Week Ending 3rd March 2016
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 18 Financials Technology Oil & Gas
Commodities 21 Energy Agriculturals
Currencies 23 EUR, USD, GBP AUD, JPY & Other Asian
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Week Ending 3rd March 2016
MACRO REVIEW
United States On the 28th of February, President Trump delivered his first speech to a joint session of Congress. Key takeaways were promises to revitalize the American coal industry, increase government spending on infrastructure by 1 trillion dollars, and severely reduce corporate and income tax levels. The speech was well received by the U.S market as the Dow Jones rose by 200 points to surpass the 21,000 mark for the first time in history the following morning. The underlying theme of the speech was restoring American economic growth by getting Americans back to work. As Trump believes, ninety-four million Americans are currently out of the labour force. Though the President is partially correct, it would be wrong to classify them as unemployed. This is because the most recent quarterly data from the Atlanta Federal Reserve shows 44.1 million are retired, 15.4 million are disabled, 12.9 million are taking care of a family member and another 15.5 million are in college or job training. Thus, they are not listed as seeking employment. According to the Federal Reserve, the unemployment rate is at 4.8%, meaning that the economy is nearing full employment and thus cannot get significantly lower. Moreover, in contrast to the market rally, distinguished economists such as Jeffrey
Sachs, Director of The Earth Institute at Columbia University, and David Stockman, former director of the Office of Management and Budget under Ronald Reagan, regard the President’s economic policy as “fiscally irresponsible”. This is because the speech outlined massive government spending alongside recordbreaking tax cuts. The President’s plan argues the tax cuts will create an environment which encourages businesses in invest heavily domestically. The blueprints of this plan are taken from former President Ronald Reagan economic policy which drastically reduced taxes at the time. Reagan’s economic policy, which created high levels of economic growth at an average of 4.6%, are highly regarded by U.S economists. However, there is a key difference between the state of the American economy today, and that of the 1980s. The key difference is that Reagan inherited a clean balance sheet and a debt of $930 billion, which was then 30% of GDP. While President Trump inherits $20 trillion worth of debt, which is 106% of GDP. Though Reagan could achieve an economic boom, he did raise the national debt to $2.9 trillion, a 190% increase, leading economists to believe President Trump is leading the economy into a debt trap. Disun Holloway
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NEFS Market Wrap-Up
UK This week has seen tremendous developments for UK investment. As part of an ambitious plan to double the size of the Welsh economy, a vision for a new integrated metro transport network for northwest Wales has been revealed by the Welsh Government. It is hoped these investments into Welsh road and rail services will act as a springboard for attracting more finance into the region, as well as improving links between the north of England, the Midlands and London. Additionally, it is estimated these improvements will bring 45,000 to 55,000 new jobs over the next 20 years. The west of England has also seen a tremendous increase in its level of investment. This is brilliant news for the region, which last week was reported to be the second fastest growing region in the UK (after Central London). In addition to receiving £230.7million of Growth Deal Funding and £180million of private investment, the Communities Secretary Sajid Javid announced a government cash boost of £52.8million. All in all, this investment will be intended to create jobs, support growing businesses and encourage growth. On a less positive note however, a report published this week for the Scottish Government concluded that a separate
deal on EU membership would result in “significant detriment” to the Scottish economy. This conclusion lies in contrast to Nicola Sturgeon’s intention to achieve a differentiated deal for Scotland following the Brexit vote. It was concluded that unless the Scottish Government changed it stance on immigration, some level of internal UK border controls would have to be introduced, which could be highly harmful to Scottish movement of goods and people. Yet many SNP politicians criticise the highly suspicious nature of the report, which was established by Ruth Davidson (leader of the Scottish Conservative party), and has a conclusion that greatly supports the Conservative agenda. Further EU developments this week include research published by London First and consultants from PwC. The analysis from ‘Facing Facts: the impact of migrants on London, its workforce and economy’ emphasises how vital immigration is to London’s economic strength, with each migrant worker contributing an average of almost £50,000 to the capital’s economy annually. Overall, there are 5.2 million people in London’s workforce, including 1.8million full-time migrant workers. EU migrant workers comprise 13% of London’s total work force (see graph). Charlotte Alder
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Week Ending 3rd March 2016
Eurozone Data from Eurostat shows that prices in the Eurozone grew by 2%, year on year, in February, driven mostly by rising energy costs. This is a rate increase from the 1.8% inflation recorded in January, and surpasses the European Central Bank’s (ECB) target of “below, but close to, 2% over the medium term”. This is the highest it has been for over four years, since January 2013 (see below). Despite Mario Draghi’s (the ECB president) pledge that interest rates would “remain at present or lower levels for an extended period of time”, the surpassing of the target rate for inflation may represent a turning point. Interest rate hawks on his Governing Council will no doubt be encouraged by the recent data to renew calls for some tightening of the ECB’s monetary policy. The hawkish outlook is strongest in Germany, the Eurozone’s strongest economy, where inflation is at 2.2%. Critics of Draghi’s dovish policies say that it punishes German savers in an economy with healthy growth. Yves Mersch, of the ECB’s executive board, raised this view in January - “How much longer can we continue to talk about ‘even lower rates’ as being a monetary policy option? Considering the importance of credibility for a central bank, as mentioned, there should be no delay in making the necessary gradual adjustments to our communication.”
Yet some Eurozone members are still some way behind the target – notably, France (1.2%), Greece (1.2%) and Ireland (0.3%). On top of this, quarterly growth in some members also remains weak – Greece is currently experiencing GDP growth of -0.4% and unemployment of 23%. Whilst the loose ECB monetary policy - which includes a promise to buy €780bn in bonds this year as part of their QE program – is unfair on well-to-do economies such as Germany’s, it is also preventing unsustainable situations such as that in Greece from getting significantly worse. Such is the nature of the Eurozone, a monetary union without fiscal unity. The compromise that so defines macroeconomic policy is only magnified when spread across distinct economies with differing strengths and weaknesses, as is the case with the Eurozone and its several crises. No wonder then, that populist movements all over Europe are so consistently anti-EU and anti-Eurozone. Whilst much of populist discussion could be labelled sensationalist at best and racist at worst, this view, that the Euro has had its day, is one echoed by mainstream economists such as Joseph Stiglitz and Mark Blyth. Jamie Peake
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NEFS Market Wrap-Up
Japan A smattering of economic data was released last week, and in general it pointed to stronger prospects for the Japanese economy. Yet, as has appeared to be a general rule for this economy, what appeared to be a boon was moderated by other, more gloomy prospects.
consumption. Household spending fell 1.2% over the year to January in real terms. As workers go into spring wage negotiations that are expected to provide only modest pay rises, it is doubtful that consumer confidence will dramatically improve in the near-term.
Starting off, Services Purchasing Manager’s Index (PMI) fell to a four-month low of 51.3 in February, down 0.6 points from January. Managers pointed towards increasing input prices, particularly in fuel costs, as dampening business confidence. Service firms raised output, albeit moderately.
In January, the Core Consumer Price Index (CPI) saw positive growth for the first time since December 2015. The index rose 0.1% month-on-month, stemming a yearlong trend of falling prices. The graph below shows the annualised CPI trend. This increase came from rising energy costs and domestic consumption, although the weakness of the latter throughout the month underscores the fragility of the economy’s recovery. Analysts expect Core CPI to head towards 1% in 2017, which is still short of the Bank of Japan’s 2% price target.
Manufacturing PMI, on the other hand, managed a 35-month high of 53.3 last month. A sharp uptick in new orders encouraged firms to boost output and raise hiring. IHS Markit economist, Samuel Agnass, predicts that this robust growth will continue over the next few months with “Japanese good producers showing intent to support this current upturn.” Business confidence soared in the index. The labour market tightening in January and unemployment fell from 3.1% to 3.0%, posting further evidence that the economy will grow strongly above its trend. Income rose on average 1.0% over the year in real terms, however Kiichi Murashima, at Citi in Tokyo, states that the effect of a hot jobs market on wages has been milder than expected. He expects that if tight labour market pressures persist, wage growth will pick up and “this may start exerting upward pressure on prices.”
Next week, the Cabinet Office releases revised estimates for growth in the final quarter of 2016, which analysts expect will be revised upward by as much as 0.2 percentage points. Daniel Blaugher
This pressure will be tempered by persistent weakness in domestic
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Week Ending 3rd March 2016
South Korea This week I will discuss recent updates in South Korean manufacturing followed by a look into the macroeconomic risks facing the country moving forward. South Korea’s manufacturing PMI data reported its seventh straight month of contraction, coming in at 49.2 for the month of February. An index reading below 50 represents a contraction compared to the previous month. The manufacturing index is believed to be a leading economic indicator that can help predict an economic expansion or recession by observing data on the following categories: New Orders, Output, Supplier Deliveries, Inventory, and Employment. Unfortunately, all five categories reported worsening figures for the month. However, it’s difficult to rely on a single indicator to understand the state of the South Korean economy when for the past seven months manufacturing PMI has been saying contraction, but the Kospi stock market index, at 2,078.75, has been saying expansion. I personally have a moderately pessimistic outlook for South Korea in spite of recent stock market highs. The 10Y bond yield, currently at 2.23%, has risen over 80bp since October 2016. The bond market is widely considered a leading indicator, much like the manufacturing PMI, and the relatively quick jump in bond yields raises concerns about the overall risk of investing in the country. South Korea’s exposure to foreign risk also concerns me, considering China’s weakening economy, the
suspicions of data fabrication, and the United States’ increasingly protectionist government. China and the United States are South Korea’s largest importers, purchasing $11bn and $5.4bn South Korean imports respectively for October 2016 – clearly South Korea has a lot to lose if these countries get derailed. The aforementioned foreign risks have been foreseeable for several months now and we have witnessed corresponding movements in the currency and bond markets. However, momentum in South Korean equities continues to dominate the negative effects brought about by these risks. Leading South Korean ETF, iShares MSCI South Korea ETF (EWY), has returned 10.66% YTD. Although heavily weighted in Samsung Electronics, up 9.93% YTD, the impressive performance of South Korean equities is significant and provides valuable insight into the power of the stock market among macroeconomic risk factors. Dan Minicucci
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NEFS Market Wrap-Up
Australia & New Zealand In the past five years, Sydney housing prices have surged 73% and 52% in Melbourne. A cocktail mixture of low interest rates, decades of economic growth and a shortage of new constructions have all added to Australia’s property market boom. Tax breaks such as “negative gearing”, and capital gains tax being discounted when investors sell have attracted buyers to the South Pacific. As far as regulation goes, banks continue lending depending on borrower’s offshore income, and have reduced high loan-tovalue lending (ratio of a loan to the value of an asset purchased). Additionally, some states have imposed tax increases on property purchased by foreign investors. However, is this a housing bubble? Although some banks argue that a housing bubble is “not evident”, Australian economists contradict this thought by stating that it is “the largest housing bubble on record”. Sydney and Melbourne continue to see rising prices, other areas, including Perth and Queensland, dependent on mining, have seen a plateau or decrease in prices since the end of the commodity boom.
as prices have fallen in January, the trade surplus has weakened. The Australian economy’s dependence on commodity prices has risen concerns to authorities including Australian Treasurer Scott Morrison. Additionally, Mr. Morrison has expressed his concerns over the record low wage growth with respect to the national budget. Even though the Australian economy has seen a strong growth spurt in the last three months of 2016, wages are stagnating and inflation is weak. However, the country continues to benefit from higher commodity prices, subsequently increasing mining company profits and driving the record trade surplus in December. Nonetheless, the Australian’s central bank has cut its overnight cash rate to 1.5% (record-low) to smoothen a transition from a mining driven economic growth to traditional services. Morrison has argued that the focus should be on balancing the national budget, as this will consequently improve wages, business expansions, and ultimately living standards. Maria Fernandes Camaño Garcia
Moreover, there has been a strong positive correlation associated with the increasing commodity prices and a trade surplus creation in the final months of 2016. As projected through the Bloomberg graph below, a close to 40% surge in commodity prices until December have contributed to Australia’s trade surplus and economic growth above expected values. However,
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Canada Canada ended a precarious year on a more sanguine note, with Q4 2016 growth results released by Statistics Canada indicating an annual rate of 2.6% for the final 3 months (see below) – much stronger than the widely anticipated 2%. Much of the growth can be accredited to strong household spending, although many major sectors of the economy had expanded in December. This was sufficient to counteract a decline in business investment, falling 2.1% in the quarter and generally remaining lacklustre since oil prices plunged. Given that business investment remains a key driver for job creation, the fall is indicative of prospective labour market issues. Derek Holt, economist at Bank of Nova Scotia appeared much more pessimistic however, quickly refuting the figures as a ‘fake beat’. Holt claims the GDP data was skewed by a plunge in imports, improving Canada’s net trade balance, and this ‘artificial’ import figure was sufficient to add over a full percentage point to Canada’s GDP growth figure. Coupled with a lack of export growth and investment, they paint ‘a picture that is grim’.
the Canadian economy, despite recent indicators pointing towards growth in the last months of 2016. The bank said the recent upsurge in consumer price is ‘likely fleeting’, whilst outlining key issues, including labour market weakness; curtailing export competitiveness. Poloz insisted that a rate cut remains feasible in the foreseeable future, although many economists do not anticipate this until 2018. The CPI rose to 2.1% in January – exceeding 2% for the first time since October 2014, namely due to carbon pricing measures introduced in Alberta and Ontario. According to the BoC’s benchmark measure, inflation is still well below the 2% target at 1.3%, and the bank states its 3 measures of inflation are emblematic of ‘excess capacity in the economy’. The BoC considers this inflationary period to be temporary, instead, highlighting ‘persistent economic slack’ in the economy. Wage growth, for example, has stagnated, with average hourly earnings rising just 1.2% year-on-year in January. Usman Marghoob
Despite growth surpassing the Bank of Canada’s (BoC) forecast of 1.5%, the central bank kept its key interest rate unchanged at 0.5% - where its been since July, 2015. The BoC reiterated previous warnings regarding ‘significant uncertainties’ languishing the economy, most significantly, the threat of protectionist policies pursued by the USA. Governor of the BoC, Stephen Poloz, lamented at palpable economic fragilities emerging in
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NEFS Market Wrap-Up
EMERGING MARKETS China
Both official government and independent Chinese economic analysis showed on Wednesday that the country’s economic growth has been stronger than expected. This has resulted in discussions of whether it is now a suitable time for the Chinese government to change policy measures such as moving from high levels of investment stimulus to structural economic changes. China’s official Purchasing Managers’ Index (PMI) rose from 51.3 in January to 51.6 in February for the manufacturing sector. A reading greater than 50.0 separates economic growth from contraction and with analysts having predicted an index value of 51.1 for February, this higher real value indicates that the once feared risk of “hard landing” in the Chinese economy, that is the danger that China’s economic slowdown from huge rapid growth over the past few years would now tip into a recession, has been eased. The graph below shows China’s PMI over the past year and its gradual and steady increase. ANZ Bank’s chief greater economist said that “a strong infrastructure pipeline and better than expected exports bode well for the near-term economic outlook.” Other recently released indices such as the China
Business Conditions Index which uses four sub-indices to measure future prospects rose to its highest level in three years at 61.7. Thirdly, survey results compiled by Caixin, a Beijing based financial and business news company, showed that private manufacturing in small and medium sized firms grew from 51.0 to 51.7 in February. These facts have led bankers, analysts and policymakers to begin talking about ways in which to reduce stimulus and focus on reducing debt levels and risk. Jianguang Chen, chief economist at Hong Kong’s Mizuho Securities, said, “There has been very strong policy stimulus since mid-2015. But as the economy is now on quite a firm path, they want to move back to risk prevention mode." The central bank which had a reshuffle last week has started by trying to reduce financial leverage and asset prices, especially housing, through increasing the money market interest rate. On Tuesday, President Xi Jinping said that economic reforms should be carried out a faster pace and that coordination and financial regulation in the financial industry should be carried out to protect against risk. Nikou Asgari
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India India’s GDP growth rate grew at a rate of 7% for the final three months of 2016 which significantly surpassed last week’s predicted figures by the International Monetary Fund and the State Bank of India. Elsewhere, India’s finance minister Arun Jaitley emphasised his concerns that a trade deal with Britain would take ‘a long time’ to secure following his visit to Britain this week. Firstly, India’s growth rate of 7% was below the first quarter growth rates of 7.4% but was markedly above the expectations of financial institutions, who predicted a substantial drop in growth rates to 6.4%. The diagram below illustrates India’s trend rate for GDP annual growth over the past three years. The IMF and the State Bank of India had predicted that growth rates were set to dramatically decline for the final quarter of 2016 as a result of the demonetisation programme which had dampened both domestic consumption and investment. Moreover, forecasters believed that the global macroeconomic conditions including the potential rise of protectionism and the resurgence in global oil prices would be detrimental to India’s short term growth prospects. However, India’s actual year on year growth statistics have exceeded expectations and have been driven by a resurgence in public spending and agriculture. India’s annual
budget released in February focused on promoting government spending to assist rural communities. Government spending rose by 19.9%, an increase compared to the 15.2% rise for the previous quarter. Meanwhile, growth contributed by the agricultural sector rose markedly by 6%. Several leading economists have admitted their surprise at the GDP statistics with Saguata Bhattatcharya, chief economist at the Axis Bank in Mumbai stating that ‘the number is better than expected.’ However, there still remain concerns that the demonetisation programme will continue to put downward pressure on growth prospects, especially in the informal sector. In other news, in his visit to the United Kingdom over the past week, Indian finance minister Arun Jaitley suggested that a potential trade deal would take time to negotiate and depended on when the Brexit process would be concluded. A trade deal would be the best interests of both nations but there have been persistent obstacles since free trade negotiations began in 2007. The main areas of disagreement have been concerning immigration and enabling British financial services to operate within the Indian market. Isher Hehar
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NEFS Market Wrap-Up
Russia and Eastern Europe A recent poll this week suggests that Russia's economy is set to return to growth this year, driven by a recovery in consumer demand and investment with low inflation and a steady rouble. Gross domestic product is predicted to expand by 1.2% in 2017, with forecasts varying from 0.6% to 2.5, the poll of 17 analysts and economists revealed. This would be a long-awaited recovery for the Russian economy after two years of contraction prompted by low oil prices and Western sanctions for Moscow's actions over Crimea. Consumer demand, Russia's key economic driver, is expected to be spurred by a 2% increase in real wages, which are adjusted for inflation. This will push retail sales 1.1% higher in 2017 after a 5.2% slump in 2016, the poll showed. Importantly, the second mostimportant economic driver, capital investment, which is estimated to grow 2.2% in 2017, the poll indicated. Lending is unlikely to become cheaper in the next few months as Russia's central bank is expected to trim interest rates only gradually. The key rate is seen at 9.5% in
the second quarter and at 8.5% by the end of the year, compared with the current level of 10%. Relatively tight monetary policy should help to bring inflation to a fresh postSoviet low of 4.3% by the end of 2017. This is, however, still above the central bank's target of 4%. Such monetary policy should also be supportive for the Russian currency. The rouble is seen at 60.5 against the dollar a year from now despite daily purchases of around $100 million by the finance ministry, which aims at restoring fiscal buffers. "The limited size of announced interventions should not prevent the rouble from benefitting from supportive fundamentals," said Vladimir Osakovsky, chief economist at Bank of America Merrill Lynch in Moscow. "Therefore, the rouble could continue to get support from the relatively high oil prices, strong carry potential as well as supportive EM flows," he said. The rouble traded at 58.2 versus the dollar in late afternoon trade on Tuesday, easing 0.2% on the day on the back of lower oil prices. William Bunnis
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Week Ending 3rd March 2016
Latin America This week, we evaluate data from Columbia, Venezuela and Brazil. The interest rate cut on Friday last week surprised both markets and analysts alike. There was mixed news from Brazil and Venezuela this week, making it an eventful week for the LatAm economies. The central bank of Columbia unexpectedly cut the nation’s benchmark interest rate, with 4 of the 6 board members voting to reduce the rate by 25 basis points to 7.25%, last Friday. This is the second cut in three months, bringing the key rate to the lowest since May 2016. The countries inflation declined in January for the 6th straight month to reach 5.47%, reflecting decreasing consumer spending and confidence in the Columbian economy. The Columbian Stock Market took a hit as investors priced in the more pessimistic outlook for the Columbian economy. Indeed, the bank members highlighted the increased odds of an “excessive” economic slowdown in the near future. Venezuela once again topped the Bloomberg Misery Index for 2017. The index is a compound measure, which takes into account countries inflation and unemployment forecasts for the year ahead, put Venezuela in first position for the third year running, ahead of South
Africa and fellow Latin American economy, Argentina. Although Venezuela hasn’t released economic data since 2015, Bloomberg’s ‘Café Con Leche’ index which measures inflation through the price of a cup of coffee, estimates that prices rose by over 1400% to date since mid-August. The Misery Index score for Venezuela stands at 499.7%, comprised of predicted inflation of 491.9% and unemployment of 7.8%. Latin America as a whole is well represented in the Misery Index with 4 economies in the top 10: Venezuela in 1st, Argentina in 3rd, Brazil in 9th and Uruguay in 10th. On Thursday, Brazil released minor economic data, in the form of February’s balance of trade and manufacturing PMI. A growth in exports fuelled the largest balance of trade surplus for February on record, standing at $4.6bn, well above the market expectations of $2.5bn. Exports grew by 15.9%, led by oil, iron ore and food stuffs. The manufacturing Purchasing Managers Index, indicating manager confidence in the manufacturing industry, rose to 46.9 from 44. The PMI demonstrate lower order levels and confidence in the industry (any measurement below 50 represents worsening conditions). Alistair Grant
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NEFS Market Wrap-Up
Africa Nigeria, Africa’s largest economy and top oil producer, endured a macabre week even by their standards. For the first time in 25 years, it suffered its first annual contraction. The 1.5% reduction in the West African nation was linked to lower oil revenues, stemming from a global drop in oil prices, a shortage of hard currency and declining numbers of crude oil output. Prosperity in Nigeria, rightly or wrongly, is indelibly linked to the oil sector. Nigeria depends on petrodollars for 70% of state revenues and 90% of export earnings. Hence, it was inevitable that a 14% regression in the size of the oil sector last year – production fell from 2.12m barrels a day in 2015 to 1.833m b/d last year – would concomitantly result in a weaker economy. The causes of Nigeria slipping into recession in the second quarter of 2016 are ubiquitous. President Muhammadu Buhari has been out of the country on extended medical leave for five weeks at a time when Nigeria needs to decide if it is ready to adopt the market-driven currency system it has pledged to turn this around. Current restrictions on access to dollars for importers of staple items such as rice and
toothpicks means demand for dollars on the black market has increased. A law system with a laissez-faire attitude means disruptive militant attacks in the Niger Delta oil hub are extant. We hope the government heeds the calls of Razia Khan, Chief Africa economist at Standard Chartered, to put in place much needed reforms. In other sobering news, South Sudan’s government has declared a famine in northern-central parts of the region. There are fears the famine could spread to over 5.5 million people if more help and assistance isn’t forthcoming. South Sudan is still a nascent nation, the world’s youngest, so perhaps it is not surprising they are one of the world’s poorest and under-developed nations. Last December, inflation was an astonishing 480%, the highest in the world. Matters have only been exacerbated by a drought that is the scourge of large parts of East Africa, with Kenya also announcing a national disaster. Africa can get through this, but not without the help of those who can. Vincent Egunlae
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Middle East News this week centres on Egypt, a country on the brink of a huge fossil fuel investment project which will likely affect their economy favourably. German Chancellor Angela Merkel visited ahead of a trip to Tunisia, signalling an approach to the Middle East very different from that of Trump. Additionally, positive predictions concerning United Arab Emirates have come to light. Italian multinational oil company, Eni, is developing a multimillion gas processing plant to serve the Zohr oil field off the coast of Alexandria in Egypt. In a bid to tap natural gas from the Mediterranean – a move both Israel and Cyprus are making – Eni has already made the biggest gas discovery ever found in the area. Given gas contributes 70% of electricity to Egypt’s domestic economy, the short-term effects of the investment will largely be seen inside Egyptian borders. In the medium to long term, however, she should be able to supply Europe, especially in light of declining North Sea reserves. A more tenuous possibility is the lessening of dependence on Russian oil, which could have ripple effects in the geopolitical arena. Indeed, the Middle East has become a sort of arena in recent months, as Western countries have differed in their respective approaches to dealings with their constituent countries. In contrast to the Trump travel ban, Angela
Merkel, in a symbolic visit to Egypt, which included a trip to the headquarters of Al-Azhar, the largest Islamic institution in the Arab world, pledged $500 million to help support Egypt’s economic program and to fund micro, small, and medium sized enterprises. In addition, the Chancellor sought to help the North African country tackle migration to Europe through the use of equipment to clamp down on human traffickers and to prevent a new migrant route opening up. Both the oil discovery and German diplomatic correspondence hint at the paving of a new path for the Western world and the Middle East which, at present, looks very upbeat. Finally, the UAE looks set to pick up in 2017 and into 2018 with growth driven by the non-oil sector. This is reflective of what we have seen in the Egyptian move to lowering dependence on oil. Fitch subsidiary forecasts 2.8% of real GDP growth in 2017 (see graph) and higher in 2018, a boost coming from construction, as Dubai prepares for the World Expo 2020, having knock-on effects in tourism and investment. All in all, then, news is positive, and there is reason to be excited for what the Middle East has to offer. Thomas Dooner
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NEFS Market Wrap-Up
Southeast Asia This week we assess Singapore’s recently published GDP figures for the fourth quarter of 2016, alongside CPI inflation data for Vietnam, Indonesia and Thailand. Singapore’s economy expanded 2.9% year-on-year in the last three months of 2016, beating both third quarter figures and initial estimates of 1.8%. It was the largest expansion for two years, as the country benefitted from rapid manufacturing growth alongside a robust service sector. Manufacturing surged 11.5% on a yearly basis, a vast improvement on the 1.8% growth figure recorded in the preceding quarter. Singapore’s Ministry of Trade and Industry (MTI) attributed this strong performance to a recovery in global demand for semiconductors, which drove growth in the country’s electronics and biomedical sectors. The MTI expects this recovery to continue into 2017, which if correct, could ensure stronger GDP figures for Singapore in the near future. Despite this, some analysts have interpreted Singapore’s growth data in a more pessimistic light. Krystal Tan, economist at Capital Economics, described the fourth quarter figures as “very volatile.” She highlighted the fact that Singapore’s annual growth rate of 2% fell well short of its neighbours Indonesia and Malaysia. Moreover, many sectors remain in the
doldrums. For example, construction shrank 2.8% in the fourth quarter after a 2.2% contraction in the preceding period. In light of these weaknesses and the continuing uncertainties in the global economy, the MTI is forecasting growth of just 1-3% in 2017. In other news, Vietnam, Indonesia and Thailand published mixed CPI inflation figures for February 2017. Consumer prices rose 5.02% in Vietnam and 1.44% in Thailand on a yearly basis, following 5.22% and 1.55% respective increases in January. By contrast, Indonesia posted its fastest inflation rate since March 2016, as consumer prices rose 3.83% year-on-year. Food inflation was the predominant cause for these differences. Whilst food price growth slowed in Vietnam and Thailand, Indonesian raw food inflation increased by 0.28 percentage points when compared to the previous period. After Malaysia and Singapore’s rapid consumer price growth last week, there does not appear to be a clear overall price trend in the region. The picture may become clearer next Tuesday when the Philippines publishes its CPI inflation figures for February 2017. Next week we will focus on recent balance of trade data releases for Malaysia and the Philippines. Daniel Pettman
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EQUITIES Financials Once again we delve into the realm of financial equities, and once again there have been several key announcements and broadcasted financial reports that have led to equity market movements. We begin with Virgin Money Holdings UK Plc which reported a 41% increase in annual profit as it grew mortgage and credit card lending. The organisation, backed by billionaire Richard Branson, saw its pre-tax profit rise to £194.4 million in 2016, an uptake on the £138 million earned a year earlier. As a consequence, the bank is proving to being have a truly great year, for not only did Virgin Money’s stock price increase by 1.1% in the immediate aftermath of the announcement, but this gain takes its overall gain for the year to 11.8%. Now I turn your attention to a more established financial service provider, Deutsche Bank, a bank that has almost doubled in market value since September 26th 2016. In spite of its recently positive trend, the last week has been more muddled, for Deutsche Bank’s shares fell as much as 3.6% and were 2.2% lower at 18.97 euros by the closing of markets on Thursday. The stock would eventually trade at about half the book value come Friday 3rd March. These figures come amid news that Deutsche are seeking to
increase capital and potentially sell part of its asset-management subsidiary Postbank. However, they have struggled to find a buyer for Postbank, but many favour sourcing capital, people including Michael Huenseler, an investor at Assenagon Asset Management, who contests that “A capital increase is probably the best option given the alternatives, everything else would cut into real business”. Lastly, we observe the excellent week that the Government Pension Investment Fund has enjoyed. This institution, the world’s biggest pension fund, announced the biggest quarterly gain in its history, a result of a surge in Japanese stocks alongside a plunge in the yen that came together to boost overseas investments. The increase in assets to 144.8 trillion yen led the benchmark Topix index to its best quarterly performance since 2013. Mikun Olupona
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NEFS Market Wrap-Up
Technology A unit of the digital cryptocurrency, Bitcoin, which is attractive to users because of its anonymity, as well as its lack of government control, has exceeded the value of an ounce of gold for the first time. It closed at $1,268 on Thursday while a troy ounce of gold stood at $1,233. The value of Bitcoin has been volatile since it was first launched in 2009, and many experts have questioned whether the crypto-currency will last. After it soared to record highs in January, it has since steadily risen in value. Tesla’s latest earnings report revealed that in 2016, the company hit a major turning point in China. Tesla revenue in the country surged higher in 2016, more than tripling compared to revenue in the market during 2015. Tesla was far too optimistic in its prediction for the Chinese market when it began making deliveries in 2014. Sales in the market accounted for just 15% of total revenue in 2014 and fell to 8% of revenue in 2015. Tesla started to see signs of a recovery in the second half of 2015. After
orders for Model S nearly doubled between Q1 and Q2, Tesla said Model S orders again increased substantially in Q3 compared to Q2. Its management indicated this growth was poised to continue. The biggest news of the week in the techworld comes from the US, where Snap, owner of messaging app Snapchat, issued its Initial Public Offering. The stock rose 44% in their first day of trading on the New York Stock Exchange, illustrated in the figure below. At the close of trade on Thursday, shares were $24.48 each, up from their opening offer price of $17 a share. It left Snap valued at almost $30bn, although it has never made a profit. At the beginning of February, Snap's formal announcement to regulators of its plans revealed that the company had revenues of $404m last year, but made a loss of $515m. However, the company’s IPO is the biggest for a US tech firm since Facebook in 2012. Angelo Perera
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Week Ending 3rd March 2016
Oil & Gas Oil and gas sector stocks were troubled by increasing US oil inventories at the beginning of the week but have since bounced back on a weak US dollar. Nevertheless, oil prices remained range bound as OPEC compliance on an agreed output cut was scrutinized. Reports show there are signs of noncompliance on the OPEC output cut and the cartel is “still keeping the market wellsupplied, especially Asia,” Clipper Data’s Director of Commodity Research Matt Smith wrote in a piece published on Friday. The NYSE Energy Sector Index closed at 16,109.81 on Thursday, up 1.62% from 15,853.43 at the end of the previous week, when the market was focusing on rising US oil inventory. Exxon Mobil (XOM) closed 0.34% higher at $83.3 on Thursday, slightly above its 52week low of $80.76, which was recorded during trading on last Friday. Investors are believed to be concerned about the company’s low earnings per share. However, the company’s CEO Darren Woods said it will shift towards shale drilling, putting $5.5 billion into the effort. “More than a quarter of the planned spending will be made in high-value, shortcycle opportunities, including the Permian and Bakken basins,” the company said on
March 1. The company sounded bullish, boosting upstream investments. Credit Suisse, for one, has upgraded the company’s stocks based a forecast oil price of $65 per barrel. Chevron (CVX) was down 0.46% to close at $113.36 on Thursday, compared with the closing price of $110.12 at the end of the previous week. British Petroleum (BP: LSE) lost 0.16% to close at 464.11 pounds on Friday. However, it has gained 3.8% from its closing price of 447.1 pounds at the end of the previous week, on impressive projections of its cash flow for the coming five years. Nearly all the major research houses indicated potential upside the company’s stocks. Meanwhile, the company also said it is going to expand its green gas fuel business in the United States. Royal Dutch Shell (RDSA: LSE) also gained 2.64% over the past week to close at 2,127.79 pounds. The market sentiment for oil remains bullish for the moment. However, the prospect is nothing for certain as oil prices continue to be driven by supply and demand and geopolitics. Michael Chen
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NEFS Market Wrap-Up
COMMODITIES Energy Natural gas prices continued their decline, as prices dropped sharply on Monday to $2.693 per million British thermal units (mmBtu). According to data from the National Oceanographic and Atmospheric Administration, heating demand for natural gas has dropped 20% below average, reflecting the fact that we have seen the warmest weather on record in December, January, and February. On Thursday, the Energy Information Administration (EIA) reported that natural gas storage in the US increased by 7 billion cubic feet in the week ending February 24, much bigger than the market expectations for a drop of 4 billion cubic feet. After an initial fall, investors brushed off the inventory data, and prices settled at $2.804 mmBtu. However, it must be said that without a significant increase in demand for natural gas, inventories could stay near record levels and could push prices down to much lower levels in the coming months. Meanwhile, oil prices settled slightly lower on Wednesday as the US West Texas Intermediate (WTI) futures for April delivery closed at $53.83 per barrel, down by 0.3%, and Brent Crude futures for May delivery dropped to $56.36, also down by 0.3%. Evidence emerged on Wednesday that OPEC producers had been complying with the agreement they came to in November to cut production. However, the drop in prices reflect the report from the EIA that US crude stockpiles rose to 520.2 million
barrels last week, an amount which represents an increase of 1.5 million barrels, and the highest amount in weekly government data since 1982. According to tanker tracking data compiled by Bloomberg, Saudi Arabia’s shipment of crude oil last month was 7.04 million barrels a day which represents a drop of 126,000 barrels a day from January, showing that OPEC’s biggest producer is cutting supplies by more than it pledged. However, a rejuvenated US shale industry, that has boosted efficiency after lower prices last year, is once again challenging for more market share and jeopardising OPEC’s efforts to drain the global supply glut. This is represented nicely in the chart below. Since the agreed cuts to production in November, there has been a sharp increase in US oil stockpiles and a sharp decrease in OPEC production, showing a divergence which needs to be addressed if market players want oil back up to the $60 dollar per barrel level. Bunyamin Bardak
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Week Ending 3rd March 2016
CURRENCIES
Major Currencies The exciting unravelling of the pound continues, the Fed begins to show its hand and ECB president Mr Draghi will spend most of his weekend pondering over inflation. In the Eurozone, the euro has been prosperous rising from £0.843 to £0.862 this week. Prices in the Eurozone rose by 2% on the year, the first time in over four years. Now Mr Draghi must try to convince his peers that such a rise is unstained and largely driven by the volatile energy markets. The central bank, which has been battling with more than three years of low prices, targets inflation of just under 2%. The pressure has begun to mount on the president as once quoted to do “whatever it takes”, he now faces the prospect of pulling back from the aggressive monetary policies of recent times. The pound tumbles to its lowest level against the dollar for nearly 6 weeks moving below the $1.225 mark. Traders point towards the news on Monday that the UK government was braced for Scotland’s first minister Nicola Sturgeon to call another vote on Scottish independence in March was behind the drop in the pound. Reports state that Sturgeon’s play will coincide with the UK’s triggering of Article 50. The other driver of the bearish behaviour of the sterling is the weak data in recent weeks, coupled by the dollar surge.
The dollar market has surged above £0.815 this week, as we edge closer to the imminent rate hike. Odds of a March rate increase hit about 80% on Tuesday, up from less than 40% a week ago, according to Bloomberg data on federal funds futures. Ms Brainard, a Fed board member has also begun preaching the hike, she said that the Fed should be prepared to increase its benchmark interest rate “soon” as the job market pushes closer to full employment and inflation moves towards the central bank’s target. The boost in the dollar cancels out the poor market reaction to President Trump’s first speech to Congress, which outlined plans to ask for $1tn in infrastructure spending but lacked details some investors had hoped for, indicative of a man clearly out of his depth. Scottish Independence rumours begins shaking up the already crippling sterling, the euro inflation dilemma needs two weeks to mull over before their next meeting and the dollar just keeps rising. Robert Tse
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NEFS Market Wrap-Up
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