Week Ending 24th February 2017
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 3 United States United Kingdom Eurozone Japan South Korea Australia & New Zealand Canada
Emerging Markets 10 China India Russia and Eastern Europe Latin America Africa Middle East South East Asia
Equities 17 Financials Technology Oil & Gas
Commodities 20 Energy
Currencies EUR, USD, GBP 21
2
Week Ending 24th February 2017
MACRO REVIEW United States This week there was more talk on trade from the White House in regards to the China trade deficit. Interestingly, at odds with most of the President's campaign rhetoric of labeling China the “grand champion” of currency manipulation, Treasury secretary, Steven Mnuchin, said on Thursday that the administration is not "making any judgments" on China's currency yet. Mnuchin went on to say "we have a process within Treasury where we go through and look at currency manipulation across the board". What this means is no official declaration will be presented until the department's next report on foreign currencies, which is due in April. However, if the department were to label China as a currency manipulator, this would lay the foundation for the first steps towards imposing heavy tariffs on China. An approach which many analysts expect would lead to a trade war. Chinese President, Xi Jinping, said at the 2017 World Economic Forum “no one will emerge as a winner in a trade war”. This is true given 20% of all U.S imports are from China. While cheap goods from China has helped fuel American economic growth, American imports have in turn helped grow China’s middle-class. The U.S. trade deficit with China was $347 billion in 2016, roughly for every $1 American exports to
China, the U.S Chinese goods.
imports $4 worth of
Also, this week the Republican party published their second draft of an Affordable Care Act (ACA) repeal plan. The draft replaces subsidies with less generous tax credits, increase the amount insurers could charge older Americans and effectively eliminate Medicaid for lowincome adults. Though the bill is supposed to go into full effect in 2020. Analyst suggests that the new provisions would leave a significant proportion of the 20 million people who gained coverage under the ACT without insurance. However, the bill is more geared for those who earn too much to receive assistance under the current laws of the ACA. Those who earn $47,520 as an individual or $97,200 for a family of four do not receive any assistance under the ACA, and it is this group that has seen their deductibles raised in 2017 by 70% to 100%. This group has long complained the unsubsidized premiums render ACA policies unaffordable. Republicans argue that giving consumers more choice of benefits packages would make coverage more affordable through increased competition, allowing insurers to offer less expensive plans. Disun Holloway
3
NEFS Market Wrap-Up
United Kingdom Whilst the British economy stands resilient against anxious economic forecasts, Scotland’s economy continues to lag. Scotland’s unemployment increased again for the third successive month, hence increasing the number of unemployed to 135,000. In contrast, overall UK unemployment last month fell to a ten-year low of 1.6 million. Furthermore, Scotland’s growth continued to lag behind England’s for the year leading up to September 2016, at 0.7% and 2.4% respectively. The causes for this growth decline include business rate increases and Scotland’s trade deficit, which is reaching record levels of $3billion. Most importantly however is the oil slump, which has seen the price of Brent crude oil (per barrel) drop from $110 (2014) to $55 today (see below). With the North Sea being one of the world’s most expensive regions for oil extraction, these low prices are making production barely profitable. Yet the north of England is looking more positive. This is following a rates revaluation that will see business rates fall by 10% in northern England and 5% in the Midlands. However, these new rates have angered many in England’s south, where average rates are expected to rise by 11%. Yet it has been retorted by various property consultants that these altered rates will spread wealth more equally across the UK, with the south formally not paying enough in business rates and the north paying too much.
Furthermore, the north of England is set to benefit from a £400million Northern Powerhouse Investment Fund from the British Business Bank, which includes £184m from the European Investment Bank. This money would be invested into small and medium-sized businesses, as well as infrastructure. It is hoped the investment will help the region realise its growth potential, thus increasing the £350billion that the north currently contributes to the UK’s GDP (approximately one-fifth of the UK economy). Finally, recent economic analysis from the Financial Times hints that a Brexit shock to the UK economy may simply have been postponed, rather than cancelled. Evidence includes two consecutive months of falling retail sales, decreased business investment in the fourth quarter of 2016, UK growth lagging in the EU, and increased risks of British companies moving operations abroad. As such, the Financial Times advises that before increasing interest rates, the Bank of England should wait until definitive evidence surrounding rising inflation rates is produced. This would avoid being caught out by what so far has been a political “phoney war”. Charlotte Alder
4
Week Ending 24th February 2017
Eurozone Data from the 14th shows that Eurozone GDP growth faltered in February, reading 0.4%, down from 0.5% in January. Although, consensus data has the rate remaining at 0.5%, and IHS Markit, a financial services company, say that according to data from the Purchasing Managers’ Index (PMI), this is the fastest Eurozone growth in six years (see below). Chief business economist at the company, Chris Williamson commented that “The Eurozone economy moved up a gear in February. GDP growth of 0.6pc could be seen in the first quarter if this pace of expansion is sustained into March”. The PMI figures also indicate that businesses are hiring workers at the fastest rate in almost ten years with manufacturing and services industries the strongest growers. The composite Eurozone PMI figure reached 56 in February, creeping up from 54.4 in January, (growth is represented by PMI data above 50). Broken down, of the Eurozone heavyweights, France outperformed Germany for the first time since 2012 with a PMI of 56.2 – a 69-month high that takes it above the Eurozone average, also. Germany rose to a 34month high of 56.1. Previously, the ECB (European Central Bank) has hiked rates in
response to similar figures, inadvertently causing the sovereign debt crisis and derailing the European economy. Economists do not expect a repeat of old mistakes – magnified by the restrictions of a shared currency – as inflation is yet to increase significantly. It is crises, such as that caused by the ECB’s hiking of rates, that are part of the motivation behind calls by some far-right groups – most notably the French Front National under Marine Le Pen - to leave the EU and the Eurozone, especially in light of June 2016’s Brexit vote. A global populist trend does make the threat of a Le Pen presidency all the more likely, and she is topping the polls – most likely due to a split opposition – yet social liberal and exbanker Emmanuel Macron looks to be very popular also, and may compromise Le Pen’s lead. Macron announced on Thursday an economic plan based off the Nordic model, that looks to make France more business friendly with a reduced 25% corporation tax, though still retaining aspects of the traditionally left-leaning country such as protecting pensions and extending unemployment benefits. Jamie Peake
5
NEFS Market Wrap-Up
Japan In recent weeks, two major Japanese multinational conglomerates have come face to face with existential crises. Toshiba, as it grapples with a massive write-down of its energy unit which has sent the company into the red to the tune of ¥390 billion yen for the fiscal year, must consider what more it can auction off to cover losses and how it can implement needed reforms to its corporate culture and structure. As for the second, the automaker Nissan – now entering a future without the involvement in daily operations of the charismatic leader Carlos Ghosn who had brought the company back from the brink of disaster in 1999 – must cope with its sprawling size as it attempts to adapt to an automotive industry which itself is evolving at speed. Both companies, whose net incomes alone are the size of small countries, are significant players in the Japanese macroeconomy. As Japan searches for a way out of a growth slump it will rely, as it has in the past, on these massive manufacturers to lead the way by innovation. Their respective crises of identity underlie the broader issues present in Japanese corporate culture. The difficulties inherent in dynamic management of an enormous company are hard to understate. It is for this reason that companies like Toshiba have adopted a
compartmentalised hierarchy. But, as Toshiba is now well aware, this model is dependent on oversight and veracity of information. Under the lifetime employment system, division managers have incentive to distort information rather than risk their positions in the company by admitting problems. Compounded with the lingering influence of past executives, whose age and experience demand reverence, there are cultural and institutional impediments to changing direction in the industry. Nissan struggled against this in 1999, when significant reforms were imperative. Its solution was to place an outsider at the top of its hierarchy. His unfamiliarity with the domestic corporate culture allowed him to mitigate its influence as he restructured the company. The result was stunning success. If the manufacturing sector of Japan’s economy is to remain relevant in the face of rapidly evolving technology, firms ought to consider Nissan as a model and expand into innovative but risky markets, such as self-driving cars, robotics, and 3D printing. Toshiba uniquely should take notes. Yet, the symptoms of its woes stem from systemic sources, and other Japanese firms will contend with similar issues. Daniel Blaugher
6
Week Ending 24th February 2017
South Korea South Korea released its interest rate decision last week, but is there an ulterior motive behind this monetary policy? Continue reading and I will tell you what I think. Also, notably, the South Korean stock market is making headlines by breaking records. Last week the Bank of Korea held interest rates at 1.25%, “… to ensure that the recovery of growth continues and consumer price inflation approaches the target level over the medium-term horizon”, according to January’s monetary policy statement. The last rate adjustment was an ease of 25bp in June 2016. The nation’s high level of private debt is creating pressure on the Bank of Korea’s ability to make rate adjustments. In light of probable future rate hikes by the Federal Reserve and the resulting upward pressure on global rates, the South Korean consumer may face problems in the future. Higher interest rates make it more difficult to repay loans, which can suppress domestic consumption and hinder growth. South Korean household debt is currently 90% of GDP, an all-time high. South Korea also claims that their interest rate decision considered the status of the global interest rate market and their devotion to, “…[alleviate] this unrest and [ensure] that market interest rate volatility [does] not expand, through implementation of market stabilization measures such as outright purchases of Treasury bonds, a reduction in the volume of Monetary Stabilization Bond issuance, etc.”
I would assert that the aforementioned statement is a convenient front for South Korea’s ulterior motive. I believe South Korea seeks to devalue its currency by keeping interest rates low and by purchasing a US Treasury bonds. China successfully used this strategy to devalue its yuan. South Korea is the world’s fifth largest exporter and stands to gain with a competitive currency. Stabilizing market rates is just a convenient excuse, in my opinion. In other news, last week the Kospi Index, South Korea’s benchmark stock index, broke through the 2,100 mark reaching its highest levels since 2015. The Kospi is up 4% this year. Among the top winners, Samsung Electronics’ stock performance has been outstanding reaching record highs in late January. Much of the good news in South Korean markets stems from improved global growth providing a boost in the nation’s exports, up 11.2% for January. Next week, South Korea releases export and foreign exchange reserves data, which will provide clarity on potential currency manipulation. Dan Minicucci
7
NEFS Market Wrap-Up
Australia & New Zealand Anti-competitive behavior has increased in banks including Australia & New Zealand Ltd. and Macquarie Group Ltd., leading to a distribution of fines. However, the Australian court has shown incentive to escalate these penalties after a speech given by the chairman of the Australian Competition & Consumer Commission, Mr. Rod Sims, on Friday the 17th. As the chairman argues, higher penalties are essential in demonstrating to firms that anti-competitive behavior contributes to an overall disturbance of the market economy rather than an additional business cost in the hopes of gaining market share. Additionally, the higher penalties would “deter large companies from contravening the law” as argued by Mr. Sims. However, this assumes that the raise of a small number of large companies dominating a market may insure a certain degree of political power too. Furthermore, the possibility of a Fed rate hike arriving sooner than expected means higher costs for Australian Banks. As about 66% of bank funds come from deposits and 34% from whole sale debt market, prospects of a Fed rate hike would result in
an increase in banks funding costs. This could subsequently increase costs for borrowers in the Australian property market if one way lenders decide to transfer this blow onto the nation’s $1.2 trillion mortgage holders. In the graph below, provided by Bloomberg, the indication of rising funding costs for 2017 are predicted to increase after a second hike to the Fed rate in the last 5 months. However, Australian banks are hoping that the increased investor confidence recently demonstrated in the U.S. can hold back the surge in funds for now. Moreover, in a data set released by Credit Suisse Group AG and the London Business School recently, two of the leading nations for best equities and bond average returns since 1900 are in the South Pacific. With Australia placing 2nd and New Zealand 4th, these Pacific countries have shown an average return of 6% for equities and just over 2% for bonds, largely due to their highly commodity based economy. Maria Fernandes Camaño Garcia
8
Week Ending 24th February 2017
Canada Alberta, Canada’s 4th most populous province, contracted by 2% in 2016; a recession initiated by a slump in global oil prices. OPEC’s unanimous edict to curtail oil production has allowed oil prices to recuperate, and Alberta is now poised to become Canada’s fastest growing province in 2017, with growth projected to be approximately 2.8% (shown below) over the course of the year. Following 2 onerous years for the province, the region should undergo a revival of oil sands projects and renewed investment in the energy sector, with the price of crude oil expected to gravitate towards $60 a barrel by the end of 2018. However, Alberta’s resurgence isn’t expected to generate many jobs, and unemployment for the province is expected to average 8.4% this year, up slightly from 2016. British Columbia, on the other hand, will see a substantial contraction in its growth rate due to a rapidly cooling housing market, with growth curtailing to just under 2% for 2017. Saskatchewan, much like Alberta, contracted over the past 2 years, yet is forecasted to experience modest growth of just-under 1% due to a precarious uranium market.
0.3%. The data is no portent of impending stagnation however, as BMO senior economist Benjamin Reitzes accredited the popularity of Black Friday for the weak retail sales, as shoppers did a portion of their holiday shopping ‘early’. Canada’s economy is very much driven by consumer spending – accounting for over half of 2016’s growth. However, consumers now hold record levels of debt, owing $1.67 for every dollar of disposable income. Ergo, the Conference Board estimates retail sales to grow at a slower rate in 2017. Canada’s aging population, meanwhile, is suppressing labour force growth. In its annual provincial outlook report, the Conference Board of Canada warned of stagnating growth in 2018, although the economy expects ample GDP growth of 1.9% this year. Low business investment, and a slow labour force growth, coupled with surging levels of household debt are likely to result in stagnant growth in 2018. Usman Marghoob
Retail sales data for December 2016, released by Statistics Canada show shoppers in Canada spent a total of $44.9 billion on retail goods, a decline of 0.5% when compared with November. A 9% decline in sales of motor vehicles was undisputedly the largest contributor to the decline, although retail sales declined by
9
NEFS Market Wrap-Up
EMERGING MARKETS China
A cabinet reshuffle on Friday has led to the appointment of top trade specialist Zhong Shan as the new minister of commerce and He Lifeng as the new head of China’s National Development and Reform Commission. The appointment of these two new ministers comes at a crucial time for China due to increasing tensions and fear of a trade war between China and the US following President Trump’s stance on Chinese trade. In an interview with Reuters on Thursday, Trump called China the “grand champions at manipulation of currency”, referring to the Chinese government’s potential devaluation of the yen in order to make exports cheap, a statement which China reacted to. China’s foreign ministry spokesman, Geng Shuang, said that his country had “no intention of deliberately devaluing its currency to gain trade advantage” and that the title of grand champion fits only in the context of “grand champions of economic development.” These comments highlight the trade power struggle between China and the US, which both Trump and many Americans are not happy about. On the bright side for China, data released on Friday by Germany’s Federal Statistics Office showed that in 2016, it overtook both the US and France to become Germany’s largest trading partner. German imports from and exports to China rose by 4% on the 2015 value, being valued at $180 billion. The graph below shows how the value of German goods imported by China has risen dramatically since the late 2000s.
This comes as great news for ChinaGerman relations but also for global free trade as Anton Boerner, head of the BGA trade association said, “Given the protectionist plans of the new US President, one would expect that the trade ties between Germany and China will be further strengthened.” Louis Kujis, a former China specialist at the World Bank, said that China is aware that they are “quite vulnerable vis-à-vis US measures” and that there exists a constant “uneas[iness]” regarding the US-China trade relationship. Therefore, this expansion of trade relations between China and other countries will no doubt be a positive step for both China and other countries afraid of the impact of increasingly protectionist US trade talk on their economies. Nikou Asgari
10
Week Ending 24th February 2017
India Two major financial institutions have both predicted that India’s GDP growth rate will decline when the figures are released next week. The International Monetary Fund and the State Bank of India’s research team have scaled back growth rates to below 6% due to the economic turbulence that has risen as a consequence of the demonetisation programme which has become a hindrance to consumption and investment in the short term. Moreover, the IMF focused on other issues that have been detrimental to India’s short term growth prospects such as high household inflation which has reduced the purchasing ability of consumers. Additionally, the persistently high government fiscal deficits have acted as a constraint on the Indian government’s ability to offer increased spending in order to enhance growth prospects. However, the IMF was more optimistic about India’s medium-term growth prospects provided the Indian government acts appropriately. An IMF statement called for Indian officials to ‘quickly restore the availability of cash to avoid further payment disruptions.’ It was also suggested that more agricultural reforms could be implemented to improve domestic food supplies and to dampen the growing danger provided to Indian citizens by food inflation.
Most significantly though, the IMF suggested that India’s medium-term growth rates are very likely to recover due to the future implementation of the Goods and Services Tax (GST). The institution believes that this reform will allow GDP growth rates to reach 8% in large part due to the efficiency gains provided. The main aim of the GST reform has been to create a single national market which would enable greater intra-industry trade. The previous system of taxation made India economically fragmented with the existence of multiple taxes preventing goods from being easily transferred between states. The division of tax powers between the central government and the state had previously resulted in an unnecessarily costly and inefficient system for all involved. Therefore, it is hoped that the GST reforms will reduce the complications caused by an overlapping tax scheme in order to create a more streamlined system. The IMF’s recent report has reiterated this optimism by stating that the proposition of a future cut to corporation tax along-side the GST reforms would be hugely beneficial in promoting business investment. It is expected that the GST reforms will be officially implemented in July 2017. Isher Hehar
11
NEFS Market Wrap-Up
Russia and Eastern Europe The unemployment rate in Russia increased to 5.6% in January of 2017 from 5.3% in December, which demonstrated the highest jobless rate since May 2016. The continued bad news surrounding the unemployment rate came on Wednesday this week when it was announced that the Russian ruble tumbled thanks to a jump in the unemployment rate to 5.9%. Despite the slight drop in the currency, the Russian ruble is still the best-performing emergingmarket currency of 2017 with many analysts pointing to the increasing oil prices as a reason for the recent strength. Approximately half of the country's national revenues come from oil and gas thanks to Russia having one of the largest natural gas reserves in the world. A preliminary estimate showed that Russia's GDP dipped by 0.2% in 2016, according to the Federal Statistics Service which was above expectations of a contraction of 0.5%, according to analysts. Russia's economy has been slowly climbing back after a sluggish 2015 and 2016 amid lower oil prices, economic sanctions and increasing unemployment. Data suggests that two industries in particular pushed the economy forward: manufacturing rose by 1.4% in 2016 and the production of natural resources was up by 0.2%. However, on the flip
side, consumption remained weak. Wholesale and retail trade dropped by 2.4% It was announced on Thursday that the Latvian parliament, the Saeima, became the first in the European Union to fully ratify a ground-breaking free trade deal between the 28-member bloc and Canada. The Comprehensive Economic and Trade Agreement (CETA) between Canada, on the one hand, and the European Union and its Member States, on the other hand, will remove 99% of existing tariffs between the two trading areas. Elsewhere in Eastern Europe, Hungary’s fourth quarter results were announced with results that it grew just 1.6% in the fourth quarter of 2016, according to unadjusted preliminary data, statistics office KSH reported. The result is below market expectations and represents the slowest rate of expansion among the Visegrad alliance countries. The reading leaves fullyear growth at 2% compared to 3.1% the previous year. That is well below both the government’s 2.5% full-year growth target and the central bank’s latest forecast for a 2.8% expansion. Will Bunnis
12
Week Ending 24th February 2017
Latin America This week came negative news for Mexico and follows consistently mixed reports for the country. Despite being earmarked as a potential growth powerhouse, Mexico has struggled economically since the financial crisis of 08/09. Moody’s, the credit rating agency, has downgraded growth forecasts for Mexico for 2017 and 2018. The agency forecasts GDP to increase by 1.4% and 2% in 2017 and 2018 respectively, down from 1.9% and 2.3% previously. Overall, Moody’s predicts the G-20 average growth rate to be 3% for 2017 and 2018, picking up from an estimated 2.6% in 2016. Global demand is rebounding after weak economic activity in 2016, and much of the adjustment to lower commodity prices is now behind us”, said Elena Duggar an Associate Managing Director at Moody’s. “However, structural factors, such as aging population and high debt levels, combined with a reduced pace of globalisation, put a cap on long-term trend growth. With regards to the other major economy of Latin America, Brazil, the Banco de Central Brazil (BCB) cut the nations benchmark
rate to 12.25%. This is the second successive 75bp reduction in the nations interest rate. The extensive measures are part of a continued attempt to stimulate growth in Brazil’s economy. The Brazilian economy is looking increasingly healthy however, with inflation coming down to within the target of 4.5% +/- 2%. Inflation last year was measured at 6.29% at the end, compared to 10.7% in January. On Friday, Colombia's central bank unexpectedly cut the benchmark interest rate as policymakers decided that consumer confidence and the sluggish economy need help even though inflation expectations remain high. The result was a market surprise given 15 analysts in a Reuters poll earlier this week expected a hold as inflation expectations are still too high after a rebound late last year, risking the bank's 2-4% target range. Next week, we will look to see the market reaction of Columbia’s surprise rate cut. Alistair Grant
13
NEFS Market Wrap-Up
Africa Historically a country of stark contrasts, it is not surprising to learn that since the late 1970’s, the share of South Africa’s wealth owned by the top 1% of earners has doubled. Coupled with the fact that the economy has been structurally distorted by the existence of successful sectors in tandem with woefully inept and underdeveloped sectors, the South African economy is crying out for change. Perhaps this formed part of the rationale behind Pravin Gordhan - South Africa’s finance minister – announcing an increase in the top tax bracket from 41% to 45%. Mr Gordhan put this forward as a necessary measure to battle weak tax receipts which are 30bn rand (£1.8bn) below estimates. However, I believe that whilst this measure may be of some benefit to South Africa, at this point it simply is not enough. The finance minister admitted himself that this years projected economic growth of 1.3% is not good enough in the face of government debts rising to 2.2 trillion rand (£135bn). Rating agencies are beginning to threaten a downgrade in ratings which would have severe adverse consequences for an economy that is already on the ropes. South Africa must build upon its
relationships between labour and capital, rich and poor, black and white which, at the moment, reflect a fractious nation. In other news, President of Rwanda, Paul Kagame has pioneered a case for Africa to open up and deregulate their airspace. Currently, Africa is almost sequestered from the global aviation industry and at the first Aviation Africa forum to take place in Africa, Kagame has encouraged all of Africa to form alliances with internationally recognised airlines in order to nourish the organic growth of a strong aviation industry. The conference saw 550 delegates hailing from 58 countries and the general consensus was the liberalisation of African airspace will have a plethora of benefits, bringing about the growth of mega-businesses whilst making air transport safer, reliable and affordable. Founder and Chairman of Nexus Flight Operation Services, Abdullah M. Al-Sayed, remarked ‘there is no open skies among African countries’, but things are changing and Africa is now set to be one of the fastest-growing aviation regions over the next two decades. Vincent Egunlae
14
Week Ending 24th February 2017
Middle East It is worth noting that the Middle East and North African (MENA) economic region is a region, firstly, of considerable diversity, and, secondly, mired in retardants that make unfettered economic growth inherently difficult. Of these retardants, the two principals are a reliance on oil exports, and, most notably, conflict. The latter, note, is much more nuanced than the prevalence of Islamic State; take, for example, the ongoing political rift between Iran and Saudi Arabia, which undermines the positive effects of the opening of Iran’s economy on the region as a whole. Overall, then, any news must be taken with a pinch of salt; having said that, however, Egyptian prospects seem to be bullish, and the UAE looks set to make 2017 its year. The benefits of the Central Bank of Egypt’s (CBE) decision to float the Egyptian pound back in November of last year, are effectuating in the North African economy. PwC reports that the reform should have positive influences on both foreign and local investment and will increase global competitiveness. Ally this with the new draft investment law, a set of tax and non-tax incentives, a road map for profit repatriation, a strategic location as a potential trading hub, and Egypt’s longterm prospects look increasingly good going into 2017. Note, of course, this is somewhat dependent on the stabilisation of USD-EGP exchange rates, which are currently volatile. In relation to this, and perhaps confirming the PwC report, the FT reported that in spite of Egyptian inflation being at a 30-year high, foreign investors are moving back into Egypt: foreign holdings of Treasury bills rose to $1.2bn in January (see graph).
East in the 2017 Index of Economic Freedom, released by US-based Heritage Foundation. Having advanced 17 positions, outperforming the UK, the US, and Luxembourg, UAE ranked 8th globally in contrast to its position at 25th last year. This is huge advance to make, and is indicative of continued fostering of investment, business, and a diverse private sector. More liberal trade has been beneficial, adding resilience to its banking sector and sustaining growth. While this is positive news, it reveals the reason perhaps why other Middle Eastern countries have not been seeing the same bounds. Syria, notably, is under strain politically, geographically and economically, as are Israel and the State of Palestine, and, indeed, their respective spheres of influence are affected accordingly. Admirable, however, in the region, is the sense of cooperation: just this week, Saudi Arabia has agreed to invest $10bn in Yemen to help support its ‘on the ropes’ economy. On first view, the Middle East is not without issue, but looks set to make what I predict to be large improvements in 2017: we will see next week. Thomas Dooner
In addition, this week saw the United Arab Emirates take the top spot in the Middle 15
NEFS Market Wrap-Up
Southeast Asia This week we assess Thailand’s GDP figures for Q4 of 2016. We also touch on CPI inflation data for Malaysia and Singapore respectively. On Monday, Thailand’s economic planning agency announced that fourth quarter GDP grew 3% year-on-year. It was the smallest expansion in 12 months, reflecting a decline in the growth of private consumption and tourist arrivals as the country continues to mourn the death of its longest-serving monarch. King Bhumibol Adulyadej was widely revered by the Thai public as a unifying political figure, and the 30-day ban on ‘entertainment’ implemented after his death in October had a significant impact on economic activity. Indeed, private consumption grew by just 2.5% in the fourth quarter of 2016 – a 0.5 percentage point decline when compared to the previous quarter. Moreover, tourist arrivals were hit by the ban, as it extended to celebrations, festivals and nightlife districts. On an annual basis, Thailand’s economy expanded 3.2% in 2016, an improvement on the 2.9% growth rate of 2015. Despite this, few analysts hold an optimistic view of the country’s growth prospects for 2017. The OECD growth forecast for Thailand is just 3.3% – 0.4 percentage points below the government’s own target. Likewise, Krystal Tan, economist for Capital
Economics, holds a pessimistic outlook for the country. She states that “a combination of high household debt, lacklustre external demand and political uncertainty will keep growth subdued in the quarters ahead.” Whether the government follows through with plans to increase spending is likely to prove critical in determining the country’s growth path over the coming year. In other news, Malaysia and Singapore both posted rapid CPI inflation for January 2017. On Wednesday, Malaysia’s statistics department announced that consumer prices rose 3.2% year-on-year. This was the highest inflation rate for 11 months, as core inflation was driven by a 3.3% increase in transport. In a similar fashion, consumer prices rose 0.6% in Singapore – the fastest rate since September 2014. Rising oil prices were the primary drivers of price growth for both countries, as this rapidly increased transportation costs. Malaysian inflation was further affected by a weakening Ringgit, which increased the price of imports for domestic producers. Next week Vietnam, Indonesia and Thailand are all publishing CPI inflation data for February 2017. The Philippines is also announcing its budget balance for December of 2016 next Tuesday. Daniel Pettman
16
Week Ending 24th February 2017
EQUITIES Financials This week we focus on the turbulent week, as 4 of the UK’s largest banks released performance figures, each showing differing fortunes and providing differing outlooks for the future as seen in stock price changes. We will in turn look at the states of HSBC, Barclays, Lloyds and RBS. First of all, despite the fact that Barclays posted an adjusted pre-tax profit of £3.2 billion, an improvement on £1.14 billion a year earlier, this figure was nonetheless below the average forecast of £3.97 billion according to analysts' estimates. Therefore, whilst its shares made initial gains, by February 24th, the price had fallen 2.6% across the duration of a week. As a consequence, the FTSE 100 index would also fall 4 points in the same period. Similarly, HSBC Holdings dropped 6.8%, the most in 18 months, after reporting a fourth-quarter profit that missed estimates, alongside a $3.4 billion pre-tax loss. Although European stocks rose to their highest level in 14 months, as the Stoxx Europe 600 Index added 0.6% on Wednesday, which came largely as a result of gains in energy shares. Interestingly, this boost was in fact depressed by HSBC Holdings Plc, which has the fourth-biggest weighting on the Stoxx 600, as Europe’s largest lender.
its recovery from the financial crisis as it announced this week it would restart dividend payments as soon as next year. As a consequence, shares in the taxpayerowned bank have risen to their highest level in 12 months. The lender, which is still 72% owned by the Government, had its stock surge by 6.9% to 259 points on Monday. Finally, at the start of the trading week the shares of Britain’s largest mortgage lender climbed as much as 4.1% to their highest price since June 23rd 2016. Lloyds Banking Group jumped to the highest level since the Brexit vote as a result of the bank boosting its dividend and lending margins. Eric Moore of Miton Group Plc commented that “Investors worry about the margins, so reemphasising their commitment was good given you’ve got this falling interest rate environment”. Mikun Olupona
More positively, Royal Bank of Scotland have made somewhat of breakthrough in
17
NEFS Market Wrap-Up
Technology This week saw companies around the world releasing their earnings reports for the final quarter of 2016. We will look at few companies that have been most affected by their revelations. Tesla reported a mixed fourth quarter with a wider loss but improved sales. The electric automaker reported a loss of 69 cents a share, 26 cents higher than expected. Revenue surged 88.4% to $2.28 billion, beating estimates by $100 million. Tesla didn't issue guidance for 2017 but said that it expects to deliver 47,000 to 50,000 Model S and Model X vehicles in the first half of the year, which would be roughly a 71% increase over a year earlier. Chinese social media stocks Sina (SINA) and Weibo (WB) were also lower following their quarterly reports. Sina, which holds a 50% stake in Weibo, reported a 37% increase in fourth-quarter earnings and 22% increase in revenue. Microblogging site Weibo doubled its adjusted profit to 34 cents a share from 15 cents a year earlier.
Even so, Sina sank more than 10% and Weibo dropped 12%. Alibaba (BABA), which has a stake in Weibo, fell 1%. Hewlett Packard Enterprise's (HPE) mixed fiscal first-quarter results show that the information technology company is still struggling to regain its footing since being spun off from PC and printer manufacturer HP Inc. (HPQ) more than year ago. The company also slashed its full-year earnings guidance to be in the range of $1.88 to $1.98 per share, down from its prior forecast of $2 to $2.10 per share (see below). CEO Meg Whitman said the downbeat full-year outlook stems from a number of expected headwinds, including higher commodities prices on memory chips for servers, an order shortfall, foreign exchange rates and some "near-term execution issues." The combination of this factors is reflected in an 8% drop in the tech giant’s share price, shown in the figure below. Angelo Perera
18
Week Ending 24th February 2017
Oil & Gas Oil and gas sector stocks gave up a large part of their gains on Friday after a weekly report showed a slight gain in US crude oil inventories, opposite to market expectations. The positions of oil futures, however, suggest big investors are betting on rising prices. The NYSE Energy Sector Index fluctuated over the week, rising on Tuesday and Thursday but losing ground on Wednesday and Friday. It was down 0.97% at 15,953.83 at noon on Friday, largely due to the latest weekly report from the US Energy Information Agency, which shows the country’s oil inventories grew for a seventh week, by 564,000 barrels. Compared with the end of the previous week, the NYSE Energy Sector Index was down 1.16%. Exxon Mobil (XOM) gained 1.05% on Thursday but was down 0.82% at $81.11 at noon on Friday, compared with the previous week’s closing price of $81.76. Chevron (CVX) was down 0.91% at $109.97 at Friday noon, giving up most of its gains on Thursday. In Europe, British Petroleum (BP: LSE) lost 0.74% to close at 447.06 pounds on Friday, which was slightly lower than the closing price of 447.55 pounds of the previous week. Royal Dutch Shell (RDSA: LSE)
shed 1.07% to close at 2,066.22 pounds on Friday, losing 1.48% over the week. Total (FP: EPA) tumbled 1.15% to close at 47.74 euros on Friday. The crude oil has been trading between $52 and $57 per barrel over the past two months. However, statistics show that fund managers now hold high levels of crude oil futures and options contracts, equivalent to some 480 million barrels of oil and nearly double what they held two months ago, suggesting that they are betting on a rise in oil prices. Analysts say they are seeing light at the end of the tunnel due to a lessening supply glut. The International Energy Agency said total global demand averaged 97.3 million barrels per day in the fourth quarter, while supply averaged 97.9 million barrels per day. Statistics show both OPEC and nonOPEC producers delivered their committed output cuts in January. Meanwhile, investors are expecting a US oil rig count due on Friday. The number for the previous week showed the US oil rig count was 597, its highest since October 2015. Michael Chen
19
NEFS Market Wrap-Up
COMMODITIES
Energy Natural gas prices plunged this week, to a six-month low, as meteorologists are expecting warmer weather forecasts for the foreseeable future, declaring that winter is pretty much over. Prices plummeted by 9.5% on Tuesday, closing at $2.56 per million British thermal units (mmBtu). There was a slight rebound on Thursday as the US Energy Information Administration (EIA) reported a fall in US natural gas inventories by 89 billion cubic feet for the week ending February 17. However, despite the recovery, analysts still maintain a pessimistic outlook for natural gas. Josh Miesel from Bespoke Weather stated that: “We're expecting to see natural gas demand fall so dramatically that we're expecting to see storage injections, which you typically don't get for another month." Meanwhile, oil prices have maintained its volatile nature throughout the week. As mentioned in previous weeks, we are seeing a surge in US crude stockpiles to its highest level in more than three decades. This has managed to offset the production cuts implemented by OPEC and 11 other nations, and has kept oil prices in a narrow range above $50 per barrel.
Barkindo said that OPEC will be sticking to the agreement going forward and hoped that compliance to the deal will be even higher as other producers are expected to join in with the cuts. Brent Crude, the global benchmark, jumped 0.9% to $56.66 per barrel, as shown below, whilst US benchmark, West Texas Intermediate (WTI) closed at $54.06, up by 1.2%. There was a slight drop on Wednesday on the expectation that there will be another surge in the US crude inventories. However, prices rose again on Thursday to its highest level in almost a month after data from the EIA showed a smaller-thanexpected rise in the stockpiles. OPEC appears to be sticking to its agreement, however, they are being let down by other producers, notably, US shale companies who have increased output. As Tony Nunan from Mitsubishi puts it: "It's a battle between how quick OPEC can cut without shale catching up." Bunyamin Bardak
On Tuesday, oil prices rose to a near threeweek high after OPEC Secretary General, Mohammad Barkindo, announced that the compliance rate of the OPEC nations to the agreed output cuts had been above 90%. 20
Week Ending 24th February 2017
CURRENCIES
Major Currencies A rather quiet week all round, the dollar reacts to the Federal Reserve’s minutes from January, the euro hits a six-week low and the pound further staggers following the emerging cracks from last week. Following the poor data on UK retail sales, the pound briefly dipped below $1.24 before slowly recovering to close the week at just over the $1.25 mark. This was mainly driven by the weakness in the dollar if anything. A 0.3% fall in UK retail sales last month was short of expectations of a 0.9% rise. This weakened the sterling by as much as 0.8% to $1.2388, pushing the currency towards the lower end of a recent trading range that has proved stable as political concerns over the shape of Brexit loosen up and the economy shows little sign of slowing down in the wake of last year’s referendum on EU membership. The euro hit lows of £0.8404 this week, even against the backdrop of strong data. Figures showed the Eurozone’s composite purchasing managers’ index (PMI) rising to its highest level in almost six years in February. But implied volatility of the currency may be the reason as to why the currency is falling. Implied volatility tracks demand for options to hedge against negative currency movements. Higher
implied volatility reflects higher expectations of currency movements over the coming period. Three-month implied volatility has been falling since the start of the year but leapt at the beginning of coverage of France’s presidential election. The measure also spiked noticeably as the efforts of early frontrunner Francois Fillon prompted fears that Marine Le Pen’s could win an unexpected victory. An opinion poll earlier in the week showing increased support for anti-euro far-right French presidential candidate Le Pen could also be playing a “marginal role” in euro weakness. The dollar has become rather predictable as of late. Fed policymakers are quoted to say short term rates should be lifted “fairly soon”. Such news rallied the dollar softly from 0.9370 to the euro to 0.9460 for the week at pixel time. However, minutes showed there was much in-house arguing about the need to react if inflation and job data are stronger than expected to prevent any overheating. We wait next week to see how much further the pound staggers, how much the dollar rallies and how much volatility is actually in the euro. Robert Tse
21
NEFS Market Wrap-Up
About Research Division We would the appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups.
The Research Division wascontact formedJosh in early 2011 and is a part of the Nottingham For any queries, please Martin at jmartin@nefs.org.uk. Economics and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teams of analysts closely monitoring particular markets and providing insights into their Sincerely Yours, developments, digested in our NEFS Weekly Market Wrap-Up. Josh Martin, Director of the Nottingham Economics & Finance Society Research Division
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 Homairah Ginwalla at hginwalla@nefs.org.uk. Sincerely Yours, Homairah Ginwalla, Director of the Nottingham Economics & Finance Society Research Division
Sponsors:
22security, product, 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 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.