Week Ending 10th March 2017
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 3 United Kingdom United States Eurozone Japan South Korea Australia & New Zealand Canada
Emerging Markets 10 India China 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 10th March 2017
MACRO REVIEW United Kingdom The UK Chancellor, Philip Hammond, released the 2017 Spring Budget this week. It included several controversial commitments, including a new tax facing more than a million self-employed. This would increase the National Insurance rate from 1% to 10% for the self-employed in April 2018, with a second increase in April 2019 to 11%. Whilst unpopular, it would raise £145million a year by 2021/2022, at an average cost of 60p a week to those affected. Another contestable commitment was increasing funding for Scotland, Wales and Northern Ireland by £350million, £200million and £120million respectively. However, Scotland’s Finance Secretary, Derek Mackay, has criticised this decision, stating that despite the boost to Scotland’s economy, the budget would initiate cuts in excess of £3.5billion. A final major announcement in the budget was increasing the threshold of income tax to £12,500 for the basic rate and £50,000 for the higher rate, by the end of this parliament.
8.8%. Yet whilst consumers may be feeling the pinch as they pay more for their groceries, increased inflation has led to a 5% increase in sale revenue for the UK’s four largest supermarkets. Furthermore, rising inflation has led to an overall expansion in the UK economy, with the Bank of England increasing the UK 2017 growth forecast from 1.4% to 2.0%. There are many possible causes for this rise in inflation, such as supply shocks across Europe and rising oil prices. Brexit however is cited to be the main cause, due to its impact on reducing the pound’s value. However, whilst growth looks positive for 2017, the growth rates for 2018 are anticipated to fall to 1.6%, as increased inflation and Brexit start to take their toll. At the moment, the high growth rates are primarily due to the sustained spending habits of the British consumer. Yet as prices rise and consumers are forced to dip into their savings, consumption is expected to fall considerably. Charlotte Alder
Additional developments in the UK economy included inflation rising substantially to a three-year high of 2.4% throughout February, from 1.8% in January (see below). Staple goods, such as fruit and vegetables, saw prices rise by more than 5%, with the price of butter increasing by 15.8% and the price of fish rising by 3
NEFS Market Wrap-Up
United States The Dow rebounds 75 points as the Labour Department reports the U.S. economy added 235,000 jobs in February. With the three-day dip now a thing of the past, it is prudent to ask, how long can this market rally last? The average rally lasts for fifty-four months, with a total market gain of 154%. The current U.S market rally is ninety-five months old and has made an approximate gain of 231%, according to chief executive officer at BlueSky Wealth Advisors, David Blain. Though this current rally has significantly surpassed the average lifespan, it is unlikely for it to come to an end in 2017. This is because since the 1950s, when the S&P 500 is higher in the month of January, the remaining months of the year are typically higher, approximately 88% of the time. Additionally, when both January and February are higher, the S&P 500 typically experiences a year end gain, says Ryan Detrick, senior market strategist at LPL Financial. As it stands, it seems 2017 may be another bullish year. During the early hours of the Trump victory, the Dow experienced a loss greater than that at the onset of the Great Recession. However, it seems the markets have since
then traded in their fears for optimism, or according to the CNNMoney's Fear and Greed Index, “greed". This is because of the President’s promises to reduces corporate tax, introduce fiscal spending and begin to rollback regulations on Wall Street. Furthermore, the historically low interest rate levels have helped spur both investors and consumers as the cost of financing through debt is low. Eric Aanes, president and founder of Titus Wealth Management believes the low cost of debt is providing consumers more “disposable income to put back into the economy to help businesses to grow." Even with federal hikes looming on the horizon this year, the federal rate will still be relatively low. However, even with what seems to be a great year for the U.S market, Carl Icahn, founder of Icahn Enterprises and avid Trump supporter, is concerned that “the market has run ahead of itself". This cautious attitude can be seen in Icahn Enterprises as Icahn's firm is betting against 1.3 shares for every one share it's betting on. This means he stands to gain if the market begins to fall. Disun Holloway
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Week Ending 10th March 2017
Eurozone Quarter on quarter growth remained steady at 0.4% for the end of Q4, Eurostat data released on Tuesday (the 7th) reveals. The ECB’s macroeconomic projections released this month also reveal annual growth forecasts have been revised up to GDP growth of 1.8% for 2017, 1.7% for 2018, and tapering to 1.6% in 2019 – up from 1.7% and 1.6% for 2017 and 2018 respectively (progress graphed below). ECB president Mario Draghi reflected on the data, describing the growth outlook as “more optimistic”. In a statement to the press Draghi noted that recovery in investment, thanks to “very favourable financing conditions”, and an increase in private consumption, thanks to rising employment and “households’ real disposable income”, were the drivers behind improved GDP growth; stating that incoming data “increase our confidence that the ongoing economic expansion will continue to firm and broaden”. A 1.5% increase in exports, triple the reading for Q3 and the highest in two years no doubt spurred growth a little, too.
Political uncertainty has no doubt stayed the ECB’s hand in switching policy up too much, with major elections taking place in France, Germany and the Netherlands this year. Populist candidates look like serious contenders in each election, and pose credible threats to Eurozone and EU stability with motivations to leave both the monetary and political unions. Much of this discontent is driven by regional inequalities and disparities in the ‘benefits’ reaped from the Eurozone. For example, whilst overall Eurozone employment is up, as noted by Draghi, countries such as Italy and Spain continue to have a vastly different experience. In Italy, home to the populist Five Star Movement, unemployment is triple that of Germany, at 11.9%. However, populists such as Marine Le Pen in France, despite the largest support, do not necessarily have the support of the majority, as her opposition is split. Recent polling by Elabe shows that around 72% of French citizens are opposed to leaving the Euro. Jamie Peake
Despite this overly positive outlook and recent increases in the rate of inflation, the ECB’s Governing Council is leaving its asset purchase programme (APP) unchanged. Currently operating at a rate of €80bn per month, from April 2017 the monthly pace falls to €60bn until the end of the programme in December 2017, or beyond if circumstances require. On top of this, interest rates are likely to remain unchanged until sometime after APP is finished, despite calls for ‘due’ hike.
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NEFS Market Wrap-Up
Japan Revised GDP estimates for the final quarter in 2016 failed to meet analysts’ expectations. The Cabinet Office last week increased its earlier growth rate estimate by 0.1 percentage points to 0.3% q/q, which fell short of the predicted 0.2 percentage point increase. Private demand was raised by 0.2%, which was largely the result of a revaluation of growth in private investment by 1.1 percentage points. In pre-emption of the fall in private consumption in January, household spending saw no change from the previous quarter. Public investment was downwardly revised from a -1.8% contraction relative to the last quarter to -2.5%. This tempered the strengthened appraisal of domestic demand, and is a disappointing sign given the government’s objectives. Aiming to revitalise the economy, PM Shinzo Abe has promised to match monetary policy efforts with wide-sweeping fiscal stimulus. Unsurprisingly, GDP growth was led mostly by net exports, which contributed 0.2 percentage points to the growth rate. Increased foreign demand comes concurrently with Japanese firms looking abroad to invest. Africa has emerged recently as a headline interest for Japanese foreign direct investment (FDI). Japanese companies continue to compete for African infrastructure projects with Chinese state and private investment. China currently is the region’s largest
trading partner. In August of last year, the Japanese government committed itself to fostering development and promised around $30bn in regional infrastructure investment at the Sixth Tokyo International Conference on African Development. In the past, Japan’s engagement with Africa has typically focused on providing humanitarian aid, but projects have included road construction – such as a bypass through the capital of Kenya – and, more recently, agriculture infrastructure development. In 2014, according to John Hopkins University, bilateral trade in goods between Japan and Africa totalled $27.5bn. Last month, Kansai Paint in Japan announced its acquisition of three east African paint companies in what is speculated to be the largest corporate acquisition in the region in two years. Deals to build business ties like this mark a transition into private-led FDI. According to Marc Fevre at Baker & McKenzie, Africa is seen as an area “where there’s a lot of opportunities to grow and have high returns.” Previously, peacebuilding and working towards a sustainable future for the region were the purported reasons for Japan’s engagement (with an underlying interest in Africa’s abundancy in natural resources), but now the focus is shifting to the region’s potential as a business partner. Daniel Blaugher
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Week Ending 10th March 2017
South Korea History was made in South Korea on Saturday with the announcement of the nation’s first impeachment. The economic implications will be discussed later on followed by a briefing on foreign reserves data. Friday March 10 marks the official impeachment of South Korea’s first female president Park Geun-hye. Her association with a scandal at the nation’s most successful technology company, Samsung Electronics, turned the public and the government against her. The company’s heir, Lee Jae-yong, sought political favors from the president to “smooth his succession and consolidate control over key group units”, according to Financial Times. Former president Park Geun-hye’s connection with the scandal surfaced October 2016, when she was admitted to having close ties with Choi Soon-sil, nicknamed the “shaman advisor”. Ms. Choi was suspected of helping Samsung’s Lee bribe the president with roughly $38m. Furthermore Choi does not hold a position within government and was found to have possession of classified political documents. Nevertheless, Choi wound up detained for influencing political affairs, Lee remains in custody, and Park was impeached and avoided indictment due to presidential immunity. A snap election to hold the office of president will take place in 60 days.
unlikely the next president will be able to make significant changes to the status quo. With political uncertainty reduced, however, public confidence and consumer sentiment is expected to improve amid a depressed consumption climate in the South Korean economy. Moving away from politics, last week South Korea released data on its February foreign reserves, which came in at $373.91bn – only a slight decline from January. The reported reserves figure also fell short of forecasts, which projected a two billion dollar increase. According to The Bank of Korea, reserves fell primarily due to lost value in held securities but were supported by an increase in deposits. The nation remains the eighth largest country worldwide in total foreign reserve holdings, just behind Russia. This week South Korea will release data on several key economic indicators. Consumer confidence will be released on Thursday and is expected to improve as South Korean consumption is currently slumping. The unemployment rate is also set to be released on Tuesday and is forecasted to increase from 3.6% to 4.0%. Dan Minicucci
Economists are not awfully concerned by the impeachment effects on the market. The existing struggle to pass legislation through a highly divided National Assembly (South Korea’s legislative branch) makes it
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NEFS Market Wrap-Up
Australia & New Zealand The New Zealand Prime Minister, Bill English, has expressed his interest in adjusting the N.Z immigration program, as well as expressing concern over President Trump’s view on trade protectionism. With a booming economy allowing budget surplus, the flock of immigration into the pacific nation has added more pressure to housing prices which are NZ$1 million on average in Auckland. On a TV interview, on the 4th of March, English stated that he previously anticipated New Zealanders to leave the country rather than stay, however, due to the economic boom 2016 there was record growth in immigration. During this interview, English argues that “there are more calls coming from businesses and the labor market about the need for skills, because we are creating so many new jobs, on the one hand. On the other hand, making sure we’re getting the people who can match those skills”. Furthermore, as a small open economy, New Zealand’s trade is vulnerable to actions of bigger nations, such as those of the United States. With China being its largest trading partners, Prime Minister English has expressed his concerns about President Trump’s actions towards creating protectionism policies against China. On another topic, a study released on Wednesday by PwC, during International
Women’s Day, estimates that unpaid childcare in Australia hinders the economy by $345 billion. The study poses the question ‘Why is it that a mother caring for her children produces no measured economic value, but the same mother hiring others to look after her children does?’. A Goldman Sachs report in 2009 estimated that the underutilization of the workforce that includes stay at home mothers costs the Australian economy 11% of GDP of an economy worth $1.6 trillion. Moreover, recently the OECD has found there to be a 25% unemployment gap created by mothers, many of which are highly educated. Other data found by the OECD has shown that Australian mothers between the ages of 25 and 54 years with children tend to only work part-time. This becomes a major issue to the economy since productivity of labor diminishes. However, this could be in part due to the high childcare costs in Australia, causing a large portion of a mother’s income to be allocated towards the option of returning to work. Should the government promote mothers’ engagement in the economy further, or can a mother-child bond be valued more than 11% of GDP? Maria Fernandes Camaño Garcia
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Week Ending 10th March 2017
Canada With GDP data showing the economy average quarterly growth of 3.2% in the second half of 2016, Canadians were offered a glimpse of a recuperating economy; eluding periods of stagnant, and often negative, growth. With further scrutiny, however, it appears substantial fragilities within the economy have surfaced. Non-residential business investment has fallen in all but 1 of the past 9 quarters, and declined 19% in the same period. Earlier data suggests the 2-year decline in investment is the largest since the 1950’s. Furthermore, investment in machinery and equipment now represents a paltry 3.7% of GDP, the lowest share of the economy since the post-war era (shown below). Statistics Canada released capital spending data intentions, which show, except for real estate and government, corporations earnestly contemplate further cuts to investment. Spending plans in the manufacturing category fell for a second-straight year for a combined C$3.5 billion ($2.6 billion) decline. Intentions were down for a third year in a row in the oil and gas sector, representing a cumulative drop of C$18.7 billion. With investment remaining a key progenitor for job creation, sluggish investment is a precursor for future labour market issues.
The OECD forecasts the Canadian economy to expand by 2.4% over the course of this year, slightly revised upwards from 2.1%, citing enduring confidence compounded by export growth, a favourable commodities market and fiscal stimulus initiatives for the optimism. The OECD remained wary of underlying fragilities in the economy, with ‘growth slow by past norms’ due to ‘consumption, investment, trade & productivity’ which appear to be ‘far from strong’. Swelling house prices, particularly in Vancouver and Toronto were an area of concern, as the OECD believes spiralling real estate prices to be a portent of an economic downturn. The average home price in Canada increase by 12% YoY through October – driven largely by growth across Toronto & Vancouver, which have soared by 16% and 25% respectively in the past 2 years. FitchRatings, called the prices ‘unsustainable’ following calls from Bank of Montreal economist, Doug Porter, who said the Toronto market had breached ‘bubble’ territory. Usman Marghoob
Nonetheless, the BoC highlighted Canada’s services’ sector’s vigour, now considered to be the vanguard for investment growth. In January’s Monetary Policy Report, policy makers proclaimed the sector has ‘underpinned total business investment in recent years’ and forecast service sector investment to increase in the future.
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NEFS Market Wrap-Up
EMERGING MARKETS India
There are rising expectations amongst Indian economists that the inflation rate will increase for first time since the demonetisation programme when the figures are released early next week. Consumer price inflation fell to record low levels of 3.17% but organisations like Capital Economics have predicted that inflation will rise to 3.5% next week. The most prominent drivers of this increase are expected to come from food inflation and perhaps most significantly through transport costs. Global oil prices have recovered recently which will encourage imported inflation due to India’s reliance on petrol to establish efficient transport links. The anticipated rise in inflation rates will ensure that the Reserve Bank of India (RBI) considers the possibility of raising interest rates when the MPC meets in April. The RBI decided to leave interest rates at 6.25% previously, which ended a period of expansionary policy. This approach could be completely reversed if inflation predictions turn out to be accurate. In other news, surveys and data collected by the World Bank has demonstrated that conducting business activities in India has become easier although in a global context, India continues to perform poorly in several tests. The survey conducted looked to measure and compare the ease of setting
up a new business in India using key indicators. These indicators include starting a business, building a warehouse with equipped amenities such as water and sewage connections and obtaining permanent electricity provision. India’s success in each of these indicators was compared to neighbouring Asian countries, developed nations and other nations of differing development levels. The results provided some optimism as India made marked improvements in the provision of electricity, being only behind Germany for this department. However, concerns persist over the other indicators measured by the survey. The research showed that it takes twice as long in India (26 days) on average to begin a business project in comparison with other major economies like the USA and the UK. Nevertheless, in a domestic sense, there has been an improvement in this statistic as it previously took 34 days to begin a new project. Moreover, the research illustrates that it still takes much longer for Indian business to settle disputes compared to advance economies. Despite some positivity emerging from the report, the Indian government can now look to utilise the data to improve the required indicators and allow new businesses to operate as efficiently as possible. Isher Hehar
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Week Ending 10th March 2017
China A document released on Monday by the Chinese government highlights plans to improve spending on infrastructure in a bid to improve China’s tourism industry and ultimately boost growth. This five-year plan is in line with China’s general shift in economic focus from trade and investment to the service sector and consumer spending. The National Tourism Administration plans by 2020 to renovate roads leading to the country’s major tourist attractions, as well as creating 20 inter-region bike lanes to encourage carbon-emission free travel. A further improvement to tangible facilities comes in the form of upgrading toilets: 100,000 new public bathrooms are planned to be built while all of China’s 5A graded tourist sites will have unisex toilets. The use of information technology plays heavily into the National Tourism Administration’s plans to enhance the tourism industry; free Wi-Fi, audio guides and online booking systems are hoped to be implemented in all 4A and above graded tourist sites by 2020 as well as a targeted 20% of total tourism spending to come from online streams such as online hotel bookings and ticket purchasing.
destination for both foreign and domestic tourists, the Chinese government’s ultimate goal is to reach $290 billion investment in the tourism industry which, according to the plan, will boost GDP by 12%. As well as boosting GDP, there is an emphasis on poverty alleviation through working on rural tourism. Through collaborating with other agencies to improve transportation, telecommunications and sewage facilities, this 13th five-year plan aims to support and improve living standards in 22,600 villages. Director of the National Tourism Administration’s Planning and Finance Department, Peng Decheng, said, “"Developing rural tourism encourages villagers to participate in industry through their labor, land or houses, which is sustainable and has many benefits. The rate of counties falling into poverty again after poverty alleviation through tourism is very low." If these long-term tourism plans are successful, the creation of jobs will lead to a positive multiplier effect, benefiting individuals and businesses as well as the Chinese government. Nikou Asgari
The accessibility of information for potential tourists is another key focus area which the government plans to develop through the sharing of information regarding China’s historical and cultural venues. The graph below shows how tourist arrivals into China follow a pattern of fluctuations annually, always falling massively around January and peaking in the autumn. By focusing on improving the image of China as a tourist
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NEFS Market Wrap-Up
Russia and Eastern Europe Friday saw the continued strength of the Russian ruble, in anticipation for the key macroeconomic GDP report which will be published early next week. The rally of the ruble was withdrawn slightly due to the weakening of oil prices across the globe with Brent Crude at $52.46 per barrel. Thanks to the slide in oil prices, it was not enough to secure further firming of the Russian currency. The ruble was 0.3 percent stronger against the dollar at 59.15 and had gained 0.1 percent to trade at 62.7 versus the euro. Russian Energy Minister Alexander Novak stated that a significant number of agreements have been prepared for the Turkey-Russia High-Level Cooperation Council (HLCC) meeting held in Moscow on Thursday. He revealed that the agreements, signed at the meeting, did not just address the economy, but also dealt with technical and cultural fields. Speaking to Anadolu Agency (AA) ahead of the HLCC meeting that brought together President Recep Tayyip ErdoÄ&#x;an and Russian President Vladimir Putin, Minister Novak highlighted that
commercial and economic cooperation between Turkey and Russia has gradually recovered after a series of mishaps in recent times. The Russian Energy Minister also noted that Russia leans towards cooperating with Turkey in the exploration and production of energy resources, adding that if suitable projects emerge in the field of upstream (production and exploration) with Turkey, Russian companies will evaluate it carefully. It seems evident that there is renewed cooperation between the two nations after this meeting, with Novak thanking Turkey for the positive communication it has maintained with Russia within the framework of the project. Novak stated, "We expect the project to be granted the status of strategic investment so that it attracts more investors. We would like to include Turkish investors in the project in compliance with intergovernmental agreements." William Bunnis
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Week Ending 10th March 2017
Latin America This week there was bad news for the Brazilian economy as the latest GDP figures were released. Meanwhile in Mexico, inflation rose to a seven-year high, leading to concern that interest rates may rise further. The Brazilian economy contracted 3.6% last year, according to figures released on Tuesday by the government. The final quarter of last year revealed at 0.9% contraction in national GDP, as shown below. The figures reveal this was the 8th consecutive quarter of economic downturn, the longest on record. The downturn, which was felt across almost all economic sectors, was slightly worse than economists’ estimates and only marginally better than 2015, when gross domestic product slumped 3.8%. But analysts said there were signs that what some are calling the Brazilian “depression”, was finally bottoming out, with economic indicators such as car production, oil exports and farming improving in the first two months of 2017. The latest figures disprove the idea that the Brazilian recession is at the beginning of the
end, with the possibility of growth picking up soon. Mexican inflation rose to a seven year high of 4.86% in February compared to a year earlier, higher than market forecasts of 4.54 % and setting the stage for the country’s central bank to raise rates again later this month. Core inflation, which excludes fuel and fresh foods, rose by 4.3% from 3.8% year-on-year in January, also a seven-year high. Capital Economics said the increase was being driven by rising inflation across most categories including housing, clothing, health and education. With regards to the minor economies of the region, Columbian retail sales month-onmonth were down 24.9% compared to December, compared to the forecast of 0.6%. In December, retail sales grew a whopping 31%. The large fluctuation in growth is not unusual however. Alistair Grant
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NEFS Market Wrap-Up
Africa This week the spotlight shines on Ghana. The government has failed to arrest their slippery slope into economic decline that has its roots in 2016. Moody’s – a renowned ratings agency – has issued a report surmising that Ghanaian banks are facing high asset risks in conjunction with the hereditary problems that come with non-performing loans. Despite buffers of solid capital and relatively stable funding, Moody’s has highlighted that the banks are still facing severe risk because of the exponential increase in ‘problem’ loans. In recent times Ghana has opened its economy to large exposure from energy companies who promised to have a coruscating effect on the country, which recently celebrated the 60th anniversary of their independence from European colonisation. However, promised government subsidies have gone unpaid, which had a snowballing effect, inadvertently prevented scheduled bank loan repayments. Mr Charles Godred Ackah – Head of the Economics Division of ISSER- formally presented the 2017 post budget analysis in Accra and he remarked that Ghana needed ‘appropriate regulation of the financial system to achieve the twin goals of inclusive growth and financial stability’. These sangfroid comments should be taken heed of, in a country reported last month to be Africa’s
most expensive to live in. On Tuesday, Mahamudu Bawumia – Vice President of Ghana – underscored the need for Africa to move away from its dissonant image. He proclaimed ‘we have to make sure we combine our resources, our energies to make sure that Africa develops economically’. If Africa can take a leaf from the China’s book, through hard work it is possible to reach where they are now. In other news, it’s widely expected that South Africa will imminently be anointed Africa’s largest economy, usurping a lackadaisical Nigeria. This doesn’t suggest that South Africa is ready to burst into a new and effulgent future, but rather it highlights just how far its ‘rivals’ are falling behind. In fact, in 2016 South Africa’s economy only rose by 0.3% as a whole, but that was enough. Since becoming Africa’s paterfamilias, Nigeria has endured a plethora of difficulties which have adversely affected economic performance, from the advent of Boko Haram to oscillating oil prices. A soon to be announced recovery plan, gives reason for hope. Vincent Egunlae
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Week Ending 10th March 2017
Middle East Following on from what, in the last two weeks, has been positive news unrealised, we look this week at methods of realisation, in particular, how Middle Eastern countries can harness technologies that have economically aided the Western world for several decades now. In addition, Iranian progress since the lifting of sanctions imposed in 2015 is contested, and Indonesia looks set to lure Middle Eastern investment. 2/3 of the population are under the age of 30 in the Middle Eastern economic region. Accordingly, dynamism and technological absorption should be ubiquities – this, however, is not the case. The reality, in actual fact, is far more backwards: only around one in five of the region’s women are employed and the region as a whole as the world’s highest youth unemployment. Prospect Magazine reports that the youth-focused employment policies have focused on stemming migration and preventing radicalisation, as opposed to “thinking creatively” about the causes of both. In addition, the “old-school” job creation schemes are too traditional, rendered otiose by robotics and Asian competition. The UN’s latest Arab Human Development Report estimates that the region needs to create 60mn jobs by 2020; if it is to do so, it might look less at old world job creation techniques, and perhaps learn something from the West’s ‘gig economy’, which, for all its downfalls, has been exceptional in the opportunities it has provided. Moreover, Iran’s supreme leader criticised his country’s slow economic recovery despite the
aforementioned lifting of sanctions. He went on to call for a more self-sufficient state. This comes ahead of Iran’s presidential election, where Ayatollah Ali Khamenei is expected to seek re-election. The recommendations are reflective of what we saw above, and indicate a fatigue with the economic status quo in the region. Since the middle of 2014, the Iranian economic situation was hampered by plunging oil prices and the embargo imposed as a result of a disputed nuclear programme. Foreign investment has been tempted from the West – but only that. Deals with the West have been few and far between and look even less likely now in the wake of President Trump’s tough approach to the region. Instead, Iran should look at ways to build up its domestic economy, focus less on foreign crutches, and give more attention to modernising its crucial oil and gas sector. In addition, it is important to note the Muslim diaspora, and the economic opportunities that may bring. In particular, we may look at Indonesia, which is the most populous Muslim nation in the world, which is billing itself as the natural home for Middle Eastern investment at a time when, as noted, the US is turning inward. Indonesia has won pledges of $1 bn in development finance and signed agreements to cut trade barriers. When we look particularly at oil, too, considering the muted oil demand in developed markets, Saudi Arabia’s role as the largest oil supplier to Indonesia, may become even more important in the years to come. Thomas Dooner
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NEFS Market Wrap-Up
Southeast Asia This week we assess the economic impact of the Philippine’s controversial anti-drugs campaign, alongside a number of data releases for the country. When President Duterte entered office last June, he did so on a promise to clamp down on the growing drugs epidemic that threatened the Philippines. Whilst this in itself was not controversial, his method – namely that of killing the “100,000 criminals” responsible for the epidemic – certainly was. In the six months that followed, anti-drug squads and vigilante groups carried out over 8000 extrajudicial killings of drug dealers, users and innocent bystanders. These tactics have drawn widespread condemnation from human rights groups and Western governments, but for many people within the Philippines, Mr Duterte is merely delivering on his pre-election promises. Indeed, he remains popular amongst the public, with the latest Pulse Asia survey putting his approval rating at 83% for the last quarter of 2016. The President hopes that his hard-line approach to crime will create an environment in which business can thrive. He is not unreasonable to think so – his anti-drugs campaign whilst mayor of Davao was credited with transforming the region’s economy. Moreover, analysts’ predictions that the bloody crackdown on drugs would damage foreign relations and discourage
investment have not yet been fulfilled. The EU and Japan have refrained from criticising the campaign in recent months, and US President Trump has actively praised the approach as “the right way”. On Friday, it was announced that export growth for January 2017 was at a three-year high, and tourist arrivals and FDI both hit record highs at the end of 2016. However, such a hard-line campaign carries huge potential risks, both politically and economically. Public safety and a strong rule of law are widely regarded as prerequisites for sustainable economic growth, so Mr Duterte’s calls for citizens to engage in extrajudicial killings threaten to undermine the very foundations upon which the country’s recent economic success has been built. Moreover, there are growing examples of police and politicians abusing the antinarcotics crackdown as a means of satisfying personal grudges. Mr Duterte himself is alleged to have ordered the arrest of Senator Leila de Lima, a leading opponent to his antidrugs war, on spurious charges. Heed should be given to her warning, given last August, that “we’re on a slippery slope towards tyranny.” Indonesia and Singapore are publishing balance of trade data for February 2017 next Wednesday and Friday respectively. Daniel Pettman
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Week Ending 10th March 2017
EQUITIES Financials In last week’s edition, I began the discussion of Deutsche Bank’s future, with news being circulated that the banking giant sought to increase capital and potentially sell part of its assetmanagement subsidiary Postbank. Alongside these developments, we consider some other more minor movements. The Deutsche Bank story has developed rapidly in the last week, as the lender presented plans for a €8bn capital increase and another strategic overhaul, driving further market activity. This press release has however placed the bank on the backfoot once again. Information released on Monday 6th March indicates a potential capital increase by means of a rights issue of up to 687.5 million new shares. As a direct consequence, by the end of Monday trading, the shares fell by 6% and were eventually trading €18.01, the lowest since mid-February. Furthermore, as of Thursday the 9th, the institution’s stock had dropped a total of about 8% since last Friday. Furthermore, the bank’s subsidiary Postbank, will now stay and be fully integrated with Deutsche’s other retail banking operations, although this restructuring initiative will cost €2bn.
The Royal Bank of Scotland Group has also had a relatively good week. The banks stock closed at $5.93 on Thursday, climbing 1.19% from the last trading session. This follows a recent positive trend as the institution’s shares have gained 3.31% in the last one month alone. This market positivity comes as in the last week the lender announced that it may divest commercial real estate loans in chunks of £300 million ($365 million) to £400 million to help reach its target to reduce riskweighted assets by 20 billion pounds. Similarly, Switzerland headquartered UBS Group’s shares rose 1.99%, finishing Thursday's trading session at $15.88. Furthermore, in total a volume of 2.91 million shares were traded on the one day, with these shares trading above their 200day moving average by 7.39%. This is a direct result of the bank’s March 2nd announcement where UBS said it had established UBS Group Funding (Switzerland) AG, a solely owned direct subsidiary of UBS Group, to issue future loss-absorbing, capital instruments and eligible senior unsecured debt, which will be guaranteed by UBS Group AG. Mikun Olupona
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NEFS Market Wrap-Up
Technology The record-setting rally in US stocks this year has been fuelled by a run-up in technology stocks as investors believe that Donald Trump’s planned tax cuts could boost spending. The S&P 500 technology sector has led the benchmark index with a 10.4% gain that has overshadowed the narrower 6% rise clocked by the S&P 500 so far this year, evident in the figure below. The technology-heavy Nasdaq Composite index is up 8.7% over the same period. The rally has also accompanied a good run for Facebook, Amazon, Netflix and Google’s parent Alphabet, the so-called Fang stocks, which have climbed an average of 12.98% so far this year and collectively added $155bn to their market value over the same period. Despite this strong first quarter rally, the tech sector was in the red on Monday the 6th, sliding 0.2%. By close of trading in New York, the S&P 500 fell 0.3% to 2,375.33. Meanwhile, the Dow Jones Industrial Average slid 0.2% on Monday, curbing its gains to 6 % so far this year, while the Nasdaq declined 0.4% to 5,849.17. This could be due to markets attempting to cool
down, as investors respond to ‘overbought’ signals, and withdraw their capital from the sector. Snap, the company behind messaging app Snapchat, fell 12% to $23.77, in its first day of declines since its IPO. Monday’s sell-off curbed the stock’s rally since its listing at $17 a share last week to about 40%. Wall Street has been bearish on the company awarding the stock five “sell” ratings, two “hold” ratings and no “buy” ratings, according to Bloomberg data. The future looks bleak for the company as it “has no ability to prevent ‘fast followers’ from stealing its best ideas” and “no clear path to profitability before 2020”, according to Laura Martin, a Senior Analyst at Needham & Co. Regardless, the tech sector continues to impress as the giants of the industry continue to innovate at unprecedented levels in order to respond to the competition from infant start-ups. The future for the sector, both near and long term, appears very promising indeed. Angelo Perera
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Week Ending 10th March 2017
Oil & Gas The oil and gas stocks were mostly lower over the past week, as the bounce-back of US shale oil at above 50 dollars per barrel of crude prices reignited concerns over the global supply glut, which had capped oil prices over the past several years. The NYSE Energy Sector Index closed at 15,700.89 on Thursday, 2.55% lower compared with 16,112.54 at the end of the previous week. On Friday, it continued to be under pressure, down 0.1% at noon on Friday, though performance of individual stocks was mixed. British Petroleum (BP: LSE) surged 16.82 pounds, or 3.7%, on Friday, amid speculation that it might be a target of acquisition by Exxon Mobil (XOM) or others. Shareholders are reportedly not happy with its share prices. The potential acquisition could be valued at around 120 billion pounds, but the weak pound might help the potential buyer. Royal Dutch Shell (RDSA: LSE) gained 0.8% on Friday at 2,106.27 pounds but lost 1.01% over the week. Total (EPA: FP) gained 1.02% on Friday and lost 1.71% over the week. Exxon Mobil (XOM) was down 0.04% at $81.64 in trading at noon on Friday, which represented a loss of 0.99% over the week.
Chevron (CVX) was down 0.11% at $109.92 at Friday noon, down 3.2% from $113.55 at market close on the previous Friday. International oil prices have been falling over the past three days amid pressure from news of further big rise in US crude inventories and growing domestic oil production. In addition, Trump is expected to boost investment in infrastructure, possibly including energy. While the OPEC and non-OPEC countries, including Russia, have been delivering their agreed output cut, senior Saudi officials told US oil firms that they should not assume OPEC would extend output curbs to offset rising production from US shale fields. Nevertheless, there are signs that OPEC is willing to seek to work together with US shale industry. “We all belong to the same industry,” said OPEC Secretary-General Mohammed Barkindo. Investors are keeping an eye on the latest US oil rig count expected on Friday, while looking to OPEC officials for clues on whether they are going to extend the output cut before the world’s main oil producers meet in May in Vienna. Michael Chen
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NEFS Market Wrap-Up
COMMODITIES Energy Natural gas prices declined on Tuesday, as investors were still monitoring the changes in the weather forecasts in order to gauge demand for fuel. Natural gas futures rose sharply on Wednesday as market participants were hopeful for bullish storage data on Thursday. As a result, natural gas for April delivery increased by 3.6% to $2.952 per million British thermal units (mmBtu). On Thursday, the US Energy Information Administration (EIA) reports showed that there was a storage draw of 68 billion cubic feet (bcf) in the week ending March 3, more than the analyst expectations of around 59 bcf. The news of the storage draw, also helped by cooling weather conditions, meant natural gas futures for April delivery rallied on Thursday by 2.51%, closing the day at $2.974 mmBtu. Meanwhile, oil prices slumped quite dramatically this week as investors are finally starting to take the record level of US oil stockpiles seriously. On Tuesday, oil fell to its lowest level this year as the US West Texas Intermediate (WTI) futures for April delivery dropped by 2.86% to settle at $50.28 per barrel. Mike Wittner, head of commodities research at Societe Generale, stated that: "The big rally in December after the OPEC agreement was based on expectations that the cuts would balance
the market. While it looks like OPEC has cut more than 1 million barrels a day of output, it’s difficult to see any impact on U.S. stockpiles." The sharp rise in US oil inventories and US crude production can be seen from the diagram below. The decline continued on Wednesday and Thursday as oil dropped below $50 per barrel for the first time since December. The fall came following the report from the EIA which showed that US crude inventories rose by 8.2 million barrels last week, the highest level in weekly government data since 1982. Brent crude for May settlement closed Thursday at $52.19 per barrel, and WTI for April settlement dropped by 2% to close at $49.28. This also marked the second highest level of trading volume in WTI history, clearly showing signs that there is a return of volatile times in the oil market. Bunyamin Bardak
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Week Ending 10th March 2017
CURRENCIES
Major Currencies The sterling has seen better weeks, the euro is doing well, perhaps too well, and across the Atlantic inevitability weakens the dollar. The non-farm payrolls in the US comfortably exceeded a consensus forecast of a 190000 rise and rose by 235000. This all but seals the long-awaited rate hike by the Fed next week. The US jobless rate slipped to 4.7% from 4.8%, while year-on-year wage growth rose to 2.8% from 2.6%. The discussion in the US is no longer if the Fed hikes rate next week, which interest rate futures markets price in at a near 100% certainty, but what happens after the March hike is the topic for discussion. The promising labour market results boosted the currency up to close at £0.8222 Such is the nature of the markets even before the budget was released to doom and gloom of the British economy came to fruition as the pound sunk to a 7-week low, even before the Chancellor Phillip Hammond opened his mouth. This was all slightly dampened by the Office for Budget Responsibility, who upgraded forecasts of UK growth, increasing its forecast for 2017 economic growth to 2.0% from its earlier 1.4% prediction, but cutting its forecasts for
the following three years. The pound fell as much as 0.5% to $1.2139 on Wednesday — its weakest level against the US dollar since January 17 — before modestly trimming its losses to trade 0.4% lower as Chancellor Hammond’s first and last spring budget failed to rally support for the UK currency. A solid bit of criticism for Hammond by an economist at Pantheon Macroeconomics, “The Chancellor lived up to his reputation for fiscal conservatism…and is pressing ahead with a tough fiscal tightening”. In the Euro space, Draghi’s job only gets harder as he signals for lower urgency to ease policy again as the ECB raised inflation and growth forecasts, sending the euro up to close at $1.067. The euro climbs to its strongest level against the greenback in three weeks but Draghi still faces the tough task in convincing the market that he can balance between insuring the less healthy parts of the bloc continue to benefit from QE, while also playing down those concerned about signs of bubbling inflationary pressures. The UK looks as bleak as its weather, the Fed finally does something and nobody wants to be Draghi. Robert Tse
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NEFS Market Wrap-Up
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