Week Ending 22nd October 2017
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 Middle East
Equity and Deals 14
Financials Technology & Health Oil, Gas & Industrials Deals
Commodities 18 Energy Agriculture
Currencies 20
EUR, USD, GBP AUD, JPY, Other Asian
2
Week Ending 22nd October 2017
MACRO REVIEW United Kingdom This week saw important data released for two key macro indicators of the UK economy: unemployment and inflation. This new data could shed light on potential actions to be taken by the Monetary Policy Committee, in regards to altering the base interest rate on November 2nd 2017. Unemployment in the UK is now at 4.3%, the lowest it’s been since 1975 (see graph below) according to the Office for National Statistics. This is consistent with the recent trend seen of a rising number of people in work. Notably for the period June to August 2017, the unemployment rate for women fell to 4.2%, its lowest point since records began. This all suggests a healthy job market.
Figures for the Consumer Price Index (CPI) were released on Tuesday, which report that CPI has reached its highest level since April 2012, of 3% inflation. Conversely wage growth has stayed
constant at 2.1%, resulting in real incomes continuing to be squeezed. A major cause for rising inflation is the fall in the pound’s value following the Brexit referendum, as well as rising transport and food costs. As for the Bank of England base interest rate, analysts are forecasting a rise on November 2nd from 0.25% (the lowest it has ever been) back up to its pre-Brexit level of 0.5%. It is suggested from the pattern of trade in interest rate derivatives that there is an 82% probability of the base rate increase. The increase could be beneficial for the economy, through its potential to curb inflation by encouraging people to save. The EY ITEM Club however are warning against the rate increase, suggesting growth is not strong enough to support it. This is mainly due to weak business confidence and a persistently weak pound amidst uncertainty over Brexit negotiations. In regards to progress made in the Brexit negotiations, it should be noted that on Friday the pound was up 0.1% on the dollar at $1.3170. A final development this week was a sharp fall of 0.8% in UK retail sales. Combined with a rise in the base rate, this has the potential to dampen the spirits of the retail industry as it moves into the Christmas period. Deevya Patel 3
NEFS Market Wrap-Up
United States In Washington, the senate took a big step towards major tax reform. Following the 51-49 vote, President Trump’s promise of a tax overhaul now only requires Republican Party (GOP) support. The budget resolution that was passed isn’t binding, but a blueprint of trillions of dollars in federal spending over the next decade. But most importantly for the GOP, the blueprint unlocks a special parliamentary procedure which requires only 50 senate votes to cut taxes by $1.5tn. Trump wrote on Twitter that: “This now allows for the passage of large scale Tax Cuts (and Reform), which will be the biggest in the history of our country!” The stock market’s run shows no sign of slowing down. After the vote in the Senate the Dow (+0.7%) and S&P 500 (+0.5%) both notched their fifth straight record closing high; the Dow's latest record close made it the most records reached for the index in a single calendar year since 1995. Optimism for Trump’s tax plan was also shown on the bond market where yields rose and in the currency market where the US dollar strengthened.
people are saying it’s down to two -- Mr. Taylor and Mr. Powell” for the top job at the Federal Reserve. However, he doesn’t rule out Yellen for re-nomination, of whom he said: “I like a lot, I really like her a lot”. Yellen ends her first term in February, however the White House has said that it is likely the President will make a decision before he leaves for Asia in November. In other news, and seeming not to impact market confidence, are the released figures on the US budget deficit for the fiscal year 2017 (see graph below). The federal government ended the fiscal year with the largest budget deficit since 2013, under President Obama. This year’s deficit of $666 billion, amounting to 3.5% of GDP, is up $80 billion from the previous year. Edward Turner
Meanwhile, the Federal Reserve chair, Janet Yellen, warned that there is an “uncomfortably high” chance that unconventional policies will have to be used again in an economic downturn, even in the absence of a recession. This comes after Trump suggests that “most
4
Week Ending 22nd October 2017
Europe This week we focus on the Catalan crisis, alongside Macron’s stance on EU trade deals and Mario Draghi’s latest speech.
protectionism, but conjointly overcome national political and economic sensitivities.
One of the most serious crises in Spain's recent history is coming to its crucial phase. The intention of the Spanish Prime Minister, Mariano Rajoy, is to imminently impose direct rule on Catalonia by invoking Article 155 of the constitution. This will bring tensions between the Catalan president, Carles Puigdemont, and Rajoy to a point of fracture during next week. According to the Financial Times, Spain’s government informed the European authorities that they expect economic growth of 2.3% next year, curbing their expectations from the previous figure of 2.6%. The region of Catalonia, which represents one-fifth of the Spanish economy, has significantly affected slower growth due to the lower domestic consumer spending as a result of the crisis.
The European Central Bank (ECB) president, Mario Draghi, urges for structural reforms to boost growth further (see graph below), which may be threatened due to the forecasted rise of interest rates. At Draghi’s last conference in Frankfurt, he stated: “With monetary policy being accommodative, we now have a window of opportunity to take these measures”. He further stated that Eurozone wages were rising slower than the ECB had expected due to security being preferred to rising wages. With over 2 trillion Euro’s worth of bonds already bought, Draghi is expected to reveal the ECB’s intentions on quantitative easing at the next council meeting on October 26th 2017. According to Reuters, the ECB will likely prolong the stimulus by extending asset purchases at lower volumes until September or December 2018. A slower taper is regarded as necessary by policymakers and investors as it will continue to protect the Eurozone from uncertainty and low inflation.
In the meantime, the French leader, Emmanuel Macron, is pushing for a harder approach to free trade talks and is demanding “an overall vision to find a balance between trade openness and protection”. In his opinion, rapid progress in negotiations could hit French farmers and workers adversely, and could disrespect the EU's high environmental and health standards. Yet the European Commission president, Jean-Claude Juncker, is facing the challenge of accelerating the ratification of future trade deals before standing down at the end of his term in November 2019. The task to elevate the EU as a leader of global trade not only signifies its intention to fight against the phenomena of populism and
Giovanni Cafaro
5
NEFS Market Wrap-Up
Japan & South Korea The South Korean economy, which is the 11th largest in the world, is currently undertaking labour productivity reforms as one of its main methods to overhaul its domestic economy. According to the organisation for Economic Co-operation and Development (OECD), South Korea’s productivity has slowed considerably in recent years, with the workforce producing very little added value despite working long hours. In 2015, South Korea’s Gross Domestic Product value per hour worked was $31, making it the fifth-lowest among the OECD members. While labour-market efficiency is a main concern for the Seoul government, South Korea’s central bank raised its growth forecast for the country on Thursday, expecting Asia’s fourth largest economy to expand 3% in 2017, up from its earlier prediction of 2.8%. President Moon Jae-in has tried his best to energize the sluggish domestic economy, most notably by increasing household income to hence increase private consumption. This was seen through the 10-Day National Holiday given to overworked citizens in early October, in the hope that they would travel around the country. However the Bank of Korea revealed that Koreans spent $4.18 billion abroad in the last quarter, thus showing the failure of the initiative.
Since Japan’s Prime Minister Shinzo Abe took office in 2012, his Abenomics programme to jumpstart Japan’s economy out of two decades of stagnant growth has focused on three aspects: negative short term interest rates for monetary policy, fiscal stimulus with government spending focused more on infrastructure and fewer mechanisms in structural reforms. Abe’s supporters seem to be confident of the effectiveness of Abenomics. Exports have done very well, growing by double digits for a third straight month in September, up by 14.1% from the year before. While this is good news, Yoshiki Shinke (Chief Economist at Dai-ichi Life Research Institute) stated that “The pace of growth isn’t speeding up, but the global economy’s doing well so it’s not surprising that Japan’s exports are increasing”. Even though unemployment levels are almost at a four-decade low, salaries haven’t increased much over the last four years, with the wages of full time workers rising an average of 0.7% in August. Thus we see the vicious circle that even though companies are doing better, it is mainly because Japanese exporters are selling well overseas rather than into the domestic market. Hayati Sharir
6
Week Ending 22nd October 2017
Australia & New Zealand The New Zealand election saga finally ended on October 19th, resulting in a coalition government being formed after a month of uncertainty. The markets have not reacted favourably to the new Labourled New Zealand First and Green Party coalition, amid concerns of a shift away from the centralist policies that have provided stability for the economy thus far. The new government is yet to outline its updated policies. This uncertainty has resulted in the New Zealand Dollar falling to a five month low compared to the USD, trading at 0.7012 USD (at the time of writing). This is fuelled by comments made by New Zealand First’s leader, Winston Peters, that the party will steer away from the “irresponsible capitalism” that has been implemented since the 1980s and that neo-liberalism is a “failed economic experiment”. Peters has demanded more protectionist measures to be implemented and has promised to raise the minimum wage to $15. Indicators also suggest that the government will massively increase fiscal spending. This is all causing great concern to businesses and investors, with these policies most likely to cause an increase in business costs as a result of higher inflation. This concern has been heightened by the inflation report on Tuesday by the Reserve Bank of New Zealand which reported that Q3 inflation from the Consumer Price Index rose to 1.9%, up from 1.7% the previous quarter, as shown in the graph below. This was above the expected rise to 1.8%, and was largely driven by an
increase in housing prices and the cost of agricultural goods. Meanwhile, the economic indicators in Australia have been positive. The Australian Bureau of Statistics released the unemployment figures on October 19th, illustrating that unemployment is at a four year low. The unemployment rate decreased from 5.6% in August to 5.5% in September, resulting in twelve consecutive months of employment rate improvements. However, real wages have not improved and this is largely down to the high business tax rates companies face. The Business Council of Australia has warned that the 30% business tax rate will prevent Australian business from competing internationally as it is the fifth highest tax rate in the OECD, where average tax rates are 24%. Consequently Australia may struggle to see the same levels of growth in the long run as investment falters.
Nicholas Gladwin
7
NEFS Market Wrap-Up
EMERGING MARKETS
Africa In recent years Ethiopia has become increasingly financially unstable. The source of this instability is an ever-growing trade deficit. In 2011, imports skyrocketed from $8.83bn to an astonishing $19.1bn in 2016. Weaker commodity prices meant exports grew at a much slower pace and weren’t able to keep up, hence falling from $5.44bn to $1.71bn between 2014 and 2016. This accumulated in the nation’s capital, Addis Ababa, which earned just $2.9bn in the 2017-18 fiscal year, compared to its $4bn target. Consequently, the Ethiopian government’s announcement to devalue the Ethiopian Birr by 15% came as no surprise this week, following pressure from the IMF and World Bank. By doing so, the nation’s exports will become cheaper and hence more competitive in international markets while imports will become more expensive and less competitive. The resulting boost in exports and fall in imports will thus close the trade deficit. This decision could not be more important for Ethiopia, though whether this policy is to be successful is yet to be seen. Elsewhere, earlier this month, Sudan was released from the constraints of the 20year trade sanctions put in place by the United States. This follows a clear commitment to push towards domestic stability, through government intervention
in Darfur and against the Lord’s Resistance Army in cooperation with the US. The lifting of these sanctions is diplomatically and economically vital for Sudan. The original sanctions were put in place in 1997, which consequently pushed up debt and inflation (currently standing at 32.86%) and crippled the banking system. Pressure mounted further in 2011, when South Sudan (where most of the nation’s oil reserves reside) seceded and the government lost a large portion of its domestic and foreign exchange income. The resulting tariffs and bans on imports only increased inflation, rather than resolving the lack of foreign reserves. It is hoped that as a result of the lifting of these sanctions and the backing of the US, confidence in the Sudanese banking system will slowly be restored. Positive signs of the confidence to come have already been seen, with Sudan receiving its first U.S. dollar transfer in 20 years last week. As such, the Sudanese pound has since fallen against the dollar. To counter this, the national government has refocused its energies on reforming the state and civil service, though whether these reforms will be effective is yet to be seen. Laura Leng
8
Week Ending 22nd October 2017
China The Chinese Communist Party’s (CCP) 19th Congress will end on Tuesday 24th October, where President Xi Jinping is expected to take a commanding hold of a second term in office. There is a wide expectation that Mr Xi’s post-congress rule will focus on reforms. Likely areas for these policies are given below in the context of the president’s initial term. Mr Xi will need to transition the economy from a rapid rate of economic growth to what the CCP calls the “New Normal,” or a slower, more stable pace for the economy. Annual GDP growth has fallen to between 6.5 and 7%, which is more sustainable compared to the pre-crisis annual growth rates above 10%. Economic growth for 2017 is likely to outstrip the pace set in last year, potentially ending a six-year decline in the rate. Since January, the economy grew at an annualised rate of 6.9%, relative to 6.7% annual growth in 2016. Yet, this growth is undercut by public investment and exports which have persisted as abnormally large drivers of Chinese economic growth. A shift to slower, consumption-led growth is mandated, and should be supported by an increased focus on new technologies, particularly electric vehicles. For instance, last month the government announced that automakers in 2019 will need to raise new electric vehicles sales to 10% of total auto sales. Mr Xi’s China has been staunchly in favour of international trade. According to a study by the Nikkei Asian Review, the number of discriminatory trade measures against Chinese commercial interests has increased since 2013, relative to the
number of measures recorded during the period of 2008-2012. Yet, the amount of protectionist legislation created by China has decreased compared to 2008-2012. Mr Xi has moved to foster economic cooperation in the Asia-Pacific region, most predominantly through the Asian Infrastructure Investment Bank, and the Belt and Road infrastructure and trade initiative. At the start of Mr Xi’s regime, he promised to reform China’s state-owned enterprises, which are more inefficient than private firms. The graph below from the FT displays the gap between the return on assets for private and public enterprises, which has persisted to date. Reforms have often involved reducing excess capacity via closures or mergers of weaker companies. Some attempts have been made to introduce mixed-ownership, where the enterprises accept private capital. If the CCP wants these enterprises to guide the economy, more efforts here should be expected. Daniel Blaugher
9
NEFS Market Wrap-Up
Latin America This week saw the end of the North American Free Trade Agreement’s (NAFTA) fourth round of negotiations and data released on Brazilian economic activity. There was also a report conducted by the Economic Commission for Latin America and the Caribbean (ECLAC) and the International Labour Organisation (ILO) on the region’s urban unemployment. In the past month, the Mexican peso has seen a continuing devaluation against the US dollar, with the start of the week seeing a five-month low at approximately MXN 19.1. This devaluation is mostly attributed to speculation surrounding the future of NAFTA. The excessive demands of the Trump administration regarding the agreement have caused a great deal of uncertainty, as Mexico and Canada indicate US proposals are too extreme. Mexico sends approximately 80% of its exports to the USA, suggesting the collapse of NAFTA would be very detrimental to its economy. However, the fourth round of talks ended on Tuesday in a stalemate, with negotiations resuming in November and being extended into 2018. This saw the peso surge, as seen in the graph below. Although there is still uncertainty surrounding the trade agreement, the strengthening of the peso demonstrates the hope of its survival.
Amazon, which currently only sells books in Brazil, officially announced on Wednesday its aim to create a third-party electronics marketplace. The news was reported by Bloomberg last week, and caused dramatic declines in share prices of e-commerce rivals, with B2W Cia Digital’s price falling by around 20% in a week. A joint report between the ECLAC and the ILO predicts urban unemployment to continue rising in this region due to low economic growth and poor labour conditions. It is estimated that the rate could reach an average of 9.4% this year, which would be a 0.5% increase from 2016. The main influences behind this trend are Brazil’s weak labour market performance and the lack of creation of formal jobs in the first half of 2017. Contrary to this report, Mexico’s September unemployment rate figures were released this week and show a fall to 3.6% compared to 4.1% in 2016. Jessica Murray
After two consecutive months of growth, Brazil saw a contraction of 0.38% in its month-on-month economic activity in August. This contraction was driven by weak performances in the industrial and retail sectors, with volumes falling by 0.8% and 1.0% respectively. In other news, Brazil has seen a decrease in retail stock prices following the expansion of Amazon’s operations in the country. 10
Week Ending 22nd October 2017
Russia & Eastern Europe This week saw new data released from the World Bank regarding economic growth in Poland. Poland is projected to reach growth levels this year higher than expected, but growth is expected to fall in 2018 as economic activity in Europe stagnates. The World Bank expects Poland’s GDP growth to reach 4.0% by the end of 2017, a 1.3% increase in growth from 2016. The projected growth for Poland in May 2017 was 3.3%, as seen in the graph below. However Carlos Piñerúa (World Bank Country Manager for Poland) has stated that by keeping inflation and its fiscal deficit under control, Poland has managed to surprise many analysts and their previous predictions. According to the World Bank, however, Poland’s economy is likely to face some challenges in the mid-term arising from fewer people in its workforce. This is due to a low average retirement age of 67 years, lack of investment in human capital and immigration, and the preference of flexible work hours by the younger working population.
workers to generate products. This will deal production a significant blow, causing further adverse disturbances in terms of lower tax revenue, stinted GDP growth and potential negative repercussions in Poland’s Balance of Payments. Secondly, whilst new technologies present more growth opportunities to Poland, Hans Timmer (World Bank Chief Economist for Europe and Central Asia) warns that this will come at the cost of more flexible labour contracts and uncertainty. Overall, immigration will be Poland’s main obstacle to overcome. It is one of the main factors affecting Poland’s labour, trade, Foreign Direct Investment and the mixing of cultures and ideas, which could eventually lead to great technological advancements and growth. Poland should therefore implement policies that support further integration, thus easing immigrants into the country. Mario Pucinelli Filho
Over the course of the last 15 years, the total International Migrant Stock of Poland (which measures the number of immigrants in a country, including refugees) has decreased by almost 26%, from over 820,000 immigrants in 2000, to just under 620,000 in 2015. Furthermore, the percentage of the workforce in Poland consisting of people aged between 15 and 24 has decreased from 33.58% in 2012 to 32.83% in 2015. This may seem harmless at first, but when coupled with the decreasing number of immigrant workers living in Poland, this could result in two major issues for its economy in the mid-tolong term. Firstly, there will be fewer 11
NEFS Market Wrap-Up
South Asia This week we focus on the Indian Government’s decision to adhere to its Fiscal Deficit Target of 3.2% of Gross Domestic Product (GDP) after the announcement in September of the deceleration of growth in the economy in the first quarter of the year. This news comes from comments made this week by Surjit Bhalla (a member of the Indian Economic Advisory Council) to Narendra Modi (India’s Prime Minister). Bhalla stated on Tuesday that he assumes India will stick to its Fiscal Deficit Target as it has done in the last three years. In addition to this, the Government plans to introduce an economic stimulus package of almost 500bn Indian rupees, aimed at boosting spending and employment. The Government also intends to recapitalize the banks and financial institutions in India by selling off certain Government stakes in lenders. Such a huge stimulus would increase India’s current fiscal deficit to 3.7% of GDP and boost economic growth, which has reached a three year low of just 5.7%. One large contributor to this slowdown of India’s economic growth is the recent decline in India’s rate of investment. Ten years ago, the Gross Fixed Capital Formation (GFCF) rate was at almost 40%, however this year it is only 27.5%.
This decline in investment comes solely from deteriorating levels of Private Sector investment, with Public Sector investment actually seeing a small increase. However the Government is now experiencing large funding issues, with Modi’s Government having almost used up its budget for the year. Due to the slowdown in the economy, tax revenues are likely to be even lower than expected. This will all ultimately make boosting investment levels extremely difficult. However, it is not all bad. Bhalla was heard saying this week that he is ‘more optimistic on the economy than [he] was two weeks ago’. Similarly, last week’s industrial output and export data could prove that the extent of the slowdown was exaggerated. Going forward, India’s main priorities have to be recapitalizing the banks and stimulating public investment. The stimulus package should provide a boost to investment and growth, yet perhaps a slight deviance from the deficit target would not be so terrible. However growth needs to be maintained over a length of time, hence the Indian Government must find a solution that is sustainable. Abigail Grierson
12
Week Ending 22nd October 2017
Middle East This week will be focused on the International Public Offering (IPO) of Saudi Aramco, the state-owned Saudi Arabian Oil Company, and why Saudi Arabia has considered now shelving the plans. Saudi Arabia plans on an international listing for a 5% stake in Saudi Aramco, which has been billed as the largest ever floatation. The sale is intended to realise a large amount of money, with Mohammed bin Salam, the Crown Prince, claiming that the company could be worth $2tn. The money attained would be vital for the Saudi Arabian economy, which is currently experiencing an economic recession. Hence the government is under great pressure to increase investment and ease the austerity measures taking place. The money would also be used to further renovate the Saudi Arabian economy and reduce its dependency on oil revenue. However Saudi Aramco is contemplating abandoning the international listing in favour of a private share sale to the world’s biggest institutional investors and sovereign wealth funds. According to those familiar with the IPO arrangements, talks about a private sale to foreign governments such as China and other investors have gathered pace. Furthermore, there are growing concerns in regards to the feasibility of an IPO. A
public listing would require a transparent and comprehensive account of the company’s assets, yet Saudi Aramco’s internal finances and operations have been masked in privacy for decades. There would also need to be a transparent decision making process, so that the shareholders could know what was being decided and why. Another major reason in favour of a private sale is politics. Saudi Arabia is looking to gain more allies and be less dependent on the US, who wants to end all involvement in foreign wars and has become more erratic under Donald Trump. The most likely buyers of a private sale would be China. This makes logical sense considering that they are a major importer of crude oil from Saudi Arabia and are an economic powerhouse across Asia. However no decision has yet been set in stone. Whilst there are many cumulative reasons for dropping the public sale, the IPO could still go ahead in 2018. If the plans do get shelved, they will most likely not be abandoned but delayed for 2019 or beyond. Abdul Akhtar
.
13
EQUITY AND DEALS NEFS Market Wrap-Up
Technology and Health Tech firms were one of the leading causes of the Dow Jones Industrial average hitting a record 23000 points. But on a more focused scale, interactions between leading firms in the economy pose interesting ramifications for the future. In a battle of the ride-sharing behemoths, Lyft and Uber, the power could be shifting. Lyft has just secured a $1bn investment from a Google-led consortium, CapitalG. While Lyft has an $11bn estimated current worth and lies far from Uber at $70bn, Uber must be wary. CapitalG operates under chairman David Drummond, who in 2013 was interestingly a member of Uber’s board. He plans for competition in the self-driving space with Uber, while Uber CEO Dara Khosrowshahi prepares Uber financially for an IPO. Lyft has not endured the controversial CEOs or sexual harassment scandals Uber has. And, with Uber’s loss of a London license, Lyft’s plans to enter the London market could materialize well. In the past few months, Apple has seen some volatility in its share price, centering around the renewal of its product cycle. Its share price fell from the beginning of September, picking up again after the release of the iPhone 8. Apple’s adoption of OLED-screen technology has seen Samsung, its rival, become the main supplier of Apple components. This has hiked the price of the iPhone X (Apple’s
10th anniversary ‘special’ model) to start at £999, which is a large price jump from previous models that consumers may be unwilling to pay. It has consequently had a positive impact on Samsung’s shares. What ramifications this will have for Apple’s share price, when the model is released, are unknown. With the iPhone 8 being reported as strongly undersold, it is yet to be seen whether this means that iPhone X sales will surge, or not, in which case Apple stands to be in for a quarter or more of falling share prices. From its testing of Echo technology in hospitals to its secret ‘1492’ team (tasked with investigating health-technology opportunities like telemedicine and electronic medical records), Amazon seems to be making movements within the health sector. Amazon could begin slowly; becoming, or partnering with, a pharmacy benefits manager, acting as a middleman between payers and the rest of the health system. Or, if it wants to be more disruptive, could change the online pharmacy and drugs distributions markets entirely. It has already had a severe impact on the likes of UPS and FedEx, and online retail as a whole. Whilst its entrance into pharmaceuticals would be rather unusual, Amazon’s power could make it a true possibility. Matthew Chapman
14
Week Ending 22nd October 2017
Financials It’s been a week of new peaks for most of our major indices. The S&P 500 has been on the rise for the past month, closing on the 20th October at a new high of 2574.97. This impressive high was achieved despite the sharp decline in Apple’s stock prices late this week, with company stocks falling by $4.49 per share between Tuesday and Thursday. Apple’s falling share price comes after reports of lower than expected sales of its flagship iPhone 8. IBM’s unexpected but impressive quarterly earnings helped to push up the Dow Jones industrial average, allowing it to close at a new high of just over 23,300 points for the first time in over 3 quarters. This growth in IBM share prices comes after the company’s announcement that it was close to achieving revenue growth for the first time in 5 years. Despite the volatile nature of the Nikkei 225, 2017 has been a good year In the Asia-Pacific markets as the Nikkei in Tokyo continued its impressive rise to a 21-year peak (see graph below), with analysts at Morgan Stanley attributing it to
investor’s lower perceived risks about the Japanese general elections taking place on Sunday 21st October. In less encouraging news, Standard Chartered, the emerging markets focused bank which seemed to be on the up last quarter after a tumultuous year, saw its credit rating downgraded. It now faces an uncertain future as UK regulators probe into claims that Standard Chartered and HSBC may have been involved in money laundering in connection to South Africa’s infamous Gupta family. The Financial Conduct Authority probe comes after a member of the unelected House of Lords wrote a letter raising concerns about the bank’s possible exposure to the Guptas. In the letter, Peter Hain said illicit funds may have passed through the United Arab Emirates and Hong Kong, where HSBC and Standard Chartered have large footprints. Despite the threat the bank seems to be rallying back, having faced a small dip to share prices when the news broke. The letter itself is not an accusation of wrongdoing. Changu Maundeni
15
NEFS Market Wrap-Up
Oil, Gas & Industry Brent crude (ICE EU) has experienced gains of over 29% since June, closing at $57.75 a barrel on Friday, whilst WTI Crude (NYMEX) closed at $51.66 a barrel, with the 50-day average rising above the 200-day average – a pattern termed ‘the golden cross’, which indicates bullishness (see graph below). Schlumberger reported that “North America’s growth engine is slowing”, as the U.S. oilrig count fell by 7 to 736 total oilrigs this week, for the third consecutive week. The decrease in productivity gains in shale production is mostly due to the exhaustion of new processes and it implies some loss of interest from investors. An increase in crude prices will, however, accelerate shale production, but will increase competitiveness of oil against renewables – the industry’s longer-term threat. Royal Dutch Shell bought one of Europe’s biggest EV charging companies last week, to try and insure against this threat. Iraqi forces reclaimed two oilfields as a result of the Kurdish vote for independence. Consequently, flows of crude oil from Kurdish oilfields fell to around 200,000 barrels a day, which supported oil prices through the week. Though exports continue momentarily, investors may turn their attention to producers from more stable regions. Futures dropped by 0.9% in London, impacting the gain of 3.4% from Friday 13th to Wednesday 18th of October. The local Genel gas deal will also suffer as
one of the potential funders is the Turkish state energy company. Rosneft’s (Russia's biggest oil company) intention to take control of Iraqi Kurdistan's main oil pipeline in a $1.8 billion round of investment is also a key development. Meanwhile, Russia’s Yamal gas project, which is set to deliver 16.5 million tonnes of gas to Asian customers, succeeded in securing foreign investors from China and France and started operating this month, despite sanctions by the US and the EU. Nonetheless, the risk associated with the project is that no similar project has ever previously been undertaken. Other energy developments between Russia and Western companies have not been as successful. While China’s demand for oil may experience a slowdown, Bloomberg reported this week that government policies will stimulate gas demand growth, as “Asia’s gas demand is expected to double…by 2025”. The surge in global demand and the decreasing supply (both as a result of OPEC’s output curbs and of recent natural disasters in North America), combined with recent developments and geopolitical events, support the oil price increases this week. Confidence is still relatively high, though some investors have reservations about the sustained increase in prices and choose to buy puts.
Felicia Bogdana Cornelia Ababii
16
Week Ending 22nd October 2017
Deals Rosneft, the Russian mammoth energy player, has announced news of its takeover of a major pipeline in Kurdistan – further increasing its hold as the number one foreign investor in the region. So what is the major motivation for this move? Many analysts speculate that it is a strategic move of Vladimir Putin’s plan to increase Russia’s political and economic influence over the Middle East. This move has taken advantage of the current political unrest in Kurdistan, whose relations with the central government in Baghdad has severely deteriorated following the independence referendum held in September. Rosneft pounced on this opportunity only days after the Baghdad government announced the possibility of re-routing oil via an old pipeline, hence by-passing parts of Kurdistan’s infrastructure. Both Rosneft and the semi-autonomous regions had agreed this deal, despite the warning of the Iraqi government not to do so and Baghdad’s forces grappling control of Kirkuk from the Kurdish. In response to this, Igor Sechin, Rosneft’s charismatic and tactful Chief Executive Officer, has stated that both the Kurdish authorities and Baghdad must resolve their issues by themselves.
to $3.5 billion. Currently, the pipeline produces 570,000 barrels per day (bpd) but the aim is to increase this by a third to 950,000 bpd. However, this will be no easy feat – as the current political climate continues to interfere with the activity of the pipeline. Last week the bpd of the pipeline dropped to a mere 200,000 after the Iraqi forces took control of Kirkuk. So what’s next for Rosneft? The world’s largest oil producer was quick to react to the situation developing in Kurdistan. It understands that they will face resistance not just from Iraq but also from its neighbours Turkey and Iran, who have also vowed to stand with Iraq and isolate Kurdistan following the aftermath of the referendum. However, Rosneft’s acquisition of 60% of the pipeline makes them the controlling stakeholder in Kurdish oil infrastructure, thus showing a sign of stability and security in the Kurdish region despite the pressure it has been subjected to from its fellow neighbours. Overall, this deal is part of a bigger plan to gain a foothold in the Middle East. Rosneft fully understands the resistance it will face, but is nevertheless up to the challenge. Sembian Balachandran
This deal has increased the Russian company’s investment in the region
17
NEFS Market Wrap-Up
COMMODITIES
Energy In terms of oil, crude oil prices ended this relatively quiet trading week near their 2017 high, despite whipsawing over uncertainties in Catalonia and Brexit negotiations. Brent crude oil saw rangebound trading between $56.66 and $58.60. West Texas Intermediate (WTI) also traded in a tight range and found strong resistance at the $52 price level. US crude oil inventories had the largest drawdown since mid-August this year, as the American Petroleum Institute (API) reported a huge drawdown of 7.13 million barrels on Tuesday. On Wednesday, the Energy Information Administration (EIA) reported that US crude inventory levels fell by 5.731 million barrels, when markets were expecting a draw of 4.242 million barrels. WTI was unable to stage a sustained price rally despite these bullish inventory figures, as the market sentiment was generally subdued the entire week. The US continues to add to its natural gas inventories as EIA reported another net increase of 51 billion cubic feet (bcf) of natural gas in storage for the week ending 13th October 2017. Natural gas prices immediately fell to its weekly low of $2.76 on the release of the report but rebounded sharply as the EIA report missed expectations of a net increase of 55 bcf.
Coal prices ended the week higher at $61.30, after Scott Pruitt (Head of US Environmental Protection Agency) signed a regulation to repeal the Clean Power Plan, which was designed to make it more difficult to build new coal-fired power plants in the US. Meanwhile, the Saudi Aramco IPO, scheduled for mid-2018, could be delayed further to 2019. The still-fledging global oil price might be one reason for the delay in Saudi Aramco’s IPO, as a higher oil price would boost Saudi Aramco’s IPO valuation and thus greatly benefit its stakeholders. It is rather coincidental that Saudi Arabia has now become the main price hawk in OPEC. Looking ahead, the main event next week is the European Central Bank’s (ECB) monthly meeting on 26th October 2017. Here it is expected that the ECB’s President, Mario Draghi, will reveal the decision on the fate of its bond-buying programme. Markets are expected to be relatively quiet as traders would typically pare bets ahead of such key events. Any surprises from the ECB would likely create price volatility in energy markets. Mingli Yong
18
Week Ending 22nd October 2017
Agricultural & Resources This week, Rio Tinto, a world leading mining company, were charged with fraud in the US alongside two previous senior executives. The mining giant also received a £27.4m fine from the FCA (Financial Conduct Authority) in the UK. It is alleged that Tom Albanese and Guy Elliott, the previous CEO and CFO of Rio Tinto respectively, attempted to misguide investors following a failed business venture. Their valuation of coal deposits located in Mozambique, which were purchased by Rio Tinto for $3.7bn, is alleged to be deliberately deceitful following the sale of the coal deposits for $50m. Both Rio Tinto and former executives have protested their innocence and pledged to fight the charges. This incident further damages Rio Tinto’s reputation after the UK Serious Fraud Office started an investigation in July following a suspicious payment made to a consultant. In BHP Bilton, which is considered the largest mining company in the world, Ken MacKenzie, the chairman, has backed Andrew Mackenzie, the CEO, following a tense AGM meeting with shareholders. Despite approaching his fifth year with BHP Bilton as CEO, A Mackenzie is coming under fire from Elliot Management Corporation, a predominately big shareholder (5%) that is owned by billionaire Paul Singer. The shareholder believes that BHP has lost $40m of shareholder value, with A Mackenzie having been given six months to save his job. However, K MacKenzie this week expressed great confidence in A Mackenzie, who believes he will continue
to do a good job. Following wide spread news that diesel and petrol cars will be banned across most of Europe and China in the next two decades to combat emissions, the demand for electric vehicle batteries is estimated to grow eleven-fold by 2025. This has led to a surge in prices for metals required to produce batteries, thus leaving carmakers with a challenge to find sustainable yet competitive prices. Volkswagen this week were unsuccessful in their under-priced bid to secure cobalt supply for a minimum of five years. Cobalt is a highly sorted metal needed to produce electric car batteries. Prices this year have increased by 80%, as seen in the graph below.
Over 60% of Cobalt is mined from the Democratic Republic of Congo, with many producers of Cobalt being big names, such as Glencore. However there is evidence to suggest child labour is still being used in smaller mining operations, something all carmakers will have to be wary of as the pressure to find suppliers increases. Sarren Sidhu
19
NEFS Market Wrap-Up
CURRENCIES Major Currencies This week, the dollar was higher by 0.22% in anticipation of the release of the Fed’s Beige Book on Wednesday, which detailed modest employment growth and pressure on prices since its last release on September 6th. This positive outlook on US employment was later corroborated by this week’s Unemployment Claims release by the Department of Labour, with actual jobless claims only at 243K against the forecasted 251K. This is a trend that has been seen consistently since the week beginning August 17th, with the exception of only one week since. All in all, this indicates good economic health in the US labour market at present. In contrast, the pound was down 0.2% at 1.363 against the dollar after the UK unemployment rate fell; although the aggregate unemployment rate held at 4.3% in Q3, the number of employed workers in fact rose by approximately 52,000. In addition, recent Bank of England (BoE) changes to capital requirements for different types of consumer loans had been expected to slow household lending in coming months, but a rise in Q3 default rates perhaps suggests that banks may be quicker to cut back levels of consumer lending. Despite this, September’s Retail Sales report released by the Office of National Statistics (ONS) on Thursday provided a very promising outlook on consumer
spending for the end of Q3. The value of inflation adjusted sales rose by 1.0% - five times the forecasted amount – contributing to the rise of the pound on Friday morning alongside its rise against the euro, following signs that Brexit negotiations may soon move forward. Angela Merkel was a key contributor to this rise, dismissing comments of fruitless Brexit talks made by the press: “My impression is that these talks are moving forward step by step. From my side there are no indications at all that we won’t succeed”. The euro has changed very little at 1.1760 against the dollar. Although ECB President Mario Draghi delivered opening remarks at the latest ECB conference in Frankfurt, markets were lacking their usual volatility as traders attempted to decipher Draghi’s public engagements for subtle clues of future European monetary policy. Data shows that the Eurozone current account surplus is rising faster than expected during August as overseas demand for equities more than doubled from Aug 2016 to Aug 2017, with total purchases rising from €134 billion to €333 billion. This reflects both increased domestic and international demand, contributing largely to recent euro stability. Amelia Hacon
20
Week Ending 22nd October 2017
Minor Currencies The week the Australian Dollar (AUD) saw a sharp drop in value since the latest release of the US import/export price index data for September. The data shows an increase on US import and export prices of 0.7% and 0.8% respectively. This has greatly strengthened the already strong US dollar, hence putting pressure on the Australian Dollar. This is a predominant explanation as to why we have seen such a decline in the trend-line of the AUD/USD at the beginning of the week, as seen in the graph below. Figures fell from 0.7875 on Monday 16th to 0.7828 on Wednesday 18th. Despite this, the AUD/USD trend found strong support on Thursday evening and was hence able to pursue a burst of new growth to 0.7878. The recovery took place after the release of the unemployment rate in Australia falling faster than expected in September. According to the report published by the Australian Bureau of Statistics, the unemployment rate fell down by 10 basis points to 5.5%, which was less than the forecast stated at 5.6%. The RBA’s meeting minutes shows particularly encouraging words, looking at the good atmosphere provided by the latest data release:
“Since early 2017, employment growth had been above trend, the unemployment rate and other measures of labour underutilisation had declined a little and labour force participation had increased, particularly for older workers and primeaged females.” In regards to the Japanese Yen, there was a volatile climb in the USD/JPY trend from 111.73 on the beginning of the week to 113.03 by Thursday morning. This uporiented tendency is mainly due to the strong reinforcement of the US Dollar, which benefited from the release of the import price index data. This was reported to be 0.7%, despite a forecast of 0.6%. The strength of the currency can also be explained by a poll released on Tuesday by Reuters, showing that manufacturer confidence in October was at its highest level since 2007. Moreover, automobile and electric machinery exports are preserving high numbers, helping to boost the manufacturing sector. Nevertheless the peak of the Japanese Yen has been starting to fall, hence pushing down the trend. Luigi Longo
21
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
The
Sponsors:
This Publication has been prepared solely for informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, product, service or investment. The opinions expressed in this Publication do not constitute investment advice and independent advice should be sought where appropriate. Whilst reasonable effort has been made to ensure the accuracy of the information contained in this Publication, this cannot be guaranteed and neither NEFS nor any other related entity shall have any liability to any person or entity which relies on the information contained in this Publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at the user’s risk. 22