Week Ending 19th 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 Middle East Africa China Latin America Russia & Eastern Europe South Asia
Equity and Deals 14
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 18
Agriculture & Resources Energy
Currencies 20
EUR, USD, GBP AUD, JPY, Other Asian
2
Week Ending 19th November 2017
MACRO REVIEW United Kingdom This week has been an important week for macroeconomic indicators. On Tuesday the Office for National Statistics (ONS) announced inflation had remained at a 5year-high of 3% for the month of October. On Wednesday UK employment data was released, which reported that the unemployment rate had remained at 4.3%. Mark Carney was spared the task of writing an explanatory letter to the Chancellor to explain the unacceptably high inflation this month, as the prediction of 3.2% inflation was not realised. Despite the price of food and non-alcoholic drinks rising at an annual rate of 4.1%, lower fuel and furniture costs meant inflation didn’t deviate far from September’s rate. Furthermore, although the value of the pound is still relatively weak and therefore continues to contribute to high inflation, it has steadied over the last 12 months, thus reducing its impact. However, there it still the potential for inflation to rise above 3%. Having now entered the Christmas period, the rising cost of food and beverages is likely to become more substantial in consumers’ basket of goods in the next couple of months.
studying, retired, out of work due to longterm illness and those looking after families. Howard Archer, an economist at the EY Item Club, suggested that Brexit uncertainty and persistently sluggish growth may be beginning to filter its way through to the labour market. We will have to wait however to see if this holds in the next quarter as well. Wage growth continues to fall in real terms, due to high inflation outpacing nominal earnings growth (see graph below), which is at 2.2% (excluding bonuses). As a result, real wages fell by 0.5%, which is consistent with the longterm trend in the variable. On a more positive note however, productivity growth was positive at 0.9%, after 6 consecutive months of negative figures. This was due to a fall in hours of work and a rise in economic growth. Since the financial crisis, productivity has taken a hit in the UK, so this news is a great bonus. Deevya Patel
On Wednesday the ONS announced that unemployment remained at 4.3%, its lowest level since 1975. However the total number of people in work dropped by 14,000 to 32 million. This is due to the increased level of inactivity in the labour market, which includes people who are 3
NEFS Market Wrap-Up
United States Statistics released this week indicate positive future projections for the US economy, however these eclipsed by the uncertainty the proposed tax reforms. Canada was also reported expected.
have been surrounding Inflation in lower than
On Thursday 16th, House Republicans passed a controversial bill to cut taxes for individuals and businesses. This bill would create new income tax bands, a new $300 tax credit, expand child credit and repeal the estate tax. The bill would also lower the corporate tax rate down from 35% to 20%. Republicans claim that this would increase the average annual income by $4000, despite reports from the Joint Committee on Taxation that suggest that average taxes would rise for all by 2027. The Senate will vote on their own proposal for a tax reform bill. If this has significant differences to the Republican bill, there will be a formal arbitration process between the two houses to find a commonly acceptable proposal. This process has created great uncertainty as many forecasters predict that there may be irreconcilable differences leading to the failure of the bill. This could have considerable negative consequences on equities, which have rallied on the expectation that the bill will pass.
US house building has increased to a yearly high of 1.29 million houses, growing 13.7% in October, as reported by the Commerce Department on Friday 17th. This exceeded expectations and is largely due to houses being rebuilt following the severe flooding earlier this year. The National Association of Home Builders reported that confidence in the housing market rose by 2 points to 70 for November. This is the second highest recording of confidence in the market since 2008. The U.S Department of Labor reported on Wednesday 15th that inflation (as measured by CPI) rose to 2% in October, which is an increase of 0.1% from September. This was largely driven by a fall in energy prices, such as the price of gasoline falling by 2.4%. Members of the Federal Reserve Bank have indicated that they would be in favour of a rate hike next month, with Bloomberg predicting a 93% chance of an increase occurring. Meanwhile, the Canadian inflation rate decreased to 1.4% in October, as reported by Statistics Canada on Friday 17th. This was largely due to a fall in energy prices and has signalled that the central bank will wait until 2018 to change rates. Nicholas Gladwin
4
Week Ending 19th November 2017
Europe While largely overshadowed by uncertainty in British politics, the European Union is making moves over euro clearing amongst current Brexit negotiations. The EU has presented a draft law to instil powers to move euro clearing away from London after Britain leaves the trading bloc in 2019. Speaking in Brussels, European Commission Vice President Valdis Dombrovskis told reporters on Tuesday: “We…need to prepare for the departure of the EU’s largest financial centre from the single market. That means taking action to preserve financial stability and provide certainty to businesses.” Forced relocation of EU citizens working in London not only threatens jobs in the city but poses the risk of increasing trading costs and harming the euro, hence why the EU is being quick to snatch the ball into its court. Perhaps such decisiveness is conducive to rising optimism over Eurozone operations; after a decade of financial crisis and uncertainty in the currency area, attitudes remain high spirited despite high unemployment and sustained divergences between member states. Converging rates of growth that are currently seen in the Eurozone is considered highly favourable for a monetary union – partially fuelled by strong Q4 export performance in the German and Italian economies.
President), are of the opinion that even with the financial crisis, “there were several countries still very much attracted to the idea of the stability and the openness that the monetary union offers to all countries”. Such a positive outlook on Eurozone recovery and the performance of the Union is likely to spill welcomingly into markets, further contributing to upward growth patterns. Notably this week, French President Emmanuel Macron is expressing discontent with European labour reforms. Macron is pushing for changes to current regulations, which he claim harms French workers by allowing companies to pay posted workers more than they receive in their home countries, but less than locals of the country in which they working. Opposition to Macron’s agenda are heard the most loudly from Hungary, Lithuania, Latvia and Poland, who refuse to back proposals altogether. These members of the bloc leverage lower wages to increase competitiveness when exporting their labour. While Macron won over Bulgaria and Slovakia during meetings over the summer, other Eastern European countries will be harder to convince unless a favourable compromise can be negotiated. Amelia Hacon
Although there will always be differing opinions on the concept of independent fiscal policy implemented in tandem with unified monetary policy, many ECB officials, including Vitor Constancio (Vice-
5
NEFS Market Wrap-Up
Japan & South Korea It is common knowledge that Japan has been waging a tough battle against deflation. However this week it was reported that Japan’s economy has expanded for the 7th consecutive quarter, hence indicating the longest period of continuous economic growth since 2001. Between July and September 2017, the nation’s GDP grew at an annualized rate of 1.4%. This is due to a number of both short-term and long-term factors. Among the short-term factors are changes in international markets, with strong demand for cars and electronics meaning rises in exports have offset slight contractions in consumption. A Reuters poll of 20 economists believed that exports had grown around 15.8% from October 2016 to October 2017. Long-term changes through “Abenomics”, as named after the Japanese Prime Minister Shinzo Abe, have contributed to dragging the economy out of its economic slump. This set of policies uses three main tools: fiscal stimulus, monetary policy and structural reforms. Over the past four years, almost 30 trillion yen has been pumped into the nation through three fiscal stimulus packages primarily focused on developing infrastructure. Monetary policy has come in the form of extensive quantitative easing and the outlandish attempt to boost consumption through negative interest rates. Finally, Abe has attempted to restructure the whole economy by reducing business regulations, as well as liberalizing the labour market and agricultural sector.
However, whether these results are sustainable is highly disputed. Dangerous policy decisions and contractions in the working age population will soon catch up with economic growth and seriously disrupt the nation’s economy. Already dependent on government spending and negative interest rates, confidence will soon falter and hence so too will investments and consumption. Furthermore since 2010, Japan’s population has been contracting. This has filtered through to the working age population, which has shrunk from 86.9 million in January 1997 to just under 76.1 million in August 2016. The limited labour supply puts serious pressure on the national economy’s ability to expand. This is particularly worrying for Japan with the rise of other competitors within Asia. This week, a Bank of America Merill Lynch report forecasted that India would overtake Japan as the third largest economy by 2028 should it continue its current economic growth path. Should Japan want to maintain this position, they will need to fight back against the crippling pressures of a shrinking population and undertake significant reforms to the economy. Laura Leng
6
Week Ending 19th November 2017
Australia & New Zealand On the 15th November, the results of the Australian vote to legalise gay marriage were released, with 61.6% of people voting in favour. In this article we will explore both the economic and social effects of the vote. Unlike other Australian votes, the gay marriage vote was voluntary yet the turnout was 79.5%. The postal survey asked voters: ‘Should the law be changed to allow same-sex couples to marry?’ Although it is a non-binding poll, the Prime Minister, Malcolm Turnbull, has just announced that he aims to pass legislation on the matter by Christmas. Although Australia is a developed economy, its legalization of gay marriage comes much later than many other similar nations. England and Wales legalized same-sex marriage in 2013 and the Netherlands legalized it in 2000. The economic impact of the legalization are expected to be huge, with a chief economist at the Australian Bank, AMP, predicting a $2 billion net economic impact over the next five years. The main beneficiaries are likely to be tourism, retail and the wedding industry. An increase in government revenue is also expected from marriage certificates, as well as a boost in consumer confidence due to a large majority of Australians agreeing with marriage equality.
The Australian Labour Force Survey taken in 2011 showed that Australia is home to approximately 33,000 same-sex couples, therefore there is huge scope for many marriages to take place following the vote. Socially, the result is likely to also have a positive effect on the people of Australia. The Co-chair of Australia’s Mental Health Commission said this week that ‘same-sex marriage policies are associated with a reduction in the proportion of high school students reporting suicide attempts’. Similarly, marriage-equality is likely to create a more inclusive and welcoming society for members of the LGBTQ community. The vote is not without negatives though. Some Australians believe that the vote itself was too costly and encouraged hate campaigns. They believe that the issue should have been put to a parliamentary vote instead of a public one. Similarly, one country that is set to lose out from the vote is New Zealand, with many same-sex couples previously traveling to New Zealand to get married after it was legalized there in 2013. New Zealand is now set to miss out on many Australian gay marriages. Abby Grierson
7
NEFS Market Wrap-Up
EMERGING MARKETS
Middle East This week has sent ripples through the stock markets of Saudi Arabia, following the country’s crackdown on corruption last week. The arrest has prompted investors from within the region to sell, thus pushing benchmarks indexes lower. Investors from the six-nation Gulf Cooperation Council sold a net 92 million dirhams ($25 millions) of stocks on Dubai’s main equity market on Tuesday, the greatest amount since February. This is mainly due to perceptions of risk and loss of business confidence among equity investors across the Gulf. Philippe Dauba Pantanacce, a Londonbased senior economist and geopolitical strategist at Standard Chartered Bank stated: “There is no doubt that many offshore investors are reassessing their view of the Gulf as a stable and predictable place to do business.” On the individual level, some Saudi billionaires and millionaires are selling investments in neighbouring Gulf Cooperation Council countries and turning them into cash or liquid holdings overseas. They are moving their assets out of the region to avoid the risk of getting caught up by the authorities. The purge is affecting some of Saudi Arabia’s richest families. For decades, they had benefited from a close relationship with the country’s rulers, which helped them win major contracts
and partner with international companies seeking a foothold in the Arab world’s biggest economy. Many bankers worldwide wonder if the bold action of the Crown Prince last week is the beginning of bringing private fortunes back home, as he attempts to modernize the kingdom, reduce its dependency on oil and make Aramco (the state-owned Saudi Arabian oil company) public. However, some bank executives are trying to channel the optimism of global finance. One US banking executive likened the developments in Saudi Arabia to postSoviet Russia’s first chaotic step towards capitalism. A US private-equity executive drew comparisons to China, where President Xi Jinping has amassed extraordinary power in his bid to catapult the nation into the centre of global affairs. The tension also comes at a difficult time, with the economy currently struggling to cope with the slump in oil prices. Unemployment among Saudis is rising and non-oil GDP is barely expanding. To boost the economy, the Saudi Arabian government plans to create the world’s largest sovereign fund and sell its stakes in the stock exchange, soccer teams and flour mills, as well as hundreds of stateowned assets (including Aramco). Hayati Sharir 8
Week Ending 19th November 2017
Africa This week will be focused on the power struggle in Zimbabwe following the military takeover. The army moved in on the early hours of Wednesday to put Robert Mugabe’s fourdecade long rule to an apparent end by placing the ruler under house arrest. The military state spokesman, General SB Moyo, said “We are targeting criminals around him who are committing crimes that are causing social and economic suffering in the country”. The military takeover was triggered by the dismissal of Emmerson Mnangagwa, the Vice President and one of Mugabe’s closest allies for the past 50 years. Mr Mnangagwa has been involved in a hostile succession battle with Grace Mugabe, the President’s wife, with the deteriorating health of Robert Mugabe initiating vicious warfare within Zanu-PF. This has resulted in factions within the ruling party. Mr Mnangagwa has fled the country but is in a strong position to lead Zimbabwe following the military intervention. Mr Mnangagwa, known as the Crocodile, has been Mr Mugabe’s right hand man for 50 years, from his teenage years spent as an activist and guerrilla fighter, to running the security services in the early days of independence. He was considered the most likely successor to Mr Mugabe following his promotion to vice-president in 2014. He became involved in a war of words with Mrs Mugabe, accusing her of trying to kill him with a poison-laced ice cream and seize power for herself.
Grace Mugabe, 40 years younger than Robert Mugabe, has been increasingly open in regards to succeeding her husband as president. She is disliked by many individuals in Zimbabwe, particularly the military, who consider her vindictive and a political opportunist with no background in the liberation struggle. Military officers and veterans of the liberation war have become concerned of Grace Mugabe’s rise, with indications that the military have been rounding up political allies of Mrs Mugabe within the ruling party, Zanu-PF. Constantino Chiwenga is the Chairman of the Joint Operations Command and the man in charge of the military takeover. He was a participant in the liberation struggle and has been loyal to Zanu-PF for many years whilst also being close to the fired vice-president, Mr Mnangagwa. With Mr Mugabe facing military pressure to publically resign and widespread expectation that Mr Manangagwa will return from exile, it can be anticipated that Mr Chiwenga will look to reinstate his ally as vice-president and the acting leader of Zimbabwe. Abdul Akhtar
9
NEFS Market Wrap-Up
China In this week’s wrap-up, Sino-American trade dilemmas and dangerous bubbles in debt and housing. During President Trump’s visit to Beijing last week, Goldman Sachs announced a fund in partnership with China Investment Corporation, standing to make the firm up to $5bn in deals. Trump’s political rhetoric, whilst still brazen and certain of China’s trade offenses, seems to be calming. Since 2000, $136bn in investments from Chinese firms have flowed into the US, with a significantly proportional $26bn coming in just the first three quarters of 2017. China seems to be reducing its home trade barriers, presently in the form of relaxed limits on foreign ownership of banks and securities firms. Zhu Guangyao, China’s vice Finance Minister, said China would begin to allow foreign investors to own 51% of Chinese securities firms, which would rise to 100% in three years from now. Around $77bn of venture capital investment has poured into Chinese firms in the years between 20142016, up from $12bn between 2011-2013. Foreign firms and their acumen may help introduce more level-headed practises, which is very important in financial markets frequented with such misconduct. China’s state-controlled banking skew and lack of loan regulation has led to piles of toxic debt. Harvard economics professor Ken Rogoff has said that China poses one of the biggest risks to the global economy over the next five years. Credit has been growing faster than the economy recently every year, sometimes at a rate twice as high. China’s debt as a percentage of GDP stands at around 260%, up from
150% at the time of the financial crisis, beating all other nations except Japan. Loans have fuelled demand for properties in China, demand that would have been perceived positively if it were not the product of toxic debt. Consequently the Chinese government has been reining in the lending practises of its banks and quashing illegal mortgage financing. However they must be careful to avoid resulting property price crashes or construction slumps. Even so, average new home prices in China’s 70 largest cities have fallen by 1.3% from September 2017 versus September 2016. The debt bubble and housing problems in China could spell bad news for the UK. The commodities that build these properties create huge revenues for UKlisted FTSE resource stocks. Londonlisted miners alone make up 7.5% of the FTSE 100 by weighting. The FTSE 350 mining supersector is up 19% this year. A heavy and consistent contraction in Chinese property prices could present a bad sign for the UK’s mining bull. China has stood as an inexplicable powerhouse of growth since the early 1990s. Is it a surety, or merely an argument of pessimism, in believing that bubbles always burst? Matthew Chapman
10
Week Ending 19th November 2017
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
11
NEFS Market Wrap-Up
Russia & Eastern Europe Following the reported increase in growth expectations for Eastern Europe last week, this week’s article will focus on Romania’s annual economic growth acceleration. According to data released on Tuesday 14th by the country’s statistical board (INS), Romania’s GDP increased by 8.8% in Q3 of 2017 compared to last year, outperforming Bloomberg’s forecast of 6.2%. Poland and the Czech Republic also surpassed expectations with annual growth of 4.7% (highest since 2011) and 5% respectively. However Slovakia’s growth of 3.3% was below estimates and Hungary’s increase was not enough to achieve the 3.6% prediction. EasternEuropean countries have been undergoing a period of GDP expansion (see graph below) due to low unemployment and systematic inflation, as well as increased demand from Western Europe of which has been experiencing steady.
According to the Austrian group Erste, growth in Romania has been powered by several factors, with strong external demand cited as a key cause. Another key growth accelerator has been increased consumption, which has been boosted by “fiscal- and wage-policy relaxation” and 20-year record-low unemployment. Finally, the agricultural sector has played a key role, with their (unanticipated) contribution to the nominal GDP figure of this quarter
being 8% - twice the amount observed over the first 9 months of 2017. Romania’s economic acceleration has outpaced China’s GDP growth. The last time this happened was in 2008, when Romania’s growth perished shortly after and the country necessitated a $24billion bailout. Concerns regarding the sustainability of Romania’s growth are therefore spreading. Due to this consumer-led boom, the head of Romania’s Fiscal Council stated: “Romania is facing slippages that the financial markets won’t ignore”. The loose fiscal policy has caused investment to drop and is set to increase the budget deficit in the next year, as the European Commission predicts the deficit to reach 3.9% of GDP (a 0.9% increase). Though the increase in wages aided the country’s growth, it also caused a rise in labour costs as wage growth outpaced productivity increases, implying a future depreciation in the RON. The resulting emerging inflation will mobilise an expansionary monetary policy, which will balance growth. The European Commission predicts that Romania’s growth will slow down to 4.4% in 2018, whilst a quarterly report conducted by UniCredit Bank last week forecasted a reduction to 3.6%. Despite predicted higher interest rates, lower fiscal stimuli and a weaker currency, the economy’s growth will most likely only mildly decelerate, as growth from Western Europe will still imply robust external demand. The governor of the central bank stated last week that the economy must avoid further consumption stimulation and must address the labour shortages if the growth is to be sustainable. Felicia Bogdana Cornelia Ababii 12
Week Ending 19th November 2017
South Asia This week New Delhi was covered in thick smog, with diplomatic work and many industries disrupted due to high particulate counts. The rapid expansion of heavy industry and manufacturing has taken advantage of India’s low-skilled labour force to deliver rapid development. As with China, this has entailed hazardous environmental consequences, with pollution levels in New Delhi sitting at 70 times the safe limit defined by the World Health Organisation. Under a lack of regulation, crop burning in the surrounding states contributed to the smog. When environmental quality threatens life and productivity, economic forces need to be restrained. The government should look to enforcing cleaner agricultural practices and setting stricter emissions standards. Yet, even with a substantial threat to life, the budget for programs of this nature is severely limited. The government already has a substantial public debt burden, which has stabilised over the last five years to around 70% of GDP (see graph below). Moody’s, however, is optimistic about India’s future. On Thursday, the US ratings agency raised the creditworthiness of India one level form Baa3 to Baa2. The markets responded positively, with the Indian rupee strengthening over 1% on Friday. The Moody’s rating was in response to the reforms implemented by Prime Minister Modi, including a massive but
controversial demonetisation order, as well as the Goods and Service Tax (GST) system implemented last July. The complexities inherent in Mr Modi’s GST reforms, which attempted the difficult task of uniting India into a single customs union, made implementation difficult and painful, hence creating further drag on economic growth. Consequently, the IMF lowered its projection for growth through to March 2018 by 0.5 percentage points to 6.7%. Earlier this month, the government dropped 178 items down from its highest tax rate to a lower tax rate, in order to retract pressure on businesses. Mr Modi is seeking to bolster growth through infrastructure investment, however funding is difficult to come by. During the Association of Southeast Asian Nations summit last week, Japanese PM Abe agreed to work together with India on infrastructure projects, including road networks and railways. Japan has already offered India a low-rate loan to cover 80% of the funding for a 500km high-speed rail linking Mumbai with Ahmadabad, a manufacturing hub. However at the summit, Japan’s initiatives in South Asia competed with China’s Belt and Road Initiative, with China seeking to expand its influence in South Asia by supporting infrastructure development. Daniel Blaugher
13
EQUITY AND DEALS NEFS Market Wrap-Up
Financials It’s been a disappointing November for the FTSE 100. It has dropped around 2.5% in the past 2 weeks and on Wednesday it fell to a 6-week low. The main culprits behind this week’s dismal performance were oil and mining giants such as BP, Shell, Anglo American and Glencore, all of which dominate the London index and are facing falling stock prices amidst globally declining oil and commodity prices. On Friday share prices of the broadcaster SKY PLC rose by 4.1% after reports that multiple buyers were interested in purchasing 21st Century Fox’s 39% stake in the company. David Madden, a market analyst at CMC markets, noted “a bidding war may ensue” which would be a boost for SKY shareholders. Despite this however the FTSE still closed on a low. The biggest loser of the week was Carillion, which saw shares fall 31% hence offsetting the gains made by Sky shares. Despite its mid-week drop on Wednesday, the S&P 500 rallied by the end of the week to close at a respectable 2578 points, however this was still 0.13% lower than last week’s closing. Strength in
telecom services and consumer staples pushed the index’s growth this week, whilst Energy was left in the red. The Nasdaq composite closed 0.5% higher than last week, as a 1% gain in Tesla helped to offset the losses of declining Amazon, Netflix and Alphabet shares. Uncertainty over whether tax reform will be achieved by year-end is responsible for a fair amount of volatility in the US markets. The differences in corporate tax proposals put forward by the Senate Republicans and those set forth by the House of Republican are creating uncertainty about the specifics of the final bill that will be implemented. Despite its promising performance last week, on Tuesday the ASX 200 fell back below its 6000-point benchmark, with losses in all its sectors (except technology) and more than 75% of its top 200 companies in the red. This week’s disappointing performance comes after a weak global lead as European markets experienced declines as well. Changu Maundeni
14
Week Ending 19th November 2017
Technology & Health This week, analysts have speculated what might be one of Amazon’s most ambitious expansions, being into the Pharmaceutical Market. Amazon, one of the biggest companies in the world, has been showing signs of expansion into the Pharmaceutical Market in the United States, a sector worth over $450 billion per annum. Reportedly, the company has been speaking with industry executives, as well as hiring several senior insurers and PBMs, but has refused to comment on this decision. Amazon has also begun selling professional medical equipment in its stores and has applied for wholesale pharmacy licences in several states. The mere possibility of Amazon entering the Pharmaceutical market has already created certain repercussions within the largest pharmaceutical companies currently operating. For example, many of these companies have introduced nextday deliveries for much of their prescription medicine, in an attempt to compete with the possibility of Amazon Prime affecting their sales. If Amazon truly does enter this market, it could benefit consumers due to an increase in competitiveness, which will likely lead to lower medicine prices. Furthermore, considering how most Americans do believe pharmaceutical prices to be too high, there is great market demand for this shift to happen very quickly.
It is therefore imperative that other major pharmaceutical companies consider the pressure imposed by Amazon and quickly become more competitive. This could be achieved for example by lowering their prices for generic and branded medicines, which is most likely what Amazon will choose to focus its attention towards. Considering that most major pharmaceutical chains have already been dealt a blow by having investors wipe out $40 billion of their market value, this is a very real and serious threat to their market stability. As Alex Schmelzer, chief executive of Mesa Rx, puts it, “the drug retailers have a good deal to worry about because, if Amazon plays its cards right, it could offer generic drugs materially cheaper than the large players�. Overall, the major Pharmaceutical companies should consider other marketing or pricing strategies in order to maintain their positions and overall market share. This could include creating new platforms for their customers to buy medicine and decreasing the prices of the most popular or important brands to the general populous. They must keep up with Amazon in order to survive if it joins their market. Mario Pucinelli Filho
15
NEFS Market Wrap-Up
Oil, Gas & Industry Global markets are currently bracing themselves for history’s biggest predicted IPO of Saudi Aramco, the state-owned Saudi Arabian oil company that is estimated to be valued at $2tn and is regarded as the world’s largest oil producer. Amin Nasser, the CEO of Saudi Aramco, has suggested potential investors should be encouraged by the anticorruption campaign sweeping across Saudi Arabia. The campaign, implemented by the crown prince Mohammed bin Salaman, has already seen the arrest of over 200 businessmen, princes and technocrats on corruption charges worth over $100bn. The host of Aramco’s IPO has still not been confirmed, with the London Stock Exchange (LSE) and New York Stock Exchange being the front-runners. However to accommodate Saudi Aramco on the LSE, critics in the UK have expressed concern at regulators ‘bending the rules’. Shadow Chancellor, John McDonnell, this week wrote to the government asking for the reasoning behind plans to give a $2bn loan guarantee to Saudi Aramco and whether these plans are indeed in the public’s interest.
The ever-changing industrial equipment sector could be reshaped once again following Emerson Electric boosting their bid to $29bn for rivals Rockwell Automation. Emerson’s CEO, David Farr, stated that should the deal go ahead it “would create a leader in the $200bn global automation market with an unmatched technology portfolio”. Airbus and Boeing once again locked horns this week at the Dubai Air show. Airbus announced a $15bn deal for the sale of 36 A380s to Emirates, whilst Boeing announced another $15bn deal also with Emirates for the sale of 40 787s. Despite guaranteeing production for the A380 for over a decade, Airbus’ public setback adds to a tough year competing with rival Boeing (see graph below), whose announcement was seen by many as a triumph over Airbus’ significant achievement. Airbus this year has had a number of setbacks, such as the delay of the A320neo-single aisle, the slow process of integrating its independent divisions and the corruption allegations in relation to compliance. Sarren Sidhu
16
Week Ending 19th November 2017
Deals SandRidge Energy Inc. of Oklahoma has announced that it will acquire Bonanza Creek Energy in a deal worth $746 million. The deal however hasn’t been welcomed with open arms on Wall Street - as shares of SandRidge took a dive of 15% within hours of the news.
of the fact that Bonanza Creek has also just emerged from its restructuring support agreement following its own Chapter 11 filing last year. Additionally, after successive quarterly revenue declines, the Denver-based company has lowered its yearly production forecast for 2017 by 4%.
Most analysts point the blame on SandRidge’s poor history of acquisitions, which led to its Chapter 11 reorganisation in 2016. The gas and petroleum exploration company had plans of growing production through various investments, however the large sums it paid led the company to be hampered by the amount of debt it accumulated. For this upcoming deal, SandRidge will now take on $274 million in debt in order to complete the acquisition. This has made many investors nervous, especially with several analysts believing that there is a lack of operational synergy between SandRidge and Bonanza Creek.
The acquisition will add 67,000 contiguous net acres to SandRidge’s already vast oil window. This will bring the total of the joint SandRidge-Bonanza Creek to over 630,000 net acres that will produce approximately 55,000 barrels of oil per day.
However James Bennet, CEO of the Oklahoma City-based company, has reassured investors of the many advantages of the acquisition, including a long list of drill-ready locations and the combined expertise of the teams. Though this may not be enough to appease SandRidge’s shareholders, who are wary
This stock and cash deal compromises of $398 million in cash, $36 per Bonanza Creek share, and 18.89million shares of SandRidge stock, which will be based on SandRidge’s stock price on November 14th. The Boards of each company have unanimously accepted the terms of the transaction and have advised that the shareholders of each company also approve the deal. The near billion-dollar deal is predicted to close in Q1 of next year and will add to SandRidge’s cash flow from the start of 2018. Sembian Balachandran
17
NEFS Market Wrap-Up
COMMODITIES
Agriculture & Resources The prices of industrial commodities associated with lithium battery productions are surging due to the increasing demand for electric vehicles. Nickel, cobalt and lithium are the three most important hard commodities needed to manufacture those batteries. For example, Cobalt currently has a price of $60,000 per ton, more than double from a year ago. It also has the strongest growth compared to all other industrial commodities. Mining giants, like BHP Billiton and Glencore Plc, have all profited from price increases. The UK government has announced to ban all petrol and diesel-powered vehicles by 2040, in the expectation that electric vehicles will replace them. France has also pledged to do something similar. Even China, the world’s largest CO2 emitter and market of both electric and fossil fuel-powered vehicles, is considering following in the UK’s footsteps by going green in the ‘near future’. If the policy were in place, it would result in a more dramatic increase for the demand of electric vehicles as well as those three minerals. There were 2 million registered electric and hybrid vehicles worldwide in 2016, a 60% increase from 2015. In 2016, the OPEC estimated that there would be 266 million electric vehicles by 2040. China’s Contemporary Amperex Technology (CATL) said on 14th November that it will launch a $2bn IPO by June next year to
finance its lithium-iron production, to hence expand supply and match the surging demand. CATL is the world’s third largest provider of electric vehicle battery solutions. Cobalt supply will reach 180,000 tonnes in 2026 from 48,000 tonnes last year, according to Benchmark Mineral Intelligence. Hence, despite the surging demand, the price of cobalt could still stabilise in the long run if supply picks up. Innovation of batteries with lower cobalt contents has already been underway as well. However the prices are still expected to increase in the short run due to supply chain vulnerability. Those minerals are tricky to mine, with strikes and weather disruptions being very common in the mining industry nowadays. 97% of the world’s cobalt production is as a byproduct of copper extraction, leaving cobalt supply greatly exposed to copper market fluctuation. However 60% of the world’s cobalt reserves are in DR Congo, a country with high levels of corruption, political instability and human rights violations. The recent exposure of child labour being used to mine cobalt in DR Congo could put car manufacturers and mining companies at an ethical crossroad amid fear of controversy from the public, hence further hindering supply. Ang Gao
18
Week Ending 19th November 2017
Energy According to Global Carbon Project’s latest report, carbon dioxide emissions are expected to rise by 2% in 2017, after three years of almost zero increase in emissions. China and developing countries are likely to be deemed responsible for this, despite their attempts to curb climate change. Yet China, the main global producer of carbon dioxide, anticipated a 3.5% surge in emissions in 2017 that coincided with their new path of economic recovery, after four years of economic stagnation. Furthermore, China's official asserted that the new emissions trading scheme, which will likely outperform the EU scheme, is almost ready to roll out, with the aim being to control emissions by generating a market cost for carbon emitters. Mr Xie Zhenhua, Beijing’s lead negotiator, stated: “The work to create a national carbon market has won successes and the whole process is going well; preparations for the carbon market are basically complete and after approval it can go ahead.” One of climate experts' principal concerns is that this scheme could attract speculators and therefore the Chinese government is expected to provide some guidance. The Norwegian $1 trillion fund, the world’s biggest wealth fund of climate risk, wants out of petroleum stocks after having previously sold most of its coal stocks. According to the FT, Egil Matsen, the deputy central bank governor, stated: “Our perspective here is to spread the risks for the state’s wealth. We can do that better by not adding oil-price risk.” This proposal, which is carefully being evaluated by the Norwegian Finance Ministry, would imply selling about $40 billion of shares in global firms such as Exxon Mobil Corp.and Royal Dutch Shell Plc. (see figure below).
In the meanwhile, lower oil prices and China’s slowing growth forecasts have negatively impacted the S&P 500 performance on Wednesday, with a fall in the energy giant's stocks such as Exxon Mobil, Halliburton and BP's US-listed shares, which decreased by 1.2%. However China’s plan to reduce chronic air pollution in urban areas, of replacing coal with liquefied natural gas, led Asian LNG price to a 10-month high. Poor gas storage capacity will imply that the demand could increase during winter and liquefied gas imports could rise during next year. On the other hand, a drop in coal inventories boosted India LNG demand, with lower predicted increases in supplies than forecasted. Giovanni Cafero
19
NEFS Market Wrap-Up
CURRENCIES
Major Currencies The USD lost ground to other safe haven currencies this week as traders turned cautious ahead of the US FOMC minutes due on 22th November 2017. Both Japanese yen (JPY) and Euro (EUR) gained nearly 1% against the greenback in this relatively quiet trading week. This year, the US Dollar Index (a measure of the value of USD against a basket of major currencies) has already fallen 20% from its 6-year high of 113.82 to trade at its current level of 93.68. This price correction happened as crude oil prices bottomed out this year. Such a coincidence should not come as a surprise as crude oil benchmarks like Brent and WTI are priced in US dollars. A stronger USD would sap demand for crude oil and vice versa, resulting in the inverse price relationship between crude oil prices and the greenback. With the current bullish momentum in oil prices that saw Brent crude trading near its two-year high, it is likely that the USD will continue on its downtrend for the medium term. The Japanese yen (JPY) outperformed its major counterparts this week as major stock indices, like S&P 500 and Dow Jones Industrial Average, traded defensively following concerns over the timeline and details of the US tax reform plan. As a safe haven currency, JPY typically strengthen for market risk aversion. Hence USD/JPY retreated
nearly 1% from ¥113.82 and tested the ¥112 level late Friday, while GBP/JPY fell 100 pips from ¥149.30 this week. Over in Europe, strong EU GDP growth data released this week looks set to round off 2017 as EU’s best year since the Eurozone crisis. EUR/USD registered weekly gains of 1.2% after solid GDP data from Germany and EU. On a side note, Bitcoin reached an all-time high of $8000 this week, after posting dizzyingly gains of 700% this year. While investors mulled over the future opportunities Bitcoin could bring about, it is the technology underpinning the cryptocurrency called blockchain that has the real potential to totally transform the global financial industry. Looking ahead, trading among the major currencies is expected to be muted next week as US markets pause for Thanksgiving Day. Investors will also be focusing on Saudi Arabia as the Crown Prince Mohammed bin Salman (MBS) will be crowned as the next King of Saudi Arabia. Being an ardent supporter of OPEC’s oil production cuts, MBS’s policies will be a key driver in future crude oil prices. Mingli Yong
20
Week Ending 19th November 2017
Minor Currencies
The New Zealand Dollar (NZD) looks set to continue its 3-month downward trend after falling to its lowest level since early July against the US dollar (USD). Currently NZD/USD trading is at 0.6818, with forecasters predicting a drop below the 0.67 mark after the expected rise of the US dollar, which would follow the Fed’s interest rate rise in December. US tax reform progress is key to any investor looking at minor currencies. On Friday, The House of Representatives voted 227-205 in support of a tax overhaul. However, 13 republicans voted no and there is still time for things to fall apart. The Senate Finance Committee’s vote after Thanksgiving will present some difficulties to President Trump, while senators have expressed serious reservations over the effect on the middleclass. The Australian Dollar (AUD) continues to sag against the USD, finishing the week on 0.7565. This comes notwithstanding strong employment data for October, where the overall jobless rate hit a low that has not been seen since 2013. Overall employment for the year has also increased by an impressive 336,000. Despite this positive news, wage growth remains stagnated and the latest inflation data is relatively weak. The Reserve Bank of Australia continues to make it obvious that they don’t want to see the AUD’s value increase any higher. These public statements seem to have had a depressing impact on the currency.
The Swiss Franc dropped against its major rivals on Friday, as the demand for safe-haven assets drops amid a climate of risk appetite. The Frank weakened to 1.1722 against the Euro and fell to 1.3138 against the Pound. The continuation of these weakening trends makes the respective support levels of 1.19 and 1.32 challenging. The Franc also dropped to 113.5 against the Yen, with 111.00 seen likely as the next support level if the Franc continues its downward trend. The developed appetite for emerging market currencies is helping the South African Rand, despite political concerns weakening the currency at the beginning of the week. However it is likely that this week’s plunging USD is the main contributor to the surge in the Rand. The fall encouraged investors to buy into emerging markets like the South African Rand, which has helped the currency with gains across the board. Edward Turner
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). 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
The
Sponsors:
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, 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.
22