Week Ending 25th February 2018
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
Equity and Deals 13
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 17
Energy Currencies EUR, USD, GBP 18 AUD, JPY, Other Asian
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Week Ending 25th February 2018
MACRO REVIEW United Kingdom Ever heard of a smart border? According to Lars Karlsson, an EU-commissioned expert, a system of electronic borders that is currently being considered by the government would make the UK a “very attractive” trading partner post-Brexit. The concept proposes that the UK and trading partners would harness a new technology that would make it easy to comply with customs procedures. Such a border has been implemented between Sweden and Norway, however Ireland’s foreign minister, Simon Coveney, pointed out that this border would undoubtedly be costly – in both time and money. A similar concept has been considered in the current Irish border conundrum, the latest political piñata unwittingly smashed by the Tories. It has been established that there cannot be a hard border between the Republic of Ireland and Northern Ireland due to the 1998 Good Friday Agreement and extensive interconnection between the respective economies. However if the UK leaves both the Single Market and customs union, the internal market is immediately transformed into an external border, meaning that all potential checks (including border checks, regulations on food safety and more) must then be enforced. Understandably, the Irish government wants a written guarantee from the UK that Northern Ireland will continue to act under EU rules and goods, with services and labour being able to move freely across the border.
Between satisfying the demands of the Democratic Unionist Party, the Irish government, Brussels and hardcore Brexiteers within her own Party, Theresa May might as well be called Dante. Rather than push through with negotiations, the UK government has called for the EU to extend the Brexit transition period ‘indefinitely’ beyond December 2020; the EU has previously insisted that Britain must be completely out of the EU by December 31st, 2020, May expects the transition period to take 24 months rather than 21. This is likely to annoy the Conservative’s most stubborn Brexiteers, including Jacob Rees-Mogg and Priti Patel, who amongst 60 others have signed a letter/ransom note to May’s Cabinet detailing demands for their vision of Brexit. In this letter, it is demanded that Britain must be free from EU regulations and be able to sign its own trade deals after March 2019, which clearly does not align with May’s intentions of keeping the EU in the Single Market and customs union during the transition period. Whether an inter-Party compromise will be found is still unclear.
Amelia Hacon
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NEFS Market Wrap-Up
United States The Dow Jones Index was slightly above 25,000 at midday on the 23rd February, hence showing almost no change compared to the previous week’s closing price. Amid the concern raised by the Florida school shooting and the views expressed by President Trump regarding gun control, the price of gun shares (such as Ruger & Co.) rallied as the American public stockpiled firearms. President Trump stated that US should introduce tighter gun controls, by toughening up background checks through placing a greater emphasis on mental health and raising the legal firearm purchase age to 21. Yet the very next day President Trump then pledged protection of gun ownership, causing much confusion on his stand on gun controls. The US economy is gaining momentum, as stated by the members of the Federal Market Open Committee (FOMC) on the 21st February. Most significantly, they had revised upwards the economic projections they had made at the previous meeting in December. The next Fed meeting will be held on 20th-21st March, and a rate hike has almost become a certainty. Other positive news in the US economy includes that on the 23rd February, the yield of 10-year US Treasury bills reached a four-year high of 2.95%. The government also released data on the 22nd February stating that the total number of people claiming US unemployment benefits had dropped to a 45-year low. This is consistent with the Fed’s assertion that the labour supply is drying up. For the week to the 17th February, unemployment declined even further to 216,000, undercutting the census figure of 233,000.
Steven Mnuchin, US Treasury Secretary, stated recently that wages can increase without incurring high levels of inflation, as he intends to calm the market’s worry of high inflation. Mnuchin has shown his support for Trump’s tax cut by stating that it is ‘absolutely’ good for the US economy, hence revealing that the $20.8tr national debt does not worry him. However some market experts have shown scepticism regarding his statements, saying they are ‘wishful thinking’ and that the tax policy could have ‘unintended consequences’. Trump also announced the ‘largest ever’ set of sanctions on North Korea over its nuclear programmes, by targeting 56 ships and maritime transport companies with the aim to cut off North Korea’s fuel supplies. In September 2017, North Korea had successfully tested a hydrogen bomb that could be installed on long-range missiles, which they claimed were able to strike US soil. Finally Rick Gates, a former top Trump campaign advisor charged by the FBI for multiple counts of tax fraud, bank fraud and money laundering, is expected to plead guilty on the 23rd February. His cooperation with the FBI could result in a significant development regarding the investigation of the Trump-Russia tie as Gates was working closely with other highranking members of the Trump campaign. What he has to offer is still unclear however.
Ang Gao
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Week Ending 25th February 2018
Europe Minutes released on Thursday 22nd from the European Central Bank’s (ECB) policymakers’ meeting last month stated that there will be no change in the ECB’s policy message for the foreseeable future. Whilst the ECB’s Governing Council meets on the 8th March, low inflation and concerns over creating greater market volatility suggest that their message will remain unchanged as per the aforementioned minutes. Following the previous week of volatility in US equities, there has been a significant net outflow of US equity funds towards the EU. Data from the Bank of America Merrill Lynch illustrated that in the week up to the 21st February, there were $2.4billion worth of redemptions made from equity funds in the US. During the same period, the EU experienced $3billion worth of net inflows. This switch has occurred due to the comparative safety of EU equities to those in the US, where a potential rate hike is imminent, thus causing concerns for investors as this is likely to have a negative effect on US equities. The EU met on Friday 23rd to discuss the future of the organisation post-Brexit. The UK’s withdrawal from the union is likely to leave an £11billion deficit in the EU’s current spending plans, on top of the already existing £7billion deficit. JeanClaude Junker, the President of the European Commission, demanded that every member state increase its contribution by 1%, however this was largely opposed.
Regarding the budget increase, Austria’s finance minister, Hartwig Loger, said that there is “no room for negotiation”, whilst Sweden’s finance minister, Magdalena Andersson, suggested that the EU should “shrink the budget”. Despite Angela Merkel announcing that Germany would significantly increase their contributions, there is very little support from other member states. Italian elections are being held on Sunday, whereby it appears that a coalition led by Silvio Berlusconi is the most likely outcome. This potential outcome has worried many leading figures within the EU, with Jean-Claude Junker stating on Thursday 22nd that the EU needs “to prepare for the worst case scenario, i.e., a non-operational government in Italy.” Junker later back-tracked on his comments, however given Italy’s turbulent history surrounding coalitions, his original statements still reflect the general sentiment among many leading figures. This uncertainty surrounding the elections crept into the markets this week with Italian bonds having their worst week since December. Italian 10 year bonds rose 10bps this week, creating a gap of 140bps between the German benchmark and Italian bonds.
Nicholas Gladwin
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NEFS Market Wrap-Up
Japan & South Korea General Motor’s announcement regarding the shutdown of Gunsan’s factory, one of its four operating plants in South Korea, has caused great concern to South Korean President Moon Jae-in. While General Motor demands financial support from the government to assist them with their restructuring operations, South Korea Government officials are put in a rather complex situation. Utilizing taxpayer money to support a U.S. automaker could generate a strong wave of public backlash. On the other hand however, if General Motor takes the decision to leave the South Korean market, approximately 140,000 Korean suppliers and subcontractors could be financially damaged. Yet relations between the US and South Korea are "as strong and robust as ever" according to President Moo Jae-in, which is particularly important considering that the dialogue between North Korea and South Korea is expected to intensify after almost two years of tensions. However the wave of American protectionism and the new proposal to impose high tariffs on steel could severely affect the economies of various countries, including China and South Korea. Michael Moore, expert of international trade at George Washington University, stated: "There's a delicate balance between making it effective and easy to protect the domestic industry and irritating a broader group of international trading partners”.
Japanese automakers are intending to expand their global market share as U.S. rivals face difficult times after two years of slow growth. Consequently U.S. discounting, which has severely reduced the operating profits of Japanese automakers such as Toyota Motor Corp and Mazda Motor Corp, could be reduced or stopped as they are deemed unsustainable in a non-growing market. Hiroto Saikawa, Nissan’s Chief Executive Officer, stated: “Competition for sales will be difficult in this environment, and improving the quality of sales will be important. We can’t compete only with incentives. We need to raise our marketing and brand value.” Meanwhile Sony Corp announced its plan to form a joint venture by entering the taxi and ridehailing market, through developing a new system based on artificial intelligence. Lastly, Japanese Prime Minister Shinzo Abe called for wage rises of 3% to boost economic growth in the attempt to fight deflation (see graph below). With annual wage talks coming in the following months, according to the Reuters Corporate Survey, the majority of Japan companies consider the 3% target as unrealistic and do not plan to raise base pay in order to avoid an increase in fixed personnel costs.
Giovanni Cafaro
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Week Ending 25th February 2018
Australia & New Zealand On Wednesday the International Monetary Fund (IMF) warned that slow wage growth in Australia would inhibit the economy’s ability to achieve a budget surplus by mid2021. The IMF predicts a wage growth at sub-3%, which is below the more optimistic estimate by the government of 3%. Currently, wage growth stands close to a 20-year low of 2.1% (see graph below). Yet the trend of slow wage growth with healthy levels of employment is a trend seen in many developed economies since the 2008 financial crisis. Similarly, a report from J.P. Morgan warns weak Australian economic growth will continue for the foreseeable future. Economists at J.P. Morgan compare Australia to the global economy and claim that it is out of sync, due to low wage growth, high household debt and persistent financial crisis-related caution. When compared to the relatively strong global growth we are now seeing in the post financial crisis era, it seems that these factors are acting as a constraint on the average consumer in Australia, hence holding back potential GDP growth.
This report is in line with the warning from the IMF. Furthermore, the Reserve Bank of Australia (RBA) has reiterated that inflation will rise only slowly as the economy strengthens. The RBA insists that the cash rate is unlikely to increase from its current level of 1.5% until wage growth picks up. In other news, a Pacific trade deal with 11 countries (including Australia, Japan and Canada) could boost the New Zealand economy by up to 1% - the equivalent of 4bn New Zealand dollars. Furthermore, on Monday, Australia’s foreign minister Julie Bishop said that Australia would “welcome interest from an economy the size of Britain’s”, in response to a question regarding Britain joining the Trans-Pacific Partnership. This may be an option for the UK post-Brexit. Bishop also stated that Britain would need to leave the EU Customs Union in order to have a bilateral trade agreement with Australia.
Deevya Patel
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NEFS Market Wrap-Up
EMERGING MARKETS
Middle East This week the IMF has warned that the ongoing geopolitical tensions in Palestine risk pushing the country to breaking point. The warning comes after it was estimated that Palestine’s 2017 economic growth had slowed to 3%. The IMF predicts that growth will continue to stagnate at around 2.3% in the upcoming years, due to capital erosion, confiscation of land and difficulty doing business. Karen Ongley, the IMF's team leader, stated: "At this rate, growth will not generate enough jobs or meaningfully improve living standards for the Palestinian people."
Numerous Middle Eastern economies are currently plagued by low productivity, thus the growth in AI will go a long way in treating this problem. At the moment, AI contributes as much to the economies of Saudi Arabia and UAE as it does to the economies of Southern Europe and developed Asia. The report comes after a year of growth in AI in the region, particularly in Saudi Arabia. This is in line with Saudi Arabia’s Vision 2030, which focuses on economic diversification in a bid to move away from its dependence on oil.
In more positive news, the Qatari economy has successfully narrowed its fiscal deficit to below 3% of GDP, from 5.1% in 2016. The resilience of Qatar’s economy as it faces a blockade from its neighbours is testament to the country’s strong economic foundations. The improvement is due to recovering oil and gas prices, as well as an associated rebound in nominal GDP and government revenue.
In line with their policy of diversification, Saudi Arabia is also set to invest $64bn in its entertainment industry over the next decade. The crown prince of Saudi Arabia wants to reduce dependence on oil revenues by increasing household spending on culture and entertainment, which should help create jobs in the sector. The country is already planning to create a large entertainment city roughly the size of Las Vegas.
Research by PwC predicts that Artificial Intelligence (AI) will contribute approximately $320bn to the Middle Eastern economy by 2030, which is equivalent to 11% of the region’s GDP.
Changu Maundeni
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Week Ending 25th February 2018
Africa Following last week’s news of Jacob Zuma’s resignation as President of South Africa, as well as the change in leadership in other countries like Ethiopia, Angola and Zimbabwe, political risk has diminished and investors seem optimistic about the continent’s outlook. Investors’ confidences have also been increased by the “stable or improving credit profiles”, the recent oil price upturn and decreased sensitivity of some countries to rising interest rates. At the same time, more African countries are seeking funds in bond markets primarily for the “refinancing or funding of infrastructure projects”, as reported by an executive director from JPMorgan’s CEEMEA debt capital markets team. Statistics from the Bank for International Settlements showed that borrowing from the international debt markets by subSaharan African countries has amounted to over $200bn – a 550% rise since 2007. Kenya’s sale of $2bn in 10- and 30-year debt attracted $14bn this week, whilst Nigeria’s sale of 12-year paper yielded 7.14% last week. Nigeria has attracted $5.5bn in the past 3 months, whilst Kenya plans to raise around $1.5bn. Additionally, investments in the agricultural sector have manifested this week. On Wednesday 21st February, Robert Petri, the Nigerian Ambassador of Netherlands, announced that the Dutch government is to invest in “key sectors of the Nigerian
economy”, particularly recognising the significance of the agricultural sector and the “huge opportunities” therein. Moreover, on Thursday 22nd, the National Council State (NCS) decided that agricultural funding will increase from $200m to $1bn, as part of Nigeria’s aim to diversify its economy, in addition to promoting food security and overcoming its current economic challenges. Also this week, grant agreements amounting to $29m were signed between the African Development Bank and the Government of Mozambique. The funding will contribute towards two operations, one of which is expected to advance agricultural practices and equipment. Pietro Toigo, a representative of the African Development Bank, indicated that even though the recent gas discoveries will have a significant impact on the economy, investment in agriculture is crucial to “ensuring the country has a solid economic base.” The agricultural sector represents a key development opportunity for the African continent. Access to crucial advanced technologies and to information on techniques, as well as the integration of farmers into regional and national markets, will considerably impact economies through higher yields and incomes. Felicia Bogdana Cornelia Ababii
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NEFS Market Wrap-Up
China For years, international news was plastered with the growing dangers of China’s pollution levels – with cities on lockdown as air became too polluted to breathe. In December 2016, 22 cities, including Beijing, were issued with pollution “red alerts” as toxic smog descended across the nation. Indeed, these problems are continuing to persist. On Thursday evening, heavy smog shut down a ferry service across the Qiongzhou Strait, which then led to a traffic jam of around 11,000 cars (estimated around 100,000 people) which lasted until the Friday morning. China’s current environment is unsustainable and has already been linked to as many as 1.6 million premature deaths. Furthermore, it could see the nation’s economic growth suffer as rising long-term sickness hampers productivity and living conditions become increasingly hazardous. Many believe we have already begun to see this result, with some arguing that China’s lower level of growth (around 6.5%, down from its 10% peak during its economic miracle) being partly the of unsustainable growth. China’s most recent five-year plan consolidated a move away from the sole focus of economic growth towards one coupled with environmental sustainability. China has made huge leaps in green technology in order to minimize byproducts of production and their consumption of unsustainable materials.
This is clear in the automobile industry, with China becoming the leader in electric and hybrid cars – many of which are now also driverless. Just this Friday, Zhejiang province gained approval to build a motorway stretching 100 miles from its capital of Hangzhou to Ningbo. This motorway stands apart from other motorways, as it would charge the electric cars as they drive. In addition, this week state radio discussed the Politburo’s work on a new Special Economic Zone, known as Xiongan New Area, which would largely look to be an environmentally sustainable “smart” city. With “important progress” being made towards the planning for the SEZ, there is the promise of a potentially more sustainable future. Xiongan will be a test site for many new eco-friendly structures that could potentially spread across the nation. Though it is unclear the true impact of China’s environmental policies so far, it is undeniable that China is making huge leaps in green finance and sustainable technology. In order for the nation’s economy to continue growing, it is very important that this change continues and extends beyond China’s borders, as the nation expands its global influence.
Laura Leng
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Week Ending 25th February 2018
Latin America In some respects, Latin America is currently performing well – steel output is up 4% this year. And in terms of consumption, Argentina and Peru demanded 18% and 13% more steel respectively. However previous IMF opinions about the improving growth prospects of the Latin American economy may be hasty, at least for its second largest region by GDP: Mexico. Benito Berber, a Nomura analyst, said that “the Mexican economy seems to be slowing down”, in reference to quarterly figures that show growth rates 0.7% lower than those of December 2017. Whilst small, the slowdown comes on the back of the Mexican President Enrique Pena Nieto’s promises to supercharge growth through economic reform. Oil production and prices in Latin America are still in an extremely problematic state. Mexico’s oil sector decreased by 10% of its GDP compared with 2016. Venezuela’s oil production recently hit a 28-year low (see graph below). The Mexican government’s response is tepid: claiming that its economic reforms will induce $150 billion worth of investment in the sector, which in turn will induce growth in the long-term. Strength seems to be rising from other sectors however – such as the expansion of the service sector by 1%. Services are key to the value-added, modern-economy growth strategy Latin America needs. Yet modest figures that have arisen without significant political muster indicate that such growth may be just another random walk. The Venezuelan response to oil problems seems non-existent. But this is probably due to their being occupied with a grave humanitarian crisis. Balancing economic freefall with the problematic
migration of around 4 million Venezuelans will certainly be straining its institutions. Another aspect of Mexico’s economy that sheds light on yet another problem ingrained in the Latin American region is that 57% of its workforce is ‘informally’ employed. With the exception of those that are self-employed, 57% is a number far too high for an economy to grow stably. The Economist cites that informality both causes and is exacerbated by low growth. Santiago Levy of the Inter-American Development Bank blames tight regulation, taxation and social-protection schemes for the lack of incentives for informal businesses to grow. In Peru in 2002, the share of the workforce in informal jobs fell from 80% to 70%, which was correlated with faster economic growth. It may be true that reducing informality in labour markets presents an avenue to growth.
Matthew Chapman
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NEFS Market Wrap-Up
Russia & Eastern Europe This week Latvia has been in the news for several banking allegations, with both AVLB Bank (Latvia’s third-largest lender) and the Latvian Central Bank involved in allegations of corruption. The AVLB Bank has been accused of money laundering, including in connection with North Korea, and the Governor of the Latvian Central Bank is suspected of bribery. Latvia has been known as the financial ‘bridge’ between the East and West of Europe since the fall of the Soviet Union in 1991. It is also seen as the banking capital of the East. This is due to several advantages the country has, such as the Russian language and business connections that have existed for many years. Furthermore the country has been part of the European Union since 2004, thus making it a secure place for investors due to EU law. Yet despite these advantages, for several years Latvia’s Banking Sector has been seen as an issue for Europe, with it being involved in many scandals since the 2008 financial crisis. In 2014 the country’s entrance into the Euro was delayed after allegations of further problems in the banking sector. On Thursday there were even fears that Russia may be involved in interfering with the upcoming general election, however it is still unclear as to whether this is true.
If true, this would be a violation of United Nations sanctions. Currently, the ECB has not released its stance on the issue but is following the matter closely whilst the details become clearer. The other major allegation to come out this week is that Ilmars Rimsevics, the Governor of the Latvian Central Bank, is accused of demanding bribes. Rimsevics has been Governor for 17 years and was due to retire next year. However many, including Prime Minister Maris Kucinskis, are now demanding he step down immediately. Rimsevics is currently not following this advice and has released a statement denying his guilt, further stating: “I have taken the decision not to resign”. Rimsevics was detained over the weekend but has now been released on bail with no formal charge. In order to cement the future of the Latvian Banking Sector as a secure and prominent financial hub, there will need to be some fundamental changes to its integrity.
Abigail Grierson
As such, this week AVLB Bank was accused by the European Central Bank (ECB) of ‘institutionalized money laundering’, despite having been under direct supervision from the ECB. Whilst most of the bank’s funds originate from Russian sources, there are also rumours that some transactions by the bank have been linked to North Korea.
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EQUITY AND DEALS
Week Ending 25th February 2018
Financials This week we go back yet again to visit indices. These are still being affected by the volatility experienced over the past weeks and have not been helped by the release of the Fed’s January meeting minutes. The dollar has also performed well against the euro and the pound, due to lackluster performance on the labour market front. Finally, oil prices remain relatively unstable. The S&P 500 suffered a 0.6% loss on Wednesday, after the United States Federal Reserve’s release of its January policy meeting documents. Other indices that fell included the Dow Jones Industrial average (down 0.7%) and Nasdaq (down 0.2%). Yet European stocks improved after Wall Street’s early rally on Wednesday, with the Stoxx 600 rising 0.2% and the FTSE 100 rising 0.5%. Germany’s Xetra Dax however still fell 0.1%. In Asia, Hong Kong’s Hang Seng index jumped 1.8% and Japan’s Topix fell 0.1%. The dollar Index has also been struck by volatility due to the release of the Fed’s documents, going up 0.4% on Wednesday to 90.05 points (see graph below), 2% higher than the three-year low it reached last week.
The dollar has been performing well against both the euro and the pound, with the euro declining 0.4% against the dollar at $1.2287, and sterling falling 0.5% against the dollar at $1.3916. In fact, the pound fell as low as $1.2908 following the release of a report regarding the UK labor market, stating it has been performing at sub-par levels. This was due to slower employment growth in December than was expected, an increase in the unemployment rate and wages failing to increase. On this front, politicians are placing their hopes on a smoother Brexit and are pushing for a tighter labor market, yet the hoped-for higher inflation could come at a severe cost in the coming months. Finally, Oil is still experiencing some volatility and is failing to find a stable price. Brent crude, the international benchmark, closed 0.3% higher at $65.42 per barrel, whilst West Texas Intermediate, the main contract for oil in the US, was down 1% at $61.18 per barrel. Mario Pucinelli Filho
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NEFS Market Wrap-Up
Technology & Health This week has seen surging shares in the Technology sector. Meanwhile there has also been a mixture of news in the Health sector, with the possibility of new drugs entering the market. Amazon topped $1500 a share for the first time this week. The stock has been growing dramatically for the past year, with shares up 27% so far in 2018. Last week Amazon surpassed Microsoft in market value, and now only sees Apple and Alphabet ahead of it. Netflix has also been performing well, with shares approaching its record high. The company has seen an impressive 45% rise in stocks in 2018. According to Thomson Reuters data, earnings per share are expected to more than triple this year. Reckitt Benckiser, the consumer goods giant, saw shares fall by 6.6% on Monday after the company reported flat like-for-like revenues. The company, owner of brands such as Nurofen and Durex, has missed its 2017 profit estimates following its struggle with a series of problems for the past year and a half. Reckitt already warned last year that sales would be affected by the cyber-attack experienced in June 2017. However the company has also been faced with rising commodity costs and a tough pricing environment in developed markets, which it expects to continue in 2018. The company’s shares have fallen 24% since June, with Monday’s drop being its biggest one day drop in seven years.
Last week AstraZeneca obtained approval from the US Food and Drug Administration (FDA) for their new lung cancer drug, Imfinzi. The approval follows positive results from the company’s “PACIFIC” trial published last year. The drug aims to treat stage III lung cancer patients, where their disease has not yet progressed following chemotherapy and radiation therapy. It is the first immunotherapy treatment approved for stage III lung cancer. The news reflects the company’s efforts to boost revenues following falls in sales from older products that have come off patent. Aimmune is also edging closer to FDA approval for its peanut allergy drug following success in its phase III trial. If the drug were to gain approval, it would be the first treatment for the allergy. The news sent the drug developer’s shares up around 10%, however they have since fallen. Competitor DBV Technologies’ shares also fell following Aimmune’s news, which saw disappointing results from a trial for its peanut allergy patch four months ago.
Jessica Murray
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Week Ending 25th February 2018
Oil, Gas & Industry This week we will be looking at the performance of mining company Anglo America alongside the French energy utility company EDF. Anglo America announced their highest dividend of the past decade and much lower debt levels after experiencing a surge in annual profits. This improvement in performance has been aided by the rise in commodity prices, the higher productivity levels and the firm’s cost cutting, following the downturn in the commodities market in 2015 and 2016. Earnings before interest, tax, depreciation and amortisation increased by 45% to $8.8bn in 2017, with revenues rising by 19% to $26.6bn. Iron ore, coking coal and manganese accounted for 60% of group earnings. The company’s share price has risen by 13% over the past year and is currently at £18 per share. Anglo has a large business in South Africa, hence the increase in share price is supported by the expectation that the new president, Cyril Ramaphosa, will support the industry. It is believed that the new leader sees the mining industry as vital for revitalising growth within the economy. Despite EDF experiencing a fall in revenue, the company reported an increase in profits that were supported through the sale of assets. This decrease in revenue was said to have been caused by a drop in hydropower and nuclear output in its domestic market, as the French government is increasing pressure
on firms to use more renewable energy resources and reduce the country’s reliance on nuclear energy. Revenues were down by 2.2%, from €71.2bn last year to €69.6bn currently. Earnings before, interest, tax, depreciation, amortisation also fell by 16.3%. The company has been facing increasing competition and made a loss of around one million customers within France, though it still serves around 85.5% of the country’s residential customers. EDF has responded to these changes in the market by announcing a push towards solar power, at a cost of around €25bn, along with green electricity tariffs. The company had announced an ambitious cost cutting plan in April 2016. As such, in the year to December 2017, operating expenses were €431m lower than the previous twelve months. Jean Bernard Levy, Chairman and Chief Executive of the group, expects a rebound in 2018 and further focus on cost saving in 2019, following the predicted decline in nuclear generation within France.
Abdul Akhtar
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NEFS Market Wrap-Up
Deals Chinese car manufacturer, Zhejiang Geely Holding Group Co., has acquired a 9.7% stake in Daimler AG, the owner of Mercedes. The deal, worth around $9bn, is the latest expansion of the Chinese car manufacturer behind brands such as Lotus and Volvo. It makes them the largest investor in Daimler AG, hence boosting their international influence. The investment was made on behalf of the company’s chairman Li Shufu. A Daimler spokesperson stated: “Li Shufu is a Chinese entrepreneur Daimler knows well and regards highly in terms of his competency and focus on future developments.” The Edinburgh based asset management firm, Standard Life Aberdeen, has sold their insurance business for over £3bn. Standard Life Assurance Limited, which was founded in 1825 and has around 3,000 employees, is being purchased by Phoenix Group. Phoenix, which specialises in closed books of business or 'zombie' funds, will almost double in size once the deal completes. The deal includes £2.3bn in cash and a 19.99% shareholding in Pheonix, which continues the two firms’ existing long-term strategic partnership. This comes a week after a huge blow to Standard Life Aberdeen, where they lost a £109bn contract with their largest client, Lloyds Banking Group. Meanwhile, industrial conglomerate Melrose is continuing its attempt of a
hostile takeover of global engineering group GKN. Jeremy Corbyn, Leader of the opposition, accused Melrose at the EEF National Manufacturing Conference of mounting a "hostile, allegedly debt-fuelled takeover bid". Melrose responded by stating: "We've made a lot of money for our shareholders… And we've made a big contribution to the UK Treasury, a good contribution to the UK economy." On 6th March the Business, Energy and Industrial Strategy Committee will hear from representatives of both companies, giving an opportunity for MPs to question the attempted takeover. Broadcomm have cut their offer by 4% to $117bn, following Qualcomm’s decision to raise its bid for NXP Semiconductors to $44bn. Qualcomm responded by saying Broadcomm had made “an inadequate offer even worse”. The proposed deal would be the biggest technology acquisition in history, hence making the shareholders’ vote on 6th March highly anticipated. Repsol, an integrated global energy company based in Madrid, are to sell their 20% stake in the Spanish utility Gas Neutral to CVC Capital Partners for €3.82bn ($4.69bn) or €19 a share. Repsol claim the capital gain from the deal will hand it a capital gain of €400million.
Edward Turner
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Week Ending 25th February 2018
COMMODITIES
Energy The National Audit Office has issued a statement warning that a subsidy scheme to support green heating systems is not meeting expectations and the government must act swiftly to find an alternative scheme to reduce the carbon emissions produced by millions of homes and businesses. The Renewable Heat Incentive (RHI) scheme was set up by the government in 2011 to support the need for low carbon heating systems. This was to be achieved by compensating participants for twenty years. As of August 2017, the government has so far forfeited £1.4bn towards the scheme and it is estimated the scheme will cost a further £23bn if the scheme is to see out its initial plan. This March the London stock market will see the IPO of Energean, a gas and oil producer, that is looking to raise $500m in order to fund gas prospects in the eastern Mediterranean. Energean, which was founded in 2007, will use an estimated $395m from the proceeds of the listing to fund and develop gas fields in Karish and Tanin, both of which are in close proximity to Israel. The CEO of Energean, Mathios Rigas, said Energean’s plan is to become “the leading independent in the region” and that “we are in the right place at the right time”. Despite the positivity however there has been speculation as to how achievable Energean’s plans are, given the neighbouring political conflicts at play.
Back in 2010, Japanese car giants Nissan and Mitsubishi introduced their own electric cars to the mass markets, which Japanese manufacturers expected to create a surge in demand for batteries. Yet this surge did not come to light and many investments took a turn in the wrong direction. Eight years later however the world’s car manufactures are now moving away from combustion engines and towards electric cars, hence causing a race to secure the raw materials needed to produce electric vehicles. Over the past decade, China has increased their market share of raw materials significantly (see graph below) compared to other countries. It is estimated that will eventually supply 60% of the world’s electric vehicles by 2030, according to Goldman Sachs. Sarren Sidhu
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NEFS Market Wrap-Up
CURRENCIES
Major Currencies The dollar continued to dominate headlines this week as the currency reclaimed some losses. The dollar index rose 2% from the three-week low that hit it the week before, to 89.89. It has strengthened due to stabilising financial markets and hawkish Federal Reserve minutes. The Vix index, a measure of Wall Street volatility, fell to 18.8, having risen above 50 during the market sell-off. Global markets have also moderated, and they gained at the end of the week. With financial markets stable, investors have regained confidence in their growth and inflation predictions. Coupled with the central bank expressing confidence in the robustness of the economy and its expectation of high inflation, markets have started to price in monetary tightening. Nick Stamenkovic at NFS Macro Consulting said that “a March [federal funds] rate hike is a done deal,” and that the main point of uncertainty is whether the Federal Reserve will raise the rate three or four times in the year ahead. Dollar confidence is countered however by the strengthening narrative that a weak dollar is here to stay. The main factors dragging on the dollar are the deteriorating current account and fiscal deficits. The dollar could strengthen if the fiscal stimulus and tax cuts translate into economic growth, but available evidence suggests that a significant portion of the
spending will be used on stock buybacks or absorbed in imports. Michael Sneyd at BNP Paribus predicts that regardless of economic performance, as financial markets stabilise, the dollar will return to a structural bear trend that was evident prior to the market sell-off. Morgan Stanley has lowered its year-end dollar-yen forecasts to ¥101 per dollar, down from its November forecasts of ¥105. The pound-dollar spread is predicted to drop to $1.32 in Q2 before recovering in the last two quarters at $1.38. As markets learn what to expect under the Fed’s new governor, significant sources of uncertainty in the forex market will stem from the European Central Bank and the Bank of England. Following a hawking inflation report from the Bank of England in February, the risk of a bank rate hike in May has risen. The bank predicts that tight labour market conditions will put pressure on prices, but its models also assume that Brexit will be a smooth transition. These predictions could be severely tested in the months to come.
Daniel Blaugher
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Week Ending 25th February 2018
Minor Currencies All three of the commodity currencies fell victim to the US Dollar strength with the NZD/USD suffering the steepest losses, after closing lower for 4 out of the 5 trading sessions this week. NZD/USD was rejected at the 0.7400 level in early week as traders kept pushing this pair lower throughout whole week. The release of Federal Open Market Committee (FOMC) minutes on Wednesday saw this pair spike briefly at 0.7380, but traders promptly faded this move before pushing it to its weekly low of 0.7272 on late Friday. Key technical support levels at 0.7250 and 0.7200 will come into focus should the NZD/USD fall further next week. The Aussie also drifted lower against the greenback as the minutes released from the Reserve Bank of Australia’s meeting sounded cautious. The bank however reiterated that a lower AUD level would help Australia’s high household debt issue. In contrast, FOMC meeting minutes released sounded hawkish and painted a rosy picture of the US economy. The AUD/USD is likely to trend lower as both the RBA and the Fed currently have contrasting views on their respective economies and monetary policies. Given the current bearish pressure on the AUD/USD, 0.7750 is a key support level to watch, as a break lower would likely see a possible test of 0.7600 in the near term
Whilst the Australian economy is growing, wages however continue to lag. The wage price index for Q4 2017 edged higher at 2.1%, slightly better than expected but Construction Work Done in Q4 2017 fell sharply by 19.4%. USD/CAD tested the 1.2700 level this week, spiking as high as 1.27596 before reversing lower on stronger-than-expected inflation figures released on Thursday. Canadian consumer price index (CPI) rose 1.7% in January on a year-on-year basis, following a 1.9% increase in December 2017. The CPI report suggested that the healthy labour market is driving up consumer prices. Core consumer prices, which are less volatile, increased for the fourth consecutive month and is currently at its highest point since September 2016. Earlier in January 2018, the IMF hiked growth forecasts for the Canadian economy, expecting growth rates of 2.3% in 2018 and 2.0% in 2019. The increased likelihood of the Bank of Canada tightening its monetary policy in the coming months would likely see USD/CAD falling further. Next week, investors will look at China’s Caixin Manufacturing PMI figure to have a gauge on the health of the world’s second largest economy. A positive surprise would likely send commodity-related assets higher given that China is the world’s biggest commodity importer (see graph below). Mingli Yong
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NEFS Market Wrap-Up
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Charlotte Alder at calder@nefs.org.uk. Sincerely Yours, Charlotte Alder, Director of the Nottingham Economics & Finance Society Research Division
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