Week Ending 4th March 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 Africa Middle East China Latin America Russia & Eastern Europe South Asia
Equity and Deals 14
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 18 Energy
Currencies 19
EUR, USD, GBP AUD, JPY, Other Asian
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Week Ending 4th March 2018
MACRO REVIEW United Kingdom Data released by the Office for National Statistics on 1st March revealed that the UK has a day-to-day budget surplus of £3.8billion. This is the first time the UK has had a budget surplus since 2002. One key reason for the surplus is better than expected tax returns of £18.4billion, according to the ONS, for the twelve months preceding January 2018. However the ONS surplus calculations exclude debt interest payments and capital investment, which were previously included. The data is therefore a symbolic milestone, as total debt for the UK rose by £37.2billion this fiscal year. The FTSE 100 reached a twelve month low, down 1.5% on March 2nd. This was caused by concerns over potential US protectionists measures, as suggested by Trump, and the EU’s leaked retaliatory measures. It has consequently led to fears of a potential trade war between the two states. Theresa May gave a keynote speech on March 2nd that outlined her aspirations for Brexit. Most notably, May stated that leaving could cause “consequences for our market access” but that she would nevertheless continue to withdraw the UK from both the customs union and the single market. A further critical component of May’s speech concerned her plans for financial services, whereby she cemented her stance that any disruption to services
between the two states would be detrimental for both parties, a view also shared by the EU. The speech received generally positive feedback from both sides of the negotiation. Michael Barnier, the EU’s Chief Brexit negotiator, stated that the speech provided great clarity and that it would help “inform European Council guidelines regarding a future free trade agreement.” This suggests that the aims set out in the speech will considerably help further negotiations, as many have been critical of the UK’s lack of clarity. The Bank of England revealed on Thursday 1st that credit card borrowing rose by £746million in January, the highest monthly increase since 2005. The data also illustrated that there had been a 9.6% increase in credit card borrowing over the previous 12 months, thus suggesting that confidence in the economy is increasing despite muted real income growth. On March 2nd the Markit UK Construction PMI figures were released, showing an increase of 1.2 index points to 51.4 in February. With this index being used as a leading indicator of growth, this result (which exceeds the market expectation of 50.7) suggests overall growth in GDP.
Nicholas Gladwin
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NEFS Market Wrap-Up
United States Trump began the new month with a shock announcement that the US would soon implement hefty new tariffs on steel and aluminium, despite the warnings of his key advisors. Import taxes of 25% on steel and 10% on aluminium are likely to trigger retaliation from other countries, with China commencing research into restrictions on key US agricultural goods. The newest wave of protectionism is not surprising as opposition to free trade was one of the central topics of Trump’s campaign, however it sent the Dow Jones tumbling by -0.29% (420 points) as steel and aluminium giants responded to the news (see graph below). One of Deutsche Bank’s teams noted that: “The biggest threat to growth is a possible protectionist turn, which could depress global trade and even trigger trade wars”. This could transpire though a drag on GDP growth as increased prices of composite goods are passed on to consumers. Michael Gapen, a chief US economist at Barclays, estimated that increased tariffs on Chinese and Mexican imports could in fact see a 0.5% annual reduction in US GDP growth in the year after tariffs are imposed.
According to Jan Hatzius, the chief economist at Goldman Sachs, the implementation of these tariffs are a likely precedent to the US exiting NAFTA and are thus far Trump’s most notable trade restriction in his presidency. Hatzius writes that the President’s proposed measures are more controversial than routine antidumping measures, though an announcement to withdraw from NAFTA does not appear likely in the near term. He also added that the tariffs do not appear to have an economic grounding and are more likely to be imposed on national security grounds, but whether this is likely is tricky to determine. Trump has been clear that he wishes to take protectionist measures against China and Mexico, yet the two largest sources of steel imports is Canada (16%) and Brazil (13%) – China does not even feature in the US’s top 10 import destinations. It appears that whilst economic motivations are behind the move, they may be narrow sighted or based on misinformation about externalities. Potential unintended consequences from the tariffs are worth keeping an eye on when the new policies come into place. Amelia Hacon
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Week Ending 4th March 2018
Europe According to inflation statistics from the European Commission office on Wednesday, inflation in the Eurozone fell over February to 1.2%, down from 1.3% in January (see graph below). This is the third month in a row that inflation has fallen, despite increasing economic growth. The main contributor to the fall was a significant reduction in the growth rate of the price of food, alcohol and tobacco, from 1.9% to 1.1%, as well as a slowdown in the growth of energy prices. These consecutive falls in the rate of inflation, taking the Eurozone further away from the European Central Bank’s (ECB) target of just below 2%, reinforce investor’s expectations that the ECB will not act to tighten monetary policy when it meets next week. To those who were looking for an end to the post-financial crisis era of unconventional monetary policy and stimulus measures, this news will come as a disappointment, especially given that stronger economic growth is not translating into a continuous rise in inflation. This unusual convention suggests that the Eurozone is not quite ready to be out of the post-crisis era just yet.
In Brexit-related news this week, UK Prime Minister Theresa May has rejected the EU’s draft withdrawal text that proposes keeping Northern Island in the customs union. May argues that it would “undermine the UK common market” and “threaten the constitutional integrity of the UK”. This is because, by remaining in the customs union with the rest of the EU, Northern Ireland would be obliged to set a Common External Tariff that would be applicable to trading with the rest of the UK as well. On Friday, Theresa May made an important speech regarding details of her desired trading relationship with the EU after Brexit. A key point of analysis is that the Prime Minister has essentially called for a free trade agreement, applicable to most sectors of the economy, between the UK and the EU. The agreement would not fit neither the Canadian deal with the EU nor the deal Norway has with the EU (which is a member of the European Economic Area). The proposed UK deal would in fact lie somewhere in between the Goldilocks Principle perhaps? Deevya Patel
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NEFS Market Wrap-Up
Japan & South Korea The robustness of Japan’s economic growth remains a topic of uncertainty, despite many indicators pointing to its strength. The unemployment rate hit its lowest rate since April 1993 at 2.4% (see graph below). The jobs-to-applicants ratio rose to 1.59 in December and remained unchanged in January. Yet with Japan’s labour market now even tighter, the scarcity is weighing heavily on small and midsize businesses. Japanese Prime Minister Shinzo Abe is hopeful that higher wages will result from the labour shortage, which in turn will spur a cycle of consumption and inflation. Mr Abe has called on businesses to raise wages by 3%. However, it seems unlikely that this will be accomplished in the spring wage negotiations, the period beginning in mid-March when most unions and employers negotiate labour contracts. The appreciating yen and the recent turbulence in the stock market has greatly damaged forecasts of corporate earnings. Japanese industry also had a worrying dip in January. Factory output fell 6.6% compared to output in December and inventories increased, according to the trade ministry. Gains in the yen were partly responsible, but the automobile industry was also hit by severe snowstorms, which affected supply chains. To reduce pressures on the industrial sector, Hiroaki Muto, at the Tokai Tokyo
Research Centre, says that: “Japan's government will try to stop the yen from rising, but they also have to worry about trade friction.” Industry output is expected to have recovered in February, however it is also expected to fall 2.7% in March. Fluctuating conditions may indicate that the economy overall will have a tougher year, and the Bank of Japan's inflation target of 2% will yet remain distant. Steel manufactures in Japan and South Korea were hit by the US’s announcement that it would put a 25% tariff on steel imports and a 10% tariff on aluminium. Shares in Toyota fell 2.4%. However the automaker hit back at the planned import tax, stating that its US-based plants sourced their steel and aluminium from local sources. Shares in the South Korean steel manufacturers, Posco and Hyundai Steel, also fell after the announcement. Moody’s, the ratings agency, said that the Korean steel sector has a relatively high exposure to US tariffs, considering that Korea was the third largest country exporting steel to the US in 2017. Yet the US claims the tariffs are necessary for national security. The move may, and likely will, lead to reciprocation and trade wars. Daniel Blaugher
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Week Ending 4th March 2018
Australia & New Zealand This week the Australian Bureau of Statistics’ Wage Price Index showed how wages had grown by 0.55% over the final quarter of 2017 (see graph below). Following many years of wage growth decline, it seems for some that wages are finally starting to improve in Australia. The Reserve Bank of Australia (RBA) released a statement saying: ‘wage growth remains subdued and is forecast to increase gradually’. Until this week it was not know how ‘gradually’ the wage growth would be, however there are now predictions that things will not improve until 2020 when spare capacity is expected to get below the tipping point of approximately 5%. Looking more closely at the figures, the growth in wages is being strongly driven by public sector wage growth, as for many in the private sector there has been little or no improvement in wages. This has been the case however for the last four years, with public sector wages outperforming the private sector. Yet despite the slight wage growth, the average Australian employee still has less disposable income in real terms now than they did in 2013. Not only have the last four years seen the stagnation of wages for Australian workers for the first time outside of a recession, but Australia’s living costs have also risen drastically, with the price of power, rent and housing increasing. The Governor of the RBA has also come out this week urging Australian workers to demand large pay rises from their bosses.
He told a conference at the Australian National University that Australia was facing a wage growth ‘crisis’. He also criticised workers by saying that they were putting job security above wage rises. Similarly, Paul Dales of Capital Economics said that Australian employees have not seen ‘one cent’ of the growth in commodity income and that it has ‘all gone into the pocket of business’. The wage stagnation crisis is consequently set to be a key factor of the next election. Voters will consequently have no difficulty in differentiating the views of the Liberal and Labor parties. The Australian Prime Minister, Malcolm Turnbull, and the opposition leader, Bill Shorten, have both made speeches this week setting out their views and plans for the crisis. Whereas Shorten believes that the Keating enterprise bargaining system should be returned, Turnbull put forward a more liberal strategy, which could even involve introducing a floor on the minimum wage relative to the median wage. The wage crisis is continuing to have a massive impact on the future of the Australian Economy, which can already be seen from falling consumer spending on luxury items. Last week the Australian Council of Trade Unions released results showing that of the 60,000 people surveyed, 81.4% of respondents said it was hard to get a pay rise and 95.6% agreed that unions should be able to bargain with economic decision makers. Abigail Grierson
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NEFS Market Wrap-Up
EMERGING MARKETS
Africa South Africa continues to be in international headlines this week, as its politicians seem to seriously consider land reform via the seizing of private property. On Tuesday the national assembly voted to start a process that would amend the constitution. Parliament had previously proposed a legislation that would allow the government to pay less than market prices for the land it expropriates, however the most recent proposal recommends land expropriation without any compensation. South Africa is one of the most unequal countries in the world, with a Gini coefficient over 65. Part of this inequality is a result of inequitable land ownership, with a recent land audit by Agri SA finding that white farmers still controlled 73% of the country’s profitable farming land. Furthermore, about 95% of the country’s wealth is in the hands of the top 10% of the population. Whilst land reform theoretically could be an effective way to address inequality, there are concerns about the rationale of such a policy. This is especially considering the disaster it caused in Zimbabwe during the Mugabe era, where confiscation spooked investors, led to the collapse of the country’s agricultural sector and became a major contributor to the hyperinflation and poverty that followed.
It will therefore be interesting to see how Cyril Ramaphosa, the new president, manages the struggling South African economy, which appears to be stuck in a middle-income trap that faces high unemployment rates (over 30%), particularly amongst the youth. With GDP growth stagnant around 1%, arguments have been made that this land reform act is merely a ploy by the ruling ANC party to try and win back support from its poorer constituents after declining support in recent years In more positive news, the Kenyan economy appears to be on the road to recovery after last year’s political instability. For a while Kenya had been one of the best regional performers in East Africa, with a growth rate of 5.8% in 2016. However 2017 was a bad year for the country, with a severe drought, low levels of private lending, a messy election and political instability all contributing to dampened economic growth. Yet the World Bank and the IMF now predict an economic growth rate of 5.5% for Kenya in 2018. In a bid to jumpstart the economy with an injection of liquidity, the Kenyan government has raised $2billion in long dated bonds. Changu Maundeni
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Week Ending 4th March 2018
Middle East This week, Oman’s Minister of Tourism, Ahmad Bin Nasser Al Mahrizi, committed the country to significantly developing its tourism sector in a sustainable manner. Al Mahrizi consequently formulated the Oman Tourism Strategy 2040, which is designed to accelerate the pace of tourism and cultural development, whilst keeping in mind the principles of sustainable development. In regards to the project, Al Mahrizi stated: “Our main long-term objective is to achieve economic diversification, together with upgrading the direct and indirect contribution of the sector in Oman’s GD”. New projects have included the Sultanate’s first snow park and the newly extended Muscat International Airport, which has now doubled its capacity to 12million people per annum. Another major upcoming project is the Qurayat Tourism Complex, which will hold a variety of hotels, restaurants and cinemas, as well as a golf course, water park and spa. As such, Oman’s tourism is forecasted to contribute to GDP by 6% over the next two decades, according to UN figures. The Jordanian government has been met with widespread protests, following the announcement on Thursday 1st March that electricity prices would rise next month for the third time since December. Since December, the price of electricity has risen in total by 2.1 cents per kilowatt. This has proved very problematic for Jordan’s civilians, considering that their overall of living that has been rising rapidly over the
past 6 months (see graph below). Yet despite the rising price of electricity, the government decided to reduce the price of gasoline and diesel between 0.6% and 1.5%. Finally, there has been a recent upsurge in the debate regarding Britain’s new relationship with Saudi Arabia, with the upcoming visit to the UK by Saudi Arabia’s Crown Prince Mohammed Bin Salman looming closely. The UK Prime Minister, Theresa May, argues that a new and stronger relationship will “usher in a new era of bilateral relations”. Boris Johnson, the UK Foreign Secretary, has also defended the relationship, arguing that the Crown Price is finally introducing the reforms Britain has always advocated, such as promoting greater female rights and a more open economy. As such, to ensure the success of the country and the Middle East, Britain has a duty to guide and encourage further reform. Yet there are still arguments that object to engaging with a kingdom that is the powerhouse of the Middle East, citing turbulent British history in the region as ample reason to exercise great caution. It is therefore of the highest imperative that, whilst Britain aims to strengthen its relationship with Saudi Arabia and help promote progress, it needs to be conducted under great care.
Jeremy Whiskard
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NEFS Market Wrap-Up
China Last Sunday the Chinese Communist Party announced its intention to abolish the presidential two-term limit. The abolishment would allow President Xi Jinping to remain in power indefinitely beyond his 2023 limit. The amendment will likely be approved by China’s rubber stamp parliament, which begins its first annual session on March 5th. The two five-year terms limit system has been in place since Mao Zedong’s death in 1976. The limit, written into the constitution by Deng Xiaoping, aims to prevent the dangers of one-man rule. It is therefore no surprise that the news has sparked protests across the country. Internet censorship has increased heavily following the news. Phrases such as “change the law” and “I disagree” have been censored, along with more surprising terms such as “Winnie the Pooh” and the letter “N”. Meanwhile, businessmen have penned open letters calling on parliament to oppose the reform. Former China Youth Daily editor Li Datong wrote “it [has] planted the seeds for China to once again fall into turmoil”. China’s state-controlled media have been defending the move, deeming it crucial for the country’s plan to establish itself as a global power. However on Thursday the Communist Party’s official People’s Daily assured that the reform does not necessarily mean life-long terms.
Global investors and economists have differing views on the proposal. Although analysts expect few impacts in the short term, it is widely believed that the reform could have a direct impact on China’s need for economic liberalisation. It is argued that the change would enable the leader to push through with economic reforms. Policy inconsistency experienced as a result of limited terms has previously slowed the process. However, thus far Xi has shown no appetite for economic liberalisation and has demonstrated bias towards the state sector. China has been focusing on supply-side reforms to increase economic growth and reduce debt levels, most notably by reducing risks in the financial system, as well as cutting steel and coal production. China’s steady growth has highlighted the success of these reforms, however more will need to be done to ensure long-term economic prosperity. Xi Jinping is already considered the most powerful Chinese leader since Mao Zedong. This reform has paved the way for Xi to strengthen his grip on power. Assuming the amendment is approved, it remains to be seen what the implications on China and the rest of the world will be.
Jessica Murray
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Week Ending 4th March 2018
Latin America This week’s focus is on Brazil’s 2017 growth reports and how the country intends to pave the way towards sustainable fiscal account. On Thursday 1st March, Brazilian statistics agency IBGE announced that Brazil had grown 1% last year, just missing the 1.1% median estimates for 2017. The growth persisted in every quarter of 2017 (see graph below), with Q4 GDP increasing 2.1% in 2017 compared to 2016. It is thought that the strong performance of the agricultural sector, as well as the increased confidence of businesses and consumers due to lower inflation, significantly aided growth. In regards to predicted growth for next year, a report released on Wednesday by the OECD predicts that growth will reach 2.2% in 2018, whilst the Brazilian government predicts the figure to be 3%. Following two consecutive years of contraction, the modest growth signals recovery of the Brazilian’s economy from a biting recession. Projections for 2018 growth rates released this week are also optimistic. A report released on Wednesday by the OECD predicts that growth will reach 2.2% in 2018, whilst the Brazilian government predicts the figure to be 3%. Following two consecutive years of contraction, the modest growth signals recovery of the Brazilian’s economy from a biting recession. Thursday’s optimistic statistics however follow last week’s failed pension reform,
which prompted Fitch to decrease Brazil’s credit rating on February 23rd as a result of “persistent and large fiscal deficits”. Restructuring the country’s social security system is imperative, considering it consists 12% of its GDP. In its report released on Wednesday February 28th, OECD also recommended reforms concerning Brazil’s public finances as means of preventing “unsustainable growth of its already high public debt.” Whilst these increased pressures to the government budget undermine confidence in the Brazilian economy and threaten to put the country back into recession, the recommendations are nevertheless very important. If implemented, they would encourage productivity and continue the growth of Brazil’s economy, as well as help promote Brazil’s entrance into the OECD – a change that would positively sway investors’ perception of the country. Brazilian elections in October however could hinder the effort towards the necessary reforms. However this week’s positive GDP data for Brazil is dampened by reports of the prolonged and intensifying drought in Argentina, unexpected slowed growth for Q4 in Mexico, and the lower-thanexpected 2017 growth reports for Chile and Colombia. The upcoming presidential elections in Brazil, Colombia, Mexico and Venezuela could greatly contract the 2018 growth rates of the LatAm region, by diminishing investor confidence through political uncertainty. Felicia Bogdana Cornelia Ababii
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NEFS Market Wrap-Up
Russia & Eastern Europe On Thursday, it was announced that the National Security and Defense Council of Ukraine intend to extend sanctions imposed on Russia’s state-owned banks. This is a year on from the original restrictions placed on five such Russian banks (Sberbank, VS Bank, Prominvestbank, VTB Bank and BM Bank). Yet already both Russia and Ukraine have seen the impact of the deterioration of the pair’s relationship. Ukrainian President Pyotr Poroshenko recently announced that “net assets of Ukrainian banks with the Russian state capital declined by a third throughout 2017”. Unfortunately for Ukraine, Russia is a key player in the global economy and a valuable relation to any nation, especially after Russia accounted for 37.8% of FDI into Ukraine in 2016. With the breaking down of this relationship and the potential for further Russian sanctions looming, Ukraine faces a shrinking global market. To add further strain to the nation’s investment inflows, the United States are increasing protectionist policies – with the likes of the EU and China particularly suffering. This week President Trump announced plans to levy penalties of 25% of steel imports and 10% on aluminum imports. Ukraine is the 12th largest steel producer and the EU as a whole is the 2nd largest producer. Already there have been warnings of a potential trade war beginning, with the EU threatening to retaliate with protectionist policies on US imports into the economic bloc.
Trade wars and the inbound wave of protectionism could potentially damage the EU. This could be worrying for Ukraine as many of the nations within the union are important economic partners, for both trade and investment. During this period of increasing protectionism, Ukraine should seek to build bridges with the EU and other economic partners in order to strengthen their economic position. It may also allow them to potentially reap the benefits of the slight British and US withdrawal from the international economy. Furthermore, in order to attract more foreign investment, a stronger legal system must be of the upmost importance. Ukraine, like Russia, is plagued with corruption and mistrust, which could discourage potential investors into the region. In June of last year, the Swedish foreign minister argued trust in the “rule of law” and institutions would see an influx of investors into the nation. The injection into the economy would help boost production and consumption, and could potentially form a platform for much more stable long term economic growth.
Laura Leng
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Week Ending 4th March 2018
South Asia This week we visit Southeast Asia, an emerging hotspot for worldwide steel and aluminium exporters after President Trump’s announcement of a new US tariff on these goods. The tariff being proposed by President Donald Trump this week, with duties of 25% on steel and 10% on aluminium, would see steel exports to the US become much more expensive for exporters. Mr Trump is thus hopeful that these plans will protect American jobs. Yet the proposal of the aforementioned tariff has sparked fears of a global trade war and has hence dragged down Asian equities, particularly the shares of Asian steel producers who supply mostly to the US. Taiwan and India will be hit hardest, as they supply predominantly to the US, whereas China will face fewer repercussions as only 2.9% of its steel production is exported to the US.
Meanwhile the European Union and ASEAN (Association of South-East Asian Nations) has pledged to speed up talks about a potential free trade deal, in order to undermine President Trump’s protectionist actions. The EU trade chief, Cecilia Malmstrom, said such a deal would “send a strong signal to the world” about Europe and ASEAN’s stance on intense protectionism. Already having struck a deal with Singapore, an ASEAN member, the EU hopes to continue talks on bilateral pacts with other states in the block and therefore attain further global integration. Overall, the introduction of this new tariff from the United States will surely send worldwide markets into a tailspin next week. Hopes are high however for big ASEAN steel and aluminium importers.
Mario Pucinelli Filho
The biggest effect of the tariff however will be felt in the form of excess supply to countries situated in South and Southeast Asia. This region houses some of the world’s fastest growing economies (such as Vietnam and the Philippines) and some of the world’s largest consumers of steel. South and Southeast Asia already accounts for 25% of China’s steel exports, mostly due to their limited and/or costly steelmaking capabilities. These countries would therefore greatly benefit from this sudden surge of cheap steel and aluminium coming from other countries in the same region.
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EQUITY AND DEALS NEFS Market Wrap-Up
Financials The U.S. President Donald Trump’s announcement of his plan to impose 25% import tariffs on steel and aluminium caused a three-day decline of the Dow and S&P 500, as of March 1st. The Dow Jones Industrial Average slid by more than 300 points after the announcement, as possible job losses and artificially higher prices of raw materials became foreseeable (see figure below). Concerns regarding higher prices made the shares of U.S. steel and aluminium companies rise, whilst the shares of automakers and other steel and aluminium consumers fell. According to data from Thomson Reuters, approximately 9 billion shares changed hands as a result of U.S. exchanges, compared to the 8.4 billion daily average for the past 20 trading days. As a consequence of this, the Cboe Volatility Index VIX reached its 15-day peak. As a result, China was opposed to this tariff proposal and described it as a possible damage to the already fragile process of global economic recovery. The
Chinese Foreign Ministry spokeswoman, Hua Chunying, stated: “All countries should make concerted efforts to cooperate to resolve the relevant issues, instead of taking trade restrictive measures unilaterally”. The EU is also prepared to react “firmly and commensurately” to defend the interests of European Nations, as EC President Juncker warned. With losses in the U.S. market, Asian trading is also likely to be impacted by concerns regarding a potential trade war and a more hawkish Federal Reserve. Japan’s Nikkei 225 index, together with Australian and Hong Kong market indexes, are expected to fall when trading begins. European bourses also fell down this morning, with Germany’s DAX dropping 1.4% and Paris’ CAC 40 falling 1.2%, following a rough day on Wall Street. Turbulent markets are expected to continue for the next few days. The U.K. Prime Minister, Theresa May, will deliver a speech regarding Brexit developments, and Italian elections on Sunday could potentially widen Italian bond spreads in the outcome that a Eurosceptic coalition is formed. Giovanni Cafaro
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Week Ending 4th March 2018
Technology & Health Technology now composes a quarter of the stock market, with 25.1% of the S&P 500 made up by the technology sector. The last time technology pushed 25% was only months before the dotcom bubble burst. However this time stocks seems more stable. Valuations are considerably less overblown, with a forward price-toearnings ratio (a key future-valuation metric) of around 19%, compared with dotcom’s 60%. The state of affairs regarding Bitcoin’s price movements may be reminiscent of the dotcom bubble in themselves. According to Mike McGlone, Bloomberg’s Commodity Strategist, its value could drop to $900 – far from its present value of around $9000, and further still from its December high of around $19,500 (see graph below). Such a situation is highly probable. Recently Mark Carney, the Governor of the Bank of England, slammed Bitcoin as exhibiting the “classic hallmarks of [a] bubble”. He has encouraged regulation and acknowledges the problem that the currency is often “used to shield illicit activities”. Nouriel Roubini, the American economist credited with predicting the 2008 financial crash, said that bitcoin is the “biggest bubble in human history”. Bill Gates shares Mark Carney’s perspective about the shady function of the cryptocurrency. Slandering it as a “rare technology that has caused deaths in a fairly direct way” – for instance, its use in the purchase of drugs – he too called for regulation. Carney suggests that cryptocurrencies do “not yet pose risks to financial stability”; but Yves Mersch (former Governor of the Central Bank of Luxembourg) and Agustin Carstens (General Manager of the Bank of
International Settlements) disagree. They believe bitcoin poses huge risks to the financial system. This week saw two familiar faces making movements into the health industry. Firstly, Uber; the ride-sharing behemoth is launching a service that allows doctors to hail cars for their patients. The rather unexpected move aims to capitalise on missed doctors’ appointments that cost the American health system $150 billion each year. The second wild-card is Apple – who has announced it will be launching its own primary healthcare clinics operating under the name ‘AC Wellness’. The scheme has been designed as of present to only serve Apple employees. While Apple-centric at present, eventually leveraging its technological strength more widely could see Apple truly disrupting the healthcare industry.
Matthew Chapman
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NEFS Market Wrap-Up
Oil, Gas & Industry For investors interested in the mining sector, there is something irresistible about Glencore, an Anglo-Swiss multinational commodity trading and mining giant, headquartered in Baar, Switzerland. After all, its stock price has almost quintupled in price to its current level of 364.20 GBX, from its low of 73.50 GBX in January 2016. Glencore profits from businesses where no one else dares to venture into, such as the copper mines in Democratic Republic of Congo (DRC), a country known for its political instability and child labour exploitation. Glencore also navigated US sanctions against Russia, before striking an $11billion deal with Rosneft in late 2016. Glencore’s CEO, Ivan Glasenberg, who has been an employee of the firm since 1984, steered the firm through the massive 2015-16 collapse in commodity prices. This was achieved by cutting debt, selling business stakes and making strategic acquisitions (for example, of the DRC’s Mutanda and Katanga Mines). These mines consequently made Glencore one of the world’s biggest suppliers of cobalt, a key ingredient in the coming boom of clean-tech products and industries, notably electric vehicles (EV) and portable batteries. The importance of these “green” metals, such as cobalt, nickel and lithium in the EV revolution, has renewed investor interests in miners. This has therefore provided that much needed boost for mining firms to emerge from the trainwreck after the China-led commodities
supercycle ended in 2014-16. There are already very bullish calls on the fact that clean energy would create an even bigger source of demand than China had in the past 15 years. However metals like cobalt are mostly found in the DRC as a by-product of copper and nickel ores. The DRC currently produces 70% of the world’s annual cobalt production, of 100,000 tons. It is therefore no wonder that analysts have called the DRC “the Saudi Arabia of the EV boom”. Despite the DRC’s potential, firms like BHP Billiton and Rio Tinto have been hesitant in investing in a country mired in political instability, violence and human rights issues. With the inelastic supply of cobalt, coupled with the impending EV boom, the price of cobalt has thus soared from its low of $22,340 per ton in 2016 to its current price of $81,000 per ton (see graph below). Companies like Apple and Volkswagen have recently snatched the headlines with reports that they are securing cobalt supplies directly from miners. There might be a silver lining however, as companies like Umicore and American Manganese have been mining cobalt from above the ground by recycling lithium-ion batteries. This therefore provides a substitute to cobalt beneath the ground. Mingli Yong
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Week Ending 4th March 2018
Deals This week we will be looking at Spotify’s proposed IPO and the re-launch of The Weinstein Company. Spotify has filed to list its shares directly on the NYSE, pushing ahead with plans for an unconventional public offering. Spotify is bypassing the usual listing process of going through Wall Street and is instead going for a direct listing. It has Goldman Sachs, Morgan Stanley and Allen & Co as financial advisors, however they will not be meeting with investors or potential buyers to coordinate sales or determine a share price. Based on a range of share sales in February, the company is valued at $19.7bn. This is close to the valuation of Snapchat, which listed a year ago. Spotify has gained twice as many subscribers as their closest rival, Apple Music, but it is still struggling with losses and the pains of undergoing the transition to become a public company. In order to cut costs and put itself on sounder financial footing ahead of an IPO, Spotify has consequently spent much of the past year negotiating lower royalty agreements with big record labels, including Vivendi-owned Universal Music, Sony Music and Warner Music. When combined, these three companies control 80% of the world’s music. Yet this public offering comes at a time when other high-profile tech companies,
such as Uber and Airbnb, have avoided public ownership. Instead, these firms have raised billions through private funding. Spotify’s decision, along with the IPO of Dropbox, seem to suggest a potential change in direction. The Weinstein Company has agreed to sell most of its assets to an investor group, which has allowed the company to avoid bankruptcy following the allegations made towards the company’s co-founder, Harvey Weinstein. Maria ContrerasSweet, a former Obama administration official who has been in negotiations with The Weinstein Company for several months, heads the investor group. The studio has been struggling to survive following the allegations, with partners cancelling projects, lawsuits mounting and board members resigning. The company has consequently hired Moelis & Company to pursue a sale. The investor group, backed by private equity billionaire Ron Burkle, is looking to use the assets purchased in order to launch a new company. This new company will have a majority female board of directors, a new vision and will create a compensation for the victims involved in the Harvey Weinstein scandal.
Abdul Akhtar
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NEFS Market Wrap-Up
COMMODITIES
Energy This week Snowstorm Emma hit the UK. On March 1st the National Grid issued a formal deficit warning regarding a potential gas shortage, hence acting as a call for suppliers to bring forward more gas. This is the first time a gas warning has been issued in eight years, in response to the sudden increase in demand for gas which is at a five-year high. As a result, within days, wholesale gas prices soared 74% to 200p per therm after the formal deficit warning (see graph below). China is the world’s largest coal consumer, yet it recently committed to scrap coal energy usage and go green. As part of its efforts, in 2017 the Chinese government eliminated or suspended 65 gigawatts of coal-fired power capacity, according to the State Council. It aims to reduce coal-fired power capacity by a further 109 gigawatts by the end of this year. However this could be a challenge due to China’s inadequate infrastructure that lacks provisions such as pipelines and electricity transmission lines, both of which are crucial for the utilisation of clean energy. CEFC China Energy, one of the largest private companies in China, is currently facing turbulent waters. Its chairman was detained on March 1st by the Chinese authorities for suspected economic crimes, including complicating in its $9bn deal to buy a stake in the Russian oil
company, Rosneft. Yet this event and the actions regarding the recently troubled Anbang Insurance Group mark a beginning of the Chinese government’s intention to crackdown on risky overseas investments and control private conglomerates that have become ‘too influential’. This week President Trump also raised the US import tariffs on steel and aluminium to 25% and 10% respectively, however energy companies are not comfortable with this new policy. Jack Gerard, the CEO of the American Petroleum Institute, expressed his frustration at this move, arguing that the oil and gas industry needs speciality steel for many of their infrastructure projects, which US steelmakers do not supply. Tariffs could consequently kill jobs and increase the costs of those projects. For example, at present the steel that is used to make the thickest energy pipelines is produced abroad, yet there is no guarantee that domestic steel producers can meet the demand of all grades of steels. Ang Gao
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Week Ending 4th March 2018
CURRENCIES
Major Currencies The Hawkish tone of Jerome Powell in his first congressional testimony as the Federal Reserve chair boosted the US dollar. Mr Powell gave a decidedly positive outlook for the U.S. economy, stating: “My personal outlook for the economy has strengthened since December”. The bullish outlook by Powell triggered more speculation that he could preside with increases in interest rates at a sharper rate than expected. However he also put an emphasis on “avoiding an overheated economy”. Nevertheless, the dollar index (DXY), a measure of the US currency against a weighted basket of global peers, rose 0.3% to 90.604 on Wednesday. However this was soon reversed on Thursday when President Trump announced that he would sign orders imposing a 25% tariff on steel imports and a 10% tariff on aluminium. “Trade wars are good, and easy to win” Trump said on Twitter early Friday. Fears over a trade war thus damaged the dollar as it posted consecutive losses. The ICE U.S. Dollar Index DXY fell 0.4% to 89.942, building on a 0.3% loss from Thursday, which was its first decline in three sessions. However the optimism surrounding Mr Powell’s testimony seems to have marginally outweighed the worries over Trump’s tariff increases, with the index showing an overall 0.1% gain over the week (see graph below).
The British Pound fell against the Euro following Theresa May’s Brexit speech on Thursday, where she laid out her plans for the future relationship between the UK and the European Union. The negative market reaction to Mrs May’s speech suggests doubt over whether a transition deal by March 23rd can be achieved. As such, the pound was overall down 1.38% for the week against the Euro. However over the week the pound was up 1.3% against the dollar. Roberto Mialich, an FX Strategist with UniCredit Bank in Milan, undertook research to show "yes, there is life in GBP/USD, but only because the USD is set to weaken further" while he "does not see – at least for now – much life in EUR/GBP". Meanwhile the dollar fell 0.47% against the Japanese yen. Whilst the yen hit its highest level since November 2016, the USD/JPY fell from ¥106.24 to ¥105.72 on Thursday. Overall, the yen rose 1.1% throughout the week. Edward Turner
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NEFS Market Wrap-Up
Minor Currencies As South Africa faces the reality of a regime change, investors are keeping a close eye on the developing situation. The South African rand (ZAR), since st December 1 , has produced total returns of approximately 18%, which for the period makes the ZAR the best performing emerging market currency. The Chilean Peso follows behind, with total returns of up to 9.25%. Emerging market currencies as a whole produced total returns of up to 4% over the same period. Despite the ZAR’s performance, investors this week sat on the fence contemplating the future of the currency. On one hand the removal of Jacob Zuma and his administration presents the opportunity for a positive outlook for South Africa. Yet many investors have chosen to act conservatively as South Africa’s new president, Cyril Ramaphosa, was the former Deputy President to Jacob Zuma.
There are also concerns surrounding the strength of the US dollar (USD). Should the US dollar strengthen, the ZAR would be potentially highly vulnerable due to the low levels of currency reserves and interest rates. The broadening gap between Hong Kong and US interest rates have increasingly reduced demand for the Hong Kong dollar (HK). As such, this week the HK fell to its weakest point against the USD since 2007 (see graph below). On Wednesday the HK traded at a low of 7.8297 per dollar, which was below the last intraday low in January 2016 of 7.8294 per dollar but above the all-time low in August 2007 of 7.8304 per dollar. The Hong Kong Monetary Authority is now implementing an exchange rate peg, to hold the HK within a range of 7.75 – 7.85 per US dollar. It is hoped that as a result, the interest rates of the two currencies will vary similarly to one another. Sarren Sidhu
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Week Ending 4th March 2018
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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