Week Ending 11th 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 China Latin America Russia & Eastern Europe South Asia
Equity and Deals 13
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 17 Energy
Currencies 18
EUR, USD, GBP AUD, JPY, Other Asian
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Week Ending 11th March 2018
MACRO REVIEW United Kingdom Data released on March 9th by the Office for National Statistics (ONS) revealed that Industry output rose by 1.3% from December 2017 to January 2018. This is the largest monthly increase in output since January 2017, as seen in the graph below. This increase was largely due to the reopening of the Forties North Sea oil pipeline which had been closed for repairs in December, leading to a 23.5% increase in mining and quarrying. The ONS also revealed that UK manufacturing had increased by 0.1% in January 2018 from December 2017. This is the ninth consecutive month of growth for manufacturing and marks the first time since records began that this has been achieved. However this figure was below the 0.2% growth that was predicted by Reuters and considerably below the 0.3% growth seen in December 2017, hence suggesting a wider slowdown in growth. Samuel Tombs from Pantheon Macroeconomics suggested that the fall in growth is a sign that “the impetus to growth from sterling’s 2016 depreciation is beginning to tail off”, amid the pound strengthening in recent months. The European Union declared on March 8th that the UK owed €2billion as a result of the failure to clamp down on Chinese importers of textiles who were avoiding paying the relevant custom duties from 2011 onwards. The total loss of budget to the EU is estimated to have been
€2.7billion but the UK has refuted this claim. These claims have arisen following a week of negotiations within the EU over how the UK’s contributions will be covered by the remaining members following Brexit. Figures released by Halifax on March 7th illustrated that UK house price growth stood at 1.8% from January to March 2018, the lowest rate since March 2013. Economists from Halifax claimed that despite the slowdown in growth, current prices will be sustained for the near future low mortgage rates, strong employment data and the continued shortage of houses. Following the emergence of a potential trade war between the EU and the USA last week, Liam Fox, the UK Trade Secretary, announced on March 9th that the UK would seek an exemption from the proposed 25% steel tariff imposed by the USA. The UK currently exports 7% of its manufactured steel to the USA, which is valued at £360million. Seeking preferential trade agreements with the USA is sensible in preparation for Brexit and may build a greater trading relationship. Nicholas Gladwin
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NEFS Market Wrap-Up
United States Following on from last week’s punitive tariff proposals on aluminium and steel, murmurs of a trade war have sparked widespread uncertainty in the US. In response, the President of the Federal Reserve of Dallas, Robert Kaplan, commented that protectionism that hurt relationships with trading partners (including Mexico) would be “against the interest of the US”. China has described the move as a “serious attack” on the system of international trade, while the UK’s Trade Secretary will be travelling to Washington next week to discuss an exemption from these tariffs for the UK. Despite the President’s efforts, it may be the case that Trump’s ‘America First’ trade policy tariffs will not have a significant impact on the economy’s growing trade deficit (see graph below). The imbalance has reached a nine-year high, having jumped by 5% to $56.6 billion. The politically turbulent trade deficit with China rose 16.7% from the last quarter and its deficit with Canada was the highest in three years. However it is worth mentioning that an element of the rise in the US trade deficit can be attributed to commodity price increases in January, as strong global performance has finally caught up with the industry and caused inflation.
This deficit is also likely to be worsened as the US labour market continues to heat up. Private sector jobs grew by 235,000 in February - 40,000 more than forecasted – which will cause an increase in national imports due to increased levels of disposable income and a subsequent boost in import demand. Whether or not this will prompt further protectionist measures is unclear. Yet this continued decline in unemployment does not appear to be strong enough to convince the Federal Reserve to raise the base interest rate for the third time this year, though it is likely that another rate hike will be seen before the year is out if the US continues on its current trajectory. Despite so many new jobs being created, wages only rose by 0.1%, keeping the annual rate close to its average of 2.6%. From this we can infer that speculative fears of a quick pick up in inflation have not yet come to fruition and that the interest rate may stay firmly where it is until at least Q2 or Q3. Amelia Hacon
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Week Ending 11th March 2018
Europe The lack of a concrete outcome in the Italian election this week proved that Populist movements across Europe are not a phase of the past. Five Star Movement (the Eurosceptic party) and League (the anti-immigration party) have each claimed a right to govern Italy after the Democratic Party only won 22.8% of the vote, thereby meaning no single party managed to win a majority of the public’s vote (see graph below). In response Matteo Renzi, the leader of the Democratic Party, resigned. It now seems that the Five Star Movement will try to find partners to form a coalition with. Further to this, the European Commission has issued a warning on the health of the Italian economy due to the “excessive economic imbalances” routed in its large debt and weak banking sector. However this warning came before the election results, which would have now greatly exacerbated the risks considering the uncertainty regarding the formation of a coalition government. The state of the Italian economy is of great importance to Brussels, given that it is the Eurozone’s third largest economy that poses severe systemic risk to the area. On Wednesday Donald Tusk clarified that Brexit would mean that the UK and the EU would be “drifting apart”, yet he does not want to “build a wall” between the two. He
said that the EU wanted a free trade agreement with zero tariffs on all goods with the UK, which would mean, rather unconventionally, that a free trade agreement would act to “loosen, not strengthen, economic ties”. In contrast to Theresa May’s desires, the EU says access for services will be limited because the UK will not share a common regulatory and judicial framework once it leaves the EU. The European Central Bank acted as expected on Thursday, when it was decided that interest rates would remain unchanged at 0%. However the monetary policy meeting did surprise some, after Mario Draghi dropped his longstanding pledge to increase the quantitative easing programme if inflation were to rise or economic conditions were to deteriorate. This caused the Euro to reach its highest intraday level against the dollar for 3 weeks, trading at $1.2411 at about 12:55pm. However this level did retreat by the end of the day after Draghi stressed that the programme could extend beyond September 2018 if inflation was not on a secure and sustainable path to meet its target. Deevya Patel
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NEFS Market Wrap-Up
Japan & South Korea The US President announced last Wednesday that he had agreed to meet next month with the North Korean leader, Kim Jong Un, alongside the South Korean President. The meeting will be a monumental step towards détente between the nations. The US and South Korea hope that this meeting will resolve tensions over North Korea’s nuclear weapons programme. North Korea’s willingness to meet with the presidents of the US and South Korea may show the impact that the tariffs have had on the secluded economy. The sanctions were imposed in response to North Korea’s nuclear weapons testing, which are now impeding Mr Kim’s attempts to strengthen the economy through market-oriented reforms. The reforms had thus far proven beneficial to the economy, however due to the sanctions, North Korea is now running out of foreign reserves. The head of the South Korean parliamentary intelligence committee forecasts that the regime will run out of hard currency by October. Not all nations are in favour of the détente. The Japanese Foreign Minister, Taro Kono, stated that the sanctions should remain in place until North Korea “completely, verifiably and irreversibly scraps” its nuclear and ballistic weapons programmes. Japan is worried that the talks are too conciliatory towards North Korea, as it views the country as a threat
to its security. The markets reacted favourably to the news, with the South Korean Kospi index gaining 1.1% last Wednesday and the won strengthening 0.4% against the dollar. Japan and South Korea are both hopeful that they will be granted exemptions from the US steel and aluminium tariffs, which will take effect on the 23rd of March. The South Korean Minister of Trade and Industry, Paik Un-gyu, explained that if South Korea could not secure such an exemption, it would consider taking the case to the WTO and asking the international body to make a ruling on the matter. The tariffs are currently set to punish the steel industry in South Korea, which makes a substantial contribution to US domestic steel consumption. The eleven remaining signatories to the Trans-Pacific Partnership, following the departure of the US from the deal, signed a new agreement in Chile on Friday. In the midst of US protectionism, the Pacific Ocean economies have moved closer to a trade relationship that will entail a 98% reduction in trade costs. In other news, the Japanese unemployment rate has fallen to 2.4%, its lowest level in 25 years. This comes as a result of over 920,000 new workers entering the labour force due to the government’s recent structural reforms (see graph below). Daniel Blaugher
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Week Ending 11th March 2018
Australia & New Zealand After the focus last week on the stagnation of Australian wages, this week we look at the whole economy following Wednesday’s Q4 GDP results. The results show how the Australian economy is still stuck in a post-Global Financial Crisis state of low growth. The final quarter of 2017 only grew by 0.36% (in seasonally adjusted terms), which is the third worst result for the past 5 years (see graph below). Although Australia is not in a recession currently, the Australian economy has only grown at an average of 2.4% each year, which is similar to levels when the country has been in a recession. This result fell short of the 2.5% forecast, as well as the 2.8% forecasted for Q3. The slower-than-expected GDP growth is thought to have been caused by a fall in exports, despite the increase in household consumption. The two main Australian exports, rural goods and transport equipment, both fell in terms of quantity exported.
Another worrying recent development for the Australian economy is President Trump’s announcement of import tariffs on steel and aluminium. Although Australia’s exports of steel and aluminium to the US only account for approximately 5% of Australian to US exports (about AUD$500million), the proposed tariffs could lead to an escalation of tariffs across the world and potentially a large trade war. This would become a large problem for Australia as cascading tariffs would negatively impact the economy. The political and economic relationship between the US and China may be damaged in the near future. This would be a major issue for Australia as China is its largest trading partner and a prominent buyer of Australia’s food and minerals.
Abigail Grierson
Some economists fear the worst for the future of the Australian economy. These experts predict that the countries most at risk are those that avoided the Global Crisis of 2008. This includes China, South Korea and Canada, as well as Australia. Professor Keen of Kingston University has even called Australia a “zombie economy” and warns that it is very worrying that the Australian debt-to-GDP ratio has risen from 150% to 260% in the last ten years. Keen also commented: “you can’t avoid a debt crisis today only by putting off till later”.
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NEFS Market Wrap-Up
EMERGING MARKETS
Africa This week brought hopeful news in the ongoing Cape Town water crisis, as it emerged that the city may not have to turn off its water supplies if its current consumption levels are maintained. In the past 2 years the Western Cape’s water consumption has been cut by 60% to delay “day zero” – when water in the sixdam reservoir falls to a critical 13.5%. In addition to the health dangers this drought has caused, there was also fear regarding the economic repercussions of the drought. The Western Cape’s economy accounts for approximately 13% of South Africa’s national economy, hence a 1% decrease in the Western Cape’s GDP would take approximately 0.13% off the nation’s economic growth. Whilst this doesn’t seem like much, this figure becomes quite serious when we take into consideration the fact that South Africa’s GDP growth has been stagnating at around 1% for the past 2 years.
from South Africa’s struggling economy were also a contributor, given how closely linked the Namibian dollar is to the South African rand. However this week the Namibian central bank released their 2018 outlook, which estimates that economic growth will steadily improve to 1.4% in 2018 and 2.1% in 2019. The first female president of Mauritius, Ameenah Gurib-Fakim, is set to resign next week over a financial scandal. GuribFakim is currently facing impeachment proceedings over alleged reports that she used a credit card given to her by a London based charity to pay for her personal expenses. Gurib-Fakim’s resignation follows the stepping down of Mauritius’s Attorney General, Ravi Yerrigadoo, to allow an investigation into money laundering. Changu Maundeni
The good news seems to be spreading in Southern Africa, as the Namibian economy appears to be on track to recovery. 2017 was characterised by a contraction in growth, which saw an average growth rate of -0.6% as well as 3 quarters of consecutive negative GDP growth (see graph below). The low growth was mainly due to consistently low mineral prices, regional droughts and shrinkages in the construction sector. Spillover effects 8
Week Ending 11th March 2018
China This week saw China announce several of its financial targets and changes for 2018, with Premier Li Keqiang announcing China’s economic growth and budget surplus targets for this year on Monday. However trade tariffs by the United States may have an adverse impact on these targets. China has set its 2018 growth target to “around 6.5%”, which Mr Li suggests will enable China to achieve relatively full employment. The target remains in line with China’s aim to double GDP per capita by 2020 from the 2010 level. Growth reached 6.9% last year, hence exceeding the same 6.5% target and demonstrating its first acceleration in 7 years (see graph below). However economists predict the economy will lose momentum this year as performances in property and infrastructure are expected to slow. Additionally, Chinese policies will be focused on stabilising the economy to reduce financial risk, as well as reducing pollution and alleviating poverty. The budget deficit target has also been cut for the first time since 2012, reduced to 2.6% from 3% the previous two years. However China has assured that it will still adopt an expansionary fiscal policy. Finance Minister, Xiao Jie, has also announced that local governments will be issuing bonds to fund infrastructure projects.
Growing trade tensions with the US may also take their toll on the Chinese economy. On Thursday, the Trump administration put into effect tariffs of 25% on steel imports and 10% on aluminium imports. China has expressed it is “resolutely opposed” to the decision, with steel and aluminium producers urging the government to retaliate. Future contracts for key commodities, such as iron, coal, and copper, have fallen following the news. Yet economists suggest that the tariffs are unlikely to have a large effect on the economy, as exports of the two commodities only account for 3% of total Chinese exports. However it is likely that US trade protectionism will further increase, especially as President Trump aims to make China reduce its trade imbalance. Despite the tensions between the two economies, China’s exports grew by 44.5% compared to the previous year in February, its fastest pace in three years. Elon Musk, CEO of Tesla Inc, has taken to Twitter to encourage Trump to also challenge Chinese import duties on automobiles. According to Musk, “no US auto company is allowed to own even 50% of their own factory in China”. Trump responded by stating that American car companies are not treated fairly, further supporting his agenda for reciprocal tariffs. Jessica Murray
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NEFS Market Wrap-Up
Latin America This week we examine Latin America’s trade prospects in light of punitive steel tariffs from the US. On Thursday 8th March, US President Trump signed plans for a 25% tariff on steel imports and a 10% levy on aluminium imports, spreading unease regarding a possible trade war. Though Mexico is exempt from the tariffs, which will take effect in 15 days, such protectionist measures may be a threat to the elusive growth of the rest of the LatAm region, in particular Brazil and Argentina. Following Gary Cohn’s (the leader of the pro-trade fraction) resignation from the White House on Tuesday 6th, market reaction in Latin America was only accelerated by Trump’s decision to advance tariff plans on Thursday: currencies fell, together with stocks. Concerns now arise that the tariffs could lead to a diversion of steel goods from the US onto the Latin American markets. Argentinian Steel Chamber (CAA) expressed concerns that exports would be directed at Argentina in particular, as the country is a common destination for “unfair trade conditions from countries such as China, South Korea, Vietnam, Russia and Ukraine.” The Brazilian Finance Minister reacted immediately to the tariffs, denouncing the tariffs as a significant hindrance to Brazilian exports and full economic recovery. According to Brazil’s steel institute, Aco Brazil, the country is the second largest steel supplier to the US and has over 100,000 employees. The minister stated that “the steel industries of both countries complement one another”, indicating that 80% of the country’s steel exports consist of semi-finished products –
a major input for the American steel industry. He also warned on Tuesday that Brazil will take actions if necessary “in the multilateral and bilateral sphere, to preserve its interests.” The remaining 11 members of the TransPacific Partnership signed a contrasting free trade agreement deal this week. This agreement overall comprises 13% of the global economy, displaying Latin America’s potential to deepen integration through the Pacific Alliance. Chilean Foreign Minister, Heraldo Munoz, stated that the Asia-Pacific trade deal is “a strong sign against [current] protectionist pressures.” With regards to growth in the region, Chile’s central bank added to the optimistic GDP figures announced last week by reporting the largest January growth seen in two years this week. Chilean growth of 3.9%, driven by a surge in mining and manufacturing, exceeded Reuter’s 3.5% prediction. In contrast however, the opposition-led congress announced on Monday 5th that Venezuela’s economy contracted 13.2% in 2017 and the latest inflation indicator reports that prices increased more than 4,000% in the past year.
Felicia Bogdana Cornelia Ababii 10
Week Ending 11th March 2018
Russia & Eastern Europe In 2017 Romania was the fasting growing economy in the European Union, with a growth rate of 7%. This was largely due to the strong domestic consumption levels that increased 9.7% in the first nine months of 2017. Furthermore the nation’s unemployment rate dropped to its lowest level in 20 years, at just 4.9%. However on Wednesday the European Commission (EC) published their country-specific report, which claimed “Romania’s buoyant economic growth risks setting the stage for a hard landing”. The EC highlighted the unsustainable nature of Romania’s current consumption and growth pattern should the necessary reforms not take place. These reforms would largely include structural reforms and reducing the budget deficit. The EC highlighted the lack of improvements in healthcare, in the quality of education and in ensuring the implementation of tax compliance. One particularly important aspect was the “limited progress on adopting legislation to ensure a professional and independent civil service and on prioritising investment”. A strong civil service is vital to ensuring the successful implementation of government policy. A lack of trust in a nation’s civil service and legislation can therefore cause investment to dry up as business and consumer confidence drops. In relation to this, in January the government
confirmed the pursuit of a new and controversial agenda, which sparked mass protests from those who felt that the government was abusing the law. Again, this political instability and mistrust could spark fears among investors and deter inward capital flows. The EC also drew on Romania’s social problems when outlining potential risks for the future. In 2016 the nation had the highest poverty level of all EU member states, as well as high child poverty levels that are still rising. This is all despite rapid economic growth. With consumption slowing down, the government must look to sustain GDP growth through other means. The most obvious of these options is investment. Fiscal stimulus however is becoming impossible as Romania is drawing ever closer to the EU’s limit of 3% of GDP. It is therefore important that the government looks at different ways to boost private investment – such as reforming legislation and implementation. The most important aim for the government should be to boost confidence in Romania’s goods and money markets, as well as regain trust from businesses and consumers.
Laura Leng
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NEFS Market Wrap-Up
South Asia This week Thailand has faced major issues on both a trade, inflationary and ethical front, with some of its top trading partners, the US and the EU, showing signs of fluctuating interest in their Thai trade. The Bank of Thailand’s Senior Director, Don Nakornthab, has reported that Thailand is currently facing trade risks due to the new US policy regarding steel and aluminium. With exports of goods and services constituting 70% of Thailand’s GDP, and Thailand’s trade surplus with the US reaching $20billion last year, any potential trade war would be a serious issue to deal with. After some inflationary pressure, Thailand is still considering undertaking monetary policy to facilitate expansion and bring inflation to target levels, but this will depend on how domestic demand fluctuates. Thailand’s central bank may consider lowering its inflation boundary targets of 1%-4%, due to the influence of an ageing population and the impact of ecommerce on prices, but the target must be reached for this to be considered a viable choice. Thailand’s fishing industry has seen some improvements on its ethical front, but forced labour, violence, and trafficking are still very big issues. These issues need to be addressed however as fishing is one of Thailand’s biggest revenue streams that generated US$6.6billion in 2014 and
currently employs more than 600,000 people. Yet if companies such as Tesco, Costco, and Nestle stop buying Thai products due to the ethical implications, it could spell serious trouble for the country. At the moment, only 29% of fishermen and 56% of workers at seafood processing plants have reported to not have experienced any indicators of forced labour. Widespread issues regarding minimum wages and issued contracts are still rampant in the industry. If this problem is not dealt with swiftly and correctly, Thailand could lose many of its most important buyers, thus causing it to lose much of its relevance within the highly competitive economic ecosystem in South-East Asia. Nevertheless, Thailand remains one of Asia’s best-performing and fastestgrowing economies. Last year the Thai baht appreciated around 12% against the dollar, making it the second-best performer in the Asian currencies basket as tracked by Bloomberg. Thailand’s government should thus consider dealing with its inflation and export threats as the top priority.
Mario Pucinelli Filho
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EQUITY AND DEALS
Week Ending 11th March 2018
Financials As trade tensions intensify, the start of a period of slower global economic growth could represent a concern for investors worldwide. US stocks dropped after Gary Cohn, US President Donald Trump’s top economic adviser and former Goldman Sachs banker, announced his resignation on Wednesday. Investors are deeply concerned about the impact of new restrictive trade policies. Gary Cohn however was identified as a crucial opponent of tariffs, pushing for a more pro-trade stance. Yet signs that the Trump administration could soften plans for import tariffs on steel and aluminium have helped to improve the sentiment across investors. Per Hammarlund, Chief Emerging Markets Strategist at SEB, stated: “The tariffs and a trade war would hurt the U.S. itself – that’s why the market doesn’t really believe it will happen”. Asian stocks jumped after the tariff exemption and “softening” announcement, with the Hong Kong’s Hang Seng index climbing by 1.1%, Tokyo’s Topix index rising by 0.6% and Sydney’s ASX 200 going up by 0.6% (see figure below). As the Chinese People’s Political Consultative Conference progresses, clear signals are being given about industries that are going to benefit from new policies and the ones that are not. Stocks related to the new plans of the Government are seeing a boost,
particularly industries such as defence, infrastructure and energy. However telecom stocks, such as China Mobile Ltd. and China Unicom Hong Kong Ltd., fell after the Government’s announcement to cut service fees by at least 30%. The pan-European FTSEurofirst 300 index jumped by 1.03% as the ECB President Mario Draghi showed continued support of the protracted stimulus and announced that the ECB is willing to maintain a “reactive” policy. Chris Scicluna, Head of Economic Research at Daiwa Capital Markets, stated: “They toned down the easing bias but there is still a willingness to ease and the tone of Draghi’s comments was still dovish, stressing that there is still not a convincing uptrend in inflation”. Whilst the Italian election outcome was in line with expectations, market turbulence could still be prompted by the formation of a populist coalition between Five Star Movement and League. Potential movements in markets are expected as a consequence of the Bank of Japan’s monetary policy decision and after the release of U.S monthly payroll data. Giovanni Cafaro
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NEFS Market Wrap-Up
Technology & Health Technology continues to climb, as does healthcare – but not without a degree of backlash for the latter. Both the Nasdaq Composite and S&P 500 are still rising – moving 1.8% and 2% respectively in the past week. Top performers include: Netflix, up 73%; Amazon, up 35%; Alphabet (Google’s parent company), up 10.9%; and Apple, up 6.4%. Snapchat, even in light of its ‘redesign’ scandal – in which it saw huge backlash towards an interface update – is seeing an 8-month-high stock price of around $18 a share. However this is still lower than its IPO share price of $24. The redesign scandal wiped $1.3bn from Snap. Inc’s market cap, but recent download increases have caused the stock price to rebound. Dropbox should perform more successfully following a potential IPO, announced 2 weeks ago. Standing as one of the most anticipated technology IPOs for several years, it has raised more than $1.7bn from venture capital investors and debt funding. According to a BusinessWire report, the cloud storage industry (in which Dropbox operates) is expected to grow at a substantial rate of 30% annually over the next few years. It also recently announced partnerships with Google and Salesforce in order to strengthen its IPO prospects.
Another company recently reaching health industry headlines is Cigna, who has just agreed to buy the largest pharmacy benefit manager in the USA, Express Scripts Holding. This is very important, as the outcry against high drug prices in the USA has intensified greatly in recent years. Such an acquisition will therefore see increasingly expensive treatment costs as rivals become more aggressive with tactics to control costs through passing them onto consumers. Last year Anthem’s planned takeover of Cigna was blocked due to concerns it would undermine competition, which is extremely important in the pharmaceutical industry. Another controversial healthcare development in the USA concerns the recent Republican tax cut package. The cuts will add billions of dollars to the profits of major USA healthcare providers. As measured by Axios, 21 of the largest healthcare companies within the USA collectively expect to gain $10 billion in tax savings in 2018 alone. Erik Gordon, a healthcare business professor at the University of Michigan, says that the tax law is “unlikely to lead to significant, longlasting savings for patients”. Several corporations, including Johnson & Johnson and Abbot Laboratories, say that they will use their billions in tax savings to pay off accumulated debt.
Matthew Chapman
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Week Ending 11th March 2018
Oil, Gas & Industry The term “blue chip” comes from the game of poker, where a blue chip holds the highest value. As such, blue-chip stocks are considered highly-valued and supreme long-term investment vehicles. Blue chip stocks are typically well-known and well-established companies, such as Royal Dutch Shell Plc (LSE:RDSB). Shell has a staggering market capitalization of £190bn, which is about the size of HSBC holdings and Barclays combined. It has also been offering its investors an above-average dividend yield of 5.93%, with Shell even managing to maintain a dividend yield of at least 5.5% throughout the oil price slump in 20142016. Such dividend yields become attractive to investors given that the government bond yields have been stuck below 2% for much of this decade. As a stock, Shell has unfailingly delivered high total returns that have consistently beaten the FTSE 100 Index. While the oil price slump over the past few years led to Shell’s underperforming share price, since 2010 Shell has nevertheless delivered an average return of 20%, as compared to the FTSE 100’s 13%. Whilst we are running out of superlatives to describe Shell as a stock investment, this oil behemoth is not resting on its laurels and has been making strategic acquisitions in response to the seismic changes in the industry. Shell recently made headlines on the 8th March 2018, when it teamed up with US private equity firm, Blackstone Plc, to make a £10bn takeover bid of BHP Billiton’s US shale assets. BHP’s US shale assets include the prized oilfields in the Permian Basin (see Figure 1) located in Texas, US.
The 2014-16 oil price crisis caused dozens of US shale companies to file for bankruptcies, hence forcing the surviving US oil companies to adopt more efficient business models. The Financial Times recently published an article on the 4th March 2018 that highlighted the productivity increase in the US shale oil industry (see Figure 2). Higher productivity means it is now possible for companies to produce more for the same investment. Joseph Triepke of Infill Thinking recently stated: “Today the Permian is busier than ever; it’s like oil was like hundred bucks again.” Coupled with the recent rebound in crude oil prices to just over $60 a barrel, Shell’s intended acquisition of BHP’s US shale assets cannot be timelier. So, investing in Shell can also not be timelier. Mingli Yong
Figure 1
Figure 2
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NEFS Market Wrap-Up
Deals This week we will be focusing on Cigna’s $56bn acquisition of Express Scripts and the GKN sealing a $6bn deal with Dana to combine its automotive business. The health insurer Cigna has announced its $67bn takeover of Express Scripts, a large pharmacy benefits manager. Mergers and acquisitions activity has been running at a record pace this year within the healthcare industry, with analysts stating that the rapid consolidation is in response to the threat posed by Amazon. Amazon is currently looking to enter the healthcare industry in an attempt to tackle the soaring costs of drugs and medical procedures in the US. Express Scripts was the largest independent pharmacy benefits manager, which acted like a middleman during negotiations between drug makers and those who buy the medicines. Through the acquisition, Cigna will hope to increase its scale, so that it can drive a harder bargain when buying drugs and services. Once the transaction is complete Cigna shareholders will own about 64% of the company, while Express Scripts investors will hold the remaining 36%.
GKN, the British automotive and aerospace components company, has made a $6bn deal with Dana, which is an American supplier of drivetrain, sealing and thermal management technologies. Investors in GKN have long pushed for a move to separate the automotive and aerospace business. This deal therefore means that GKN will become smaller and more focused on the aerospace industry, where they are a significant supplier to both Boeing and Airbus. This deal also has implications for Melrose Industries, a company specialising in acquisition and performance improvement. Melrose had made a hostile £7bn bid for GKN, which now looks uncertain. As stated by the companies involved, combining GKN’s vehicle drive businesses, which last year generated £5.3bn in sales, with 104-year-old Dana, will bring together companies with complementary portfolios. GKN has a significant presence in passenger cars and light vans, with half of the world’s cars using GKN’s powertrain systems, whilst Dana has a strong presence in commercial and off-highway vehicles Abdul Akhtar
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Week Ending 11th March 2018
COMMODITIES
Energy This week Ofgem, the UK government’s energy regulator, has launched its toughest ever plan to crack down on energy network profits, with the aim to save households £5bn on energy bills in the next 5 years. This amounts to a saving of £15-25 a year per household. The plan wants to reduce the amount that consumers contribute to energy network investments via their bills, hence greatly reducing the profits of energy network companies. A report by Citizens Advice in 2017 says that energy companies have made £7.5bn in ‘unjustified’ profits. Jonathan Brearley, a senior partner at Ofgem, expressed his view that “consumers must be confident they continue to get good value for money for the services the networks deliver”. On the other hand, the Energy Networks Association thinks that ‘balanced regulation is crucial’, as the proposed regulation would hinder crucial infrastructure investments. On March 7th, the US Energy Secretary Rick Perry called for a new era of “new energy realism”, which would be fuelled by fewer regulations and Trump tax cuts. This “new energy realism” emphasises prioritising innovations such as hydraulic fracturing over regulation, in exchange for ‘energy security’ and ‘energy dominance’. With crude oil prices now standing above $60 per barrel, the resurgent shale gas
industry makes the US one of the world’s top oil producers. ExxonMobil and Chevron might also redirect funds from their offshore operations to fracking. However President Trump’s new tariff on steel might put this oil boom into stagnation. There are stringent technical requirements for the steel grade that is currently used to build oil pipelines – at the moment, around ¾ of the pipelines in the country are made from imported steel. As a result of the steel tariffs, it is therefore expected that oil production will fall, with pipeline companies passing on the cost to oil and gas producers that use their lines. For example, the Dakota Access Pipeline, a mega infrastructure project advocated by Trump, would see its cost rise by $300m. Having overtaken Saudi earlier this year in terms of oil production, it was estimated that the US would also pass Russia by the end of the year and become the largest oil producer in the world. However this figure will need to be revised given the inevitable disruptions in pipeline construction. Russia and OPEC could consequently be the biggest winners from this new tariff, as their efforts to drive up oil prices by restraining supply were always threatened by the increasing US oil supply. Yet with this new policy in place, oil prices could be even higher in the future. Ang Gao 17
NEFS Market Wrap-Up s.
CURRENCIEs
Major Currencies The U.S. Dollar (USD) saw some interesting short-term movements this week, following a second week of indecisive price actions. USD weakness showed at the start of the week as Trump’s proposal to impose tariffs on aluminium and steel last Thursday extended declines in the Greenback. On Tuesday Gary Cohn, Director of the National Economic Council and chief economic advisor to President Trump, announced his resignation. Cohn, a supporter of free-trade, made his decision following Trump's cancellation of a meeting with end-users of steel and aluminium, which Cohn had arranged in an attempt to dissuade the president from the planned tariffs. This had an immediate impact on the Dollar. The ICE U.S. Dollar Index (DXY) fell 0.45% on Tuesday alone, reaching a low of 89.41 for the week. But on Friday the country's nonfarm jobs report came out better than expected. Chris Low, chief economist at FTN Financial, stated: "The payroll gain was huge, the biggest in over a year and a half. But wage pressures retreated, and the unemployment rate was stable thanks to a surge in participation and immigration." This news helped the Greenback climb back above 90.00 on the DXY to 90.12, up 0.17% from last week. Meanwhile the pound (GBP) rallied a bit during the week, gaining 0.33% against
the dollar on Friday, with the GBP/USD currently at 1.3854. However don’t expect any major changes in sterling. Unless there is a firm shift from either side of the Brexit negotiating table, Sterling will remain rudderless. Next week produces a rare occasion where the UK data calendar is empty, with the only event for Sterling traders to keep an eye out for is the Spring Budget Statement on Tuesday. However this data-free week may heighten the GBP, since any action will be dictated by the other side of any sterling crosses. President Trump continues to stoke fears of a trade war and the Euro is still trying to decide if this Thursday’s ECB meeting was mildly hawkish or dovish. There is potential for volatility in sterling pairs, but sterling won’t have anything to do with it. Meanwhile it was a lacklustre week for the Euro, after mixed signals from the ECB meeting and a strong performance from the populist parties of Italy. The single currency has fallen almost 2% against the dollar since hitting $1.25 in early February. Policymakers in the ECB meeting also didn’t fulfil the hope of providing a clear signal regarding the path of future monetary policy.
Edward Turner
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Week Ending 11th March 2018
Minor Currencies Following on from poor performance last week, the Hong Kong dollar fell to its lowest point in just over 33 years against the US dollar, following a constant gap between interest rates in the US and Hong Kong. The afternoon of March the 5th saw the Hong Kong dollar marginally hit an intraday low of HK$7.883 per $1. The Hong Kong Monetary Authority, established in 2005, allows a trading range of HK$7.75 – 7.85, which this week’s prices still operate in. However, given the prolonged period of gaps between interest rates, there is concern these caps may be breached. As news developed that there had been significant diplomatic progress between North Korea and South Korea, the Southern Korean Won rose higher against the US Dollar (see graph below), as markets also exhibited signs of the tension easing between the two nations. The news came out on the 6th March, when
North Korea proposed that they would possibly agree to terminate their nuclear programme with the proposal of a security guarantee. Both Moon Jae-in and Kim Jong Un, the respective leaders of South and North Korea, also agreed to a summit at the end of April this year. The won jumped 1.1%, with $1 being worth 1065.9 won. Monday provided no relief however for the Canadian dollar (CAD), as the North American currency fell further to an alltime low since July 2017 of CAD$1.30. Later on, the CAD fell to another low of CAD$1.3001 per US dollar, equal to a fall of 0.9%. This was trigged by the country’s slowing economy, concerns regarding NAFTA, and worries over President Donald Trump’s proposed import tariffs on steel and aluminium.
Sarren Sidhu
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NEFS Market Wrap-Up
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Charlotte Alder at calder@nefs.org.uk. Sincerely Yours, Charlotte Alder, Director of the Nottingham Economics & Finance Society Research Division
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