After months of taking a battering surrounding the New Zealand elections, the New Zealand Dollar could soon recover. Many factors are pointing to a prompt recovery, such as the Reserve Bank of New Zealand (RBNZ) increasing its inflation forecasts, sooner-thanexpected interest rate rises, and improvements in New Zealand’s terms of trade and current account deficit. This week, the NZD made a 0.5% weekly gain, up at 69.38 US cents against 69.05 US cents a week ago. This week the Swiss France weakened against its most major opponents, principally due to early European deals on Thursday. Throughout the week, the franc dropped to a low of 1.1615 against the Euro, 1.0018 against the dollar, and 113.29 against the yen. However Thomas Jordan, Chairman to the Swiss National Bank (SNB), maintains that the franc is “highly valued” and has lots of room to manoeuvre, due to the very loose monetary policies implemented by the SNB. For example, the SNB’s negative interest rate of -0.75% is key to managing both inflation and monetary policy alterations.
The South African Rand faces a big fall as a major downgrade of its credit rating looms. This downgrade is seen to be the result of the Zuma government preparing to rollout free higher education. With the downgrade to the country’s sovereign credit rating imminent, strategists at JPMorgan are recommending that traders sell the ZAR against both the US Dollar and the Euro. If South Africa loses both its investment grade ratings from Standard & Poor’s and Moody’s, it would be excluded from the Citi WGBI local-currency bond index, which would see index trading funds and investment grade credit funds forced to sell their South African holdings. Finally, it is anticipated that the Canadian Dollar will weaken further against most currencies, especially the US dollar. This is the result of the Trudeau Government’s programme of public works and generous spending starting to fade, and the economy consequently being faced with lower inflation and competitiveness. As such, the CAD is set to fall 5% against the dollar between now and the end of 2018. Yet slowing inflation means the Bank of Canada is unlikely to raise interest rates again, thus depriving the currency of the key support it needs to regain strength.
Jeremy Whiskard
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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). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Charlotte Alder at calder@nefs.org.uk. Sincerely Yours, Charlotte Alder, Director of the Nottingham Economics & Finance Society Research Division
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