Week Ending 29th 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 Agriculture Energy
Currencies 20
EUR, USD, GBP AUD, JPY, Other Asian
2
Week Ending 29th October 2017
MACRO REVIEW United Kingdom After last week’s data for unemployment and inflation, this week saw figures for UK GDP released. GDP for the third quarter rose by 0.4%, slightly higher than analysts’ prediction of 0.3%. The rise was driven mainly by the service sector, specifically computer programming, motor traders and retailers. Conversely construction saw a 0.7% fall (see chart below). On Wednesday, when GDP data was released, the pound was up 0.9% against the dollar at $1.32530. The news of better than expected growth, combined with last week’s rise in CPI inflation to 3%, substantiates City economists’ prediction of a rise in the base rate next week, by the Bank of England. Furthermore, this week saw the price of 10-year UK bonds fall, pushing yield to 1.41%. All in all, this suggests City investors are very confident of a rate hike.
However it is reasonable to suggest that a base rate rise is premature and that the Bank will not make this move yet. The British Chamber of Commerce have
warned against it, amidst worries that the economy is not yet robust enough to handle an interest rate hike. It is feared that a base rate hike may have too much of a contractionary effect on GDP, with current 0.4% growth still being below 2016 levels. We can therefore be certain that if the decision to increase the base rate from its current level of 0.25% is taken, then it will be a small increase and future rises will be gradual. Last week reported that September had seen a 0.8% fall in retail sales. In response, this week the British Retail Consortium (BRC) urged the Chancellor, Phillip Hammond, to freeze income taxes in his budget announcement on 22nd November 2017. The retail industry has faced many setbacks in recent months. This includes a weak Pound, a persistent switch to online shopping by consumers, and 3% inflation, which has caused real income to fall by 0.4% (as revealed by the ONS this week). Given that household spending accounts for 60% of UK GDP, it is reasonable to suggest that a rise in income tax, resulting in a ceteris paribus fall in spending, has the ability to dampen growth in the future. Important news to look out for next week includes the decision by the Monetary Policy Committee on the base rate on Thursday. Deevya Patel 3
NEFS Market Wrap-Up
United States President Trump has declared that the opioid crisis is a public emergency. On Thursday, he noted "last year we lost at least 64,000 Americans to overdoses." And he was not wrong. Opioids, which include heroin and some prescription drugs, are responsible for more deaths in America than guns, cars and HIV/AIDS. Aware of the weight of the problem, President Trump went off script during his speech in the White House’s East Room on Thursday. A rare humble moment from the President saw him draw on his own personal experiences, citing his brother Fred who died at just 43 due to alcohol problems – “I learned because of Fred… To this day I have never had a drink and I have no longing for it, I have no interest in it.” President Trump surprised everyone on twitter, not for the first time, as he announced he would allow the release of classified files relating to the assassination of John. F. Kennedy. Trump eventually released the files on Thursday and the conspiracy theories have not been put to bed. In one extraordinary revelation, the released files revealed that a British newspaper, Cambridge News, received a call just 25 minutes before the assassination. A memo to the director of the FBI, Herbert Hoover, stated that "The British Security Service (MI-5) has reported that at 1805GMT on 22
November an anonymous telephone call was made in Cambridge, England, to the senior reporter of the Cambridge News… The caller said only that the Cambridge News reporter should call the American Embassy in London for some big news and then hung up." On the stock market, the main indexes posted weekly gains. Nasdaq and the S&P 500 closed on Friday at record highs. The S&P 500 gained 0.81% and Nasdaq gained 2.2%. The drivers of the gains this week came from the Tech giants (see table below), as Amazon, Google parent Alphabet, Intel and Microsoft posted better than expected third-quarter reports. Strong third-quarter GDP figures and more optimism on Trump succeeding in his tax overhaul had the U.S dollar posting its highest weekly gain of 2017. The ICE U.S. Dollar Index DXY +0.17% was up 0.4% to 94.999. Finally, prior to the likely announcement next week, Trump is leaning towards former investment banker, Jeremy Powell, to succeed Janet Yellen as the next chair of The Federal Reserve. Powell is seen to be of the similar ilk of Yellen, more dovish than hawkish. Edward Turner
4
Week Ending 29th October 2017
Europe The ECB’s announcement to cut the asset-purchasing program to 30bn Euros has met the expectations of both markets and investors. Bond purchases will be halved for nine months from January 2018, to help promote extended stability within the Eurozone. Mario Draghi’s decision to ease stimulus is aimed at keeping interest rates ultra-low and to prolong the period of economic recovery and expansion. According to the FT, Mr Draghi stated: “Domestic price pressures are still muted overall and the economic outlook and the path of inflation remain conditional on continued support from monetary policy. Therefore, an ample degree of monetary stimulus remains necessary”. ECB's reasonably cautious statement however has affected the Euro’s fall to $1.1637 (as of 11:15 am, Oct. 27th – see figure below) following a two-day rally before the announcement. Yields on European notes have also been negatively impacted by the intention to diminish bond purchases with peripheral government securities hit the worst.
majority in the chamber. The Spanish government however would immediately reject any deceleration of independence as illegal and therefore not recognisable by the broader international community. From an economic perspective, we must focus on the huge movement of Catalan firms that are setting up their legal bases outside the region of Catalonia to overcome the uncertainty of possible future developments. Reaching a solution shortly would save the Spanish economy from shock and protect GDP growth. The dramatic drop of 30% in the revenue from trading bonds and stocks has put rising pressure on Deutsche Bank’s management teams. The results were far below analysts’ expectations, hence Deutsche Bank is currently finding it very hard to maintain the support of investors. Deutsche Bank’s chief executive said the strategy of cutting costs will gradually become clearer in the near future. Giovanni Cafaro
The uncertainty caused by the Catalan crisis is still undoubtedly affecting Spain’s economy. Mr Puigdemont, the leader of Catalonia, refused to call the regional election as he said he had not received sufficient guarantees from Spain's government. “If he takes any step back, they eat him alive”, stated the analyst Talavera about the Catalan leader. As the Spanish PM Mariano Rajoy prepares to restore order in the streets of Catalonia by taking direct control of the Catalan government, a formal declaration of independence seems as the most plausible decision by the Catalan parliament with separatists retaining the 5
NEFS Market Wrap-Up
Japan & South Korea South Korea’s GDP expanded 1.4% in the July-August period, the fastest pace South Korea’s economy has expanded since 2010. This growth was above the 0.8% prediction given by economists surveyed by Reuters, and was significantly above the growth attained in Q2 of 2017 of 0.6%. South Korea’s economy is benefiting from a double-digit expansion in exports (see graph below), fuelled by overseas demand for semiconductors, steel and petrochemical products. However Hyundai, the world’s fifth-largest automaker based in South Korea, reported a 16% drop in net profit in Q3, which was particularly due to falling sales in two of its biggest markets, China and the US. The automaker company is currently in the middle of a crisis in China, which accounts for a fifth of its sales by volume. This is due to a consumer backlash against South Korean products, following the controversial installation of a US missile shield in South Korea. Shipments in China fell by more than a quarter in three months to September 30th amid slowing demand for sedans, which is Hyundai’s strength. Koo Za-yong, Hyundai Vice-President said, “Despite the uncertain environment, we will look at the issues from a long-term perspective, rather than taking a shortterm approach to boost sales.” In Japan, following Shinzo Abe’s big victory in last week’s election, Mr Abe immediately addressed the concern of low
salaries amongst Japanese workers by demanding Japanese companies lift pay by 3% next year. To encourage this, Mr Abe is opting to give tax breaks to companies that expand their wage bill. Rising wages are seen as essential to fuel higher consumption and inflation, thus explaining the deep government interference in private sector wage settlements. According to the trade union federation Rengo, wage rises this year averaged at 1.98%. This is a decline from a peak of 2.2% in 2015. With higher productivity amongst Japanese workers fuelled by rising wages, the Japanese economy wants to see an improvement in its two decades of on-and-off deflation. On another note, the Bank of Japan’s latest financial system report showed a “striking” low profitability on an international comparison for its regional banking sector. It addressed the issue of over-banking in Japan, which is currently said to be overstaffed, inefficient and plagued by too many branches. The statistic used to illustrate this problem was 4,833 Japanese bank branches per 10,000 sq kilometres of habitable area, which is by far the highest density of bank branches amongst the advanced economies. It is also three times higher than notoriously over-supplied Germany. Hayati Sharir
6
Week Ending 29th October 2017
Australia & New Zealand The new coalition government in New Zealand is yet to announce many key policy areas and subsequently has caused great uncertainty across the economy in the last week. Meanwhile, in Australia, disappointing figures regarding inflation have been released, dampening business expectations for the future. In a key note policy, marking a shift away from the neo-liberalist policies of the previous government, the New Zealand government has banned foreign investors from purchasing homes in New Zealand in an attempt to ameliorate the housing crisis they are currently experiencing. Prime Minister-elect Jacinda Ardern remarked on Tuesday 24th that the coalition government had “agreed on banning the purchase of existing homes by foreign buyers". In a survey conducted by Knight Frank, a property consultant, it was discovered that annual house price growth stood at 10.4% in New Zealand. The housing crisis has been largely caused by a surge in immigration, causing demand for houses to rise, as well as low interest rates that have caused mortgages and loans to become more affordable. The new coalition government has stated that they will target both immigration and housing in an attempt to reduce house prices. The impact of banning foreign investors from purchasing homes is highly unknown as of now, but it is unlikely to
resolve the house price issue for middleto-low income families as many of these investors purchase higher valued properties. The impact of foreign investment on business is also unknown, as this policy suggests that the government will take a more interventionist approach that may worry potential investors. The New Zealand Dollar is yet to recover from its fall last week, which is currently trading around 0.6600 to 0.7000 USD. This is likely to continue as uncertainty over the new government grows. Meanwhile, in Australia, the Australian Bureau of Statistics released the inflation report on Wednesday 25th, as measured by the Consumer Price Index, which illustrated that inflation had increased to 0.6%, bringing the annual inflation rate to 1.8%. The major cause of this inflationary pressure is the increase in the cost of electricity, which rose by 8.9% over the quarter, as well as large increases in other energy commodity prices. This has sparked large concern amongst businesses as it means that their business costs are significantly higher, which is likely to cause cost-push inflation and raise prices further.
Nicholas Gladwin
7
NEFS Market Wrap-Up
EMERGING MARKETS
Africa Rather surprisingly, the South African economy entered recession in Q1 of 2017, following growth rates of -0.3% in Q4 of 2016 and -0.7% in Q3 of 2016. This low growth was caused by multiple factors, including poor government management (through over-spending and corruption), falling levels of FDI into the country, and a credit bubble. All of these then contributed to a crisis in confidence. The 5-month strike in the platinum-belt only put further pressure on the already struggling nation, which is currently the world’s largest platinum producer.
on government debt, which reached an alltime high in Q2 of 2017 at 63923m USD. The downward spiral accumulated into a credit rating cut from both Standard and Poor’s and Fitch Ratings Ltd to BB+ in April this year - putting investments into the economy at junk status. Any worsening to the economy could push credit companies to downgrade this investment rating further to a noninvestment grade. This would prove detrimental, as pushing capital costs up and reducing finance options will trigger heavy outward flows from the economy.
However, economic growth picked up to 2.5% in the second quarter of this year, with the nation’s February Budget predicting 1.3% and 2% growth in Q3 and Q4 respectively. However, according to surveys carried out by Bloomberg, 22 economists forecasted growth at 0.7% and 1.2% for the following quarters respectively – almost half of what the February Budget predicted. Confidence in Africa’s largest economy has taken a further hit as the Treasury announced forecasts for tax revenue to be overvalued for the quarter by around 50.8bn rand. This is the largest under-collection of tax since the 2009 recession.
The government are predicted to respond by contracting expenditure, pushing up taxes and selling assets. However, the underlying issue of poor governance needs to be resolved for long-term change. To address this the government will need to reform every aspect of the public sector, such as introducing crackdowns on corruption to improve governance and new measures to boost efficiency of financial institutions. This long-term change is necessary to reform the deep-rooted issues in the South African economy. Laura Leng
This puts further pressure on South Africa’s budget deficit, which has been running persistently high since 2008, and 8
Week Ending 29th October 2017
China The 19th National Congress of the Communist Party of China concluded last week with President Xi Jinping firmly cementing his hold on a second term as the leader of China. He has filled the top leadership positions with allies, and it may now be possible for him to break precedent to run for a third term. Moreover, he has written his name and philosophy into the Party charter, a privilege shared only with Mao Zedong and Deng Xiaoping. During the National Congress, the Party indicated that it would move away from setting GDP growth goals. The government will still aim to double GDP and per-capita income from the 2010levels by 2020, but from 2021 the government will not set long-term growth targets. This reflects a policy move away from the high-speed growth of the 1990s and 2000s to “high-quality growth”, meaning greater efforts will be made to increase the efficiency of production techniques, reduce the debt burden, and become world leading in research and development. Though in the short-term the government plans to become a “moderately prosperous society” until 2035, it aspires to make China a great, modern power by 2050. As seen in the graph below, the OECD in 2014 projected China to surpass the US by 2020 in real output.
Chinese stocks rallied to a two-year high on the Hong Kong stock exchange. The Hang Seng China Enterprises index rose 1.72% to 11,643.57. Over the year, the index has risen 24%. By comparison, the buoyant S&P 500 index has risen 15% year-to-date. The recent gains came amidst robust third-quarter earnings reports by Chinese banks. There was also optimism after the Politburo Standing Committee announced its members. Julia Wang, the economist for Greater China at HSBC Global Research, said that she expects “coordinated policies to reduce financial risks, more institutionalized environment policies, and accelerated [reforms of state-owned enterprises]” under Mr Xi’s renewed administration. The Ministry of Finance on Wednesday sold USD $2 billion in 5- and 10-year dollar bonds, the first time it has issued non-renminbi debt since 2004. The finance ministry hoped the bond sale would lead to lower borrowing costs for Chinese companies. If this sale is the first in a series of dollar bond sales, analysts believe the yields they are sold at will give a benchmark for Chinese firms to value their own debt deals. Daniel Blaugher
9
NEFS Market Wrap-Up
Latin America This week we focus on decisions made by the central banks within the two largest Latin American economies, Brazil and Mexico. On Wednesday, the Brazilian central bank cut its benchmark rate from 8.25% to a near all-time low of 7.50%. However, it has reduced its pace of monetary easing following four consecutive 100 basis point cuts. Brazil has shown signs of a gradual recovery following two years of recession, assisted by low inflation and some fiscal reforms. It is predicted that the benchmark rate could go as low as 7% to facilitate this recovery. However, the economy is still in need of reforms to plug its significant budget deficit. Plans have been made to overhaul the country’s pension system, specifically to increase the average retirement age (currently 55), and to privatise several state assets. However, accusations of corruption against the Brazilian president have slowed plans and lost Congress support. Following on from the problems seen last week regarding the Mexican peso, Mexico’s currency commission has decided to increase the number of auctions of peso hedging instruments in an attempt to strengthen the currency. The central bank decided to hold three auctions on Thursday, worth $1bn, and are continuing weekly auctions until December 6th, worth a total of $4bn.
The central bank’s decision caused the peso to strengthen temporarily. The hedges take the form of non-deliverable forwards with the difference being settled in pesos; this means that if the peso depreciates by the end of the contract then the central bank must pay the difference in pesos, but if the peso appreciates then the bank receives the difference. This method has given the central bank a means of reducing demand for the peso, thus strengthening the exchange rate, without depleting foreign exchange reserves. However, there is the risk of potential fiscal costs if the peso continues to fall and there has been limited success of this method in the past in economies such as Brazil. It should be noted that this particular swap programme is relatively small, meaning that the impact it has may only be short-term or minimal. Next week I will assess Venezuela’s debt situation. On Friday, the state-owned oil giant Petroleos de Venezuela SA paid $842m in principal on a 2020 bond. Although this has relieved investors’ fear of default, Venezuela has missed several payments this month and has another large payment due next week. Jessica Murray
10
Week Ending 29th October 2017
Russia & Eastern Europe This week saw Poland’s business confidence begin its projected decline, and a warning from the European Commission to Croatia. As explained in last week’s Wrap-Up, Poland has been undergoing some issues regarding migration and employment, mostly in terms of the emigration of natives to other countries such as the United Kingdom, and a lack of young Polish workers in the market. This has had a negative effect on Poland’s manufacturing sector index, making it fall from 6.3 points to 4.3 points in a month. However, having maintained its business confidence index above the zero-point mark and enabled increases in production in recent weeks, Poland’s business climate has managed to stay in a relatively healthy situation. Nevertheless, the decline in confidence (see graph below), which is projected to continue in the months to follow, is largely due to a worsening in the general sentiment for the forecasted economic situation in Poland. This has been caused predominantly by employment and production issues, and a less optimistic outlook for domestic and export orders.
The European Commission has warned twelve member states, one of which being Croatia, that their high public debts pose a serious risk to their economies in the long run. Although Croatia is expected to lower its public debt by 2-3% during the next four years, a new period of increased borrowing during this time could increase public debt to 88% of Croatia’s GDP. Another concern to Croatia is how little of its GDP is expected to grow in the coming years. While projected growth rates are more than 2% for the next two years, they are expected to fall between 0.1% and 0.9% in the years to follow. Such low growth rates, coupled with high total expenditures, could prove even more menacing in the future. Furthermore, Croatia has many uncertainties surrounding its economy. These are mostly due to external factors that affect its GDP, such as interest rates in world markets and the movement of energy prices. Like Poland, Croatia also faces workforce issues in terms of an aging population and a loss of young workers. In the worst-case scenario, Croatia’s public debt could constitute 110% of its GDP, but it could also fall below 80% under favorable circumstances. Overall, the governments for both Poland and Croatia should implement policies that allow for smoother immigration into their countries. This will therefore increase their workforce, production and GDP. Mario Pucinelli Filho
Poland’s Business Confidence Chart
11
NEFS Market Wrap-Up
South Asia This week marks the end of the year of mourning for the former Thai King Bhumibol Adulyadej, Thailand’s longest serving monarch, who died on the 13th of September 2016 at the age of 88. Known as the ‘Father of all Thais’, his death sent the whole country into a year of mourning, leaving large economic and political instability in its wake.
Many companies now hope that the end of the mourning period will result in a major pick-up in consumer spending and a revival of the Thai economy. With half of Thailand’s $407 billion GDP comprised of consumption spending, this will be vital to ensure that Thailand’s 2017 economic growth rises above 2016’s 3.2% growth rate.
King Bhumibol was largely seen as a figure of stability due to him seeing out 20 military coups and 30 prime ministers. He also played a notable role in unifying Thailand, which suffers from rifts between the Royal Palace and the Government. Following his death, a period of great political instability followed which has still not been subdued.
However there are fears that the rise in consumption will not increase as much as hoped. Household debt is now at 78% of GDP, a figure much higher than other ASEAN (Association of Southeast Asian Nations) country. This will greatly dampen any rise in consumption.
The markets were also hit badly by the news of the King’s demise. In respect for the king’s death, a formal month-long entertainment ban was imposed and many Thai’s put off luxury purchases. As can be seen in the graph below, this caused consumer spending to fall notably. Last Wednesday however was the beginning of a lavish 5-day, $90 million royal cremation and ceremony for the deceased King. The funeral ceremonies are due to end on Sunday 29th October.
Furthermore, Thailand still suffers from political instability from within the Palace. The new King, Maha Vajiralongkorn, has not yet gained full support from the public or the military, which is vital for a monarchy. Known as the ‘Play-boy Prince’, King Maha faces much controversy due to his extravagant lifestyle and his harsh methods of ruling. Abigail Grierson
12
Week Ending 29th October 2017
Middle East This week will be focused on Saudi Arabia’s most recent plan of transforming their economy through the creation of a $500bn economic zone. In the Saudi Kingdom’s most costly and ambitious attempt to diversify their economy, Saudi Arabia unveiled a $500bn plan to create an economic zone in the country’s north-west region. The fall in oil prices has hit the economy hard, with the International Monetary Fund suggesting that economic growth will fall to 0.1% this year. The Crown Prince, Mohammed bin Salam, hosted a conference with various bankers and investors in order to illustrate his vision of modernising the country’s economy. The economic zone, called Neom, will cover 26,000sq-km on the Red Sea coast and will be linked to bordering Jordan and Egypt. The aim of the economic zone is to lure investment into new technologies, especially robotics and renewable energy, and add $100bn to GDP by the year 2030. This project is part of Prince Mohammed’s National Transformation Programme, launched last year, with the goal of privatising assets and reducing unemployment from 11.6% to 9% by 2020. It is planned to be funded by a mixture of government spending, private investment and capital from the Public Investment Fund.
This is not the first time that the Saudi Kingdom has planned projects with Riyadh (the capital of Saudi Arabia), having struggled to implement far smaller schemes that had a similar target of helping to diversify the economy and create jobs within the private sector. A decade ago, the Kingdom outlined plans for the launch of six new economic zones. However only one, the King Abdullah Economic Zone, developed to a meaningful size whilst the others were either downgraded or scrapped. However Prince Mohammed insists that the Neom project will be different but is also aware of the time pressure the economy is under, stating “This challenge worries me, but I have no doubt that with hard work and in partnership with many around the world and inside Saudi Arabia, we will overcome this challenge.” Klaus Christian Kleinfeld, the former Chairman and Chief Executive of Arconic and Alcoa (two major US companies), has signed on to be the Chief Executive of Neom. Masayoshi Son, founder of SoftBank, also hopes to provide investment, with further investment being provided to Saudi Electricity Company (the Kingdom’s electricity utility). Abdul Akhtar
13
EQUITY AND DEALS NEFS Market Wrap-Up
Financials It’s been quite the week for the world’s largest banks. JP Morgan Chase shares rose 1.6% on Tuesday, allowing its share price to rise above $100 for the first time. Historically, breaching levels like this tends to increase the buying pressure on a company’s stock. Coupled with JPM’s impressive third quarter earnings, which showed growth of 11% in earnings per share, means that we can expect to see further impressive developments in the company’s stock. JPM’s share price has been consistently on the rise despite its corporate and investment sector underperforming compared to last year. The bank’s disappointing investment performance, which seems to be catching across the market, could be reflective of muted activity in bond markets following the long trend of low interest rates. Lloyds Banking Group experienced a phenomenal rise in profits as the bank announced pre-tax profits for the third quarter of £1.95bn. This is a staggering increase of 141% from the same period last year. The impressive results are partly due to reduced PPI costs. The bank, which recently returned to private hands after its 2008 bailout, set aside £700m in the first half of the year to PPI provisions, which to date have cost the bank a total of £18bn.
After lower-than-expected third quarter profit figures, shares in Barclays closed 7.4% down on Thursday. Despite the fact that its overall profits were up 31% from the last quarter, share prices were dragged down by lacklustre profits in its investment banking sector, with profits down from £1bn to £652m. Higher company earnings were partly due to the absence of PPI provisions, which they fulfilled in the first half of the year. In recent years the bank has been inundated by various litigations and is currently involved in a legal fight with the US government over fines for its role in selling risky mortgages. In August the bank paid a further £77m to settle a claim by 44 US states that it rigged the Libor (London Interbank Offered Rate) system between 2005 and 2009. The Libor scandal has already cost the bank over £300m. In a bid to streamline operations and focus on US and UK markets in June, Barclays sold off its controlling interest in all its Africa operations valued at £2.2bn. Barclays is the UK’s only remaining global investment bank. Changu Maundeni
14
Week Ending 29th October 2017
Technology & Health In this week’s wrap-up, yet another disruptive tech start-up encroaches on a unicorn-level IPO, and turmoil arises between governments, health services and big pharma. Spotify’s UK revenues rose by 27% to £237 million within the last year. It is rumoured to pitch an IPO around the end of the year, potentially valued at around $16bn (Reuters) with some valuations in the $20bn region, surpassing the seldom seen $1bn/IPO ‘unicorn’ valuation. However, potential investors must proceed with caution – Spotify has not reported a profit in over a decade. Once public, it must demonstrate confident progress towards profit every quarter or its investors may respond with worrying questions about the company’s future. It must also pitch its IPO correctly – another bull-hailed tech start-up, Snap Inc., was reportedly underpaid for its stock and shed $10bn in its share value within 4 months of its IPO. Spotify’s competition is stiff from Google’s YouTube, whose streaming is supported by a model similar to Spotify’s ‘free’, adsupported version. Google’s parent company, Alphabet, reported a sales increase of $2.2bn in the last 3 months, against last year. Amongst the rising stocks of Amazon and Microsoft, this rise in Alphabet led the Nasdaq and S&P 500 indexes to rise by 1.9% and 2.7% respectively. In the manufacturing world, Japan’s Mazda Motor Corp recently made a breakthrough in combustion ignition technology, creating a 30% more fuelefficient engine. In the short term this could positively impact business, but car firms need to look to the electrical-car future, especially under the UK
government’s 2040-onward petrol and diesel car ban. Even Dyson, a technology company focusing on primarily household appliance manufacturing, has said it will invest £2.5bn in electric car development, and will manufacture from 2020. Before the 2040 legislation, firms like Tesla looked promising to market speculators as they had focused their efforts in a market with which typical car-manufacturers were not concerned. However Tesla is still performing strongly, with its Model S and X cars responsible for 45% of all electric vehicle sales this year. A large proportion of pharmaceuticalindustry buzz this week has arisen from President Trump’s opioid epidemic crackdown. The epidemic stems from a mid-90s relaxation on legislative barriers to marketing legal narcotics and belated efforts to crack down on prescription painkiller trading (often referenced as the primary gateway drug to heroin). Opiant Pharmaceuticals, a firm developing opioid antagonists involved in substance abuse treatment, saw its stock soar by 46% since Trump’s crackdown declaration. Back in the UK, recent reports from the National Audit Office (NAO) have declared that the NHS could have prevented the WannaCry ransomware attacks that caused disruption in 34% of NHS trusts in England. Amyas Morse, head of the NAO, called the attacks ‘relatively unsophisticated’, with NHS Digital admitting that system vulnerabilities could have been fixed more quickly. Matthew Chapman
15
NEFS Market Wrap-Up
Oil, Gas & Industry Despite a reported increase in US production for the first time in 5 weeks on Wednesday 25th and an increase in the US rig count for the first time in 4 weeks on Friday 27th, oil prices remained constant this week. This was due to continued geopolitical tensions in the Middle East and a statement from Saudi Arabia’s Crown Prince on Thursday expressing the country’s support of extending supply cuts. Brent (ICE EU) futures increased by 4.26% since last week, reaching a 27month high of $60.21 a barrel on Friday. WTI Crude (NYMEX) settled at $53.69, with a $1 increase on Friday afternoon alone. Industry giants this week have also reported larger profits. Total SA reported the highest earnings from oil and gas in two years, whilst Exxon’s CEO announced “a 50% increase in earnings” compared to last year. Investors’ concerns were further alleviated with the news that hurricane Harvey only decreased per share earnings by 4 cents. Nonetheless, Exxon stocks dropped 1% after the announcement. Although Brent (ICE EU) and Natural Gas (NYMEX) have had similar price patterns over the past 6 months (and historically since the early 1980s), the futures diverged recently. This was particularly over the past week, where natural gas futures fell by 3.78% to an 8-month low, settling at $2.779 (see graph below).
On Tuesday 24th, Trump’s administration announced the biggest ever oil and gas lease sale in the U.S. This will involve over 75 million acres in the Gulf of Mexico and will take place in March. It is intended to boost the local economy and create jobs, as well as achieve “energy dominance in the global market”, as stated by the Interior Secretary. Simultaneously, regulators have decided to introduce a “permit by rule” system in Utah. This is a critical development that will cut both costs and emissions, and could potentially initiate a shale-drilling boom in the region. Aramco, the Saudi Arabian Oil Company, is the biggest energy company worldwide and is set to be the largest IPO up-to-date, despite the company’s plans to only enlist 5% of the stocks (as revealed by the CEO this week). Saudi Arabia intends to raise $100bn to invest in non-oil sectors as part of its objective to diversify its oil-reliant economy. Saudi Arabia’s bullish stance and supply cuts are set to maintain high oil prices up to the scheduled IPO’s release date in the second part of 2018. Volatility in the market is to be expected however, until OPEC’s meeting at the end of November. Felicia Bogdana Cornelia Ababii
Brent Crude against Natural Gas
16
Week Ending 29th October 2017
Deals “Buy low, sell high” is the mantra for every investor, whether they are active or passive. In most cases shareholders tend to be silent, however a new theme is developing as activist shareholders become more vocal. This has resulted in major impacts on company affairs, with Swiss shareholder revolts recently present in Nestle and Credit Suisse. However the most recent fatality at the hands of shareholder activism was the $20 billiondollar merger between Clariant (the Swiss specialty chemicals company) and U.S. manufacturer Huntsman. Both are already big players in the chemical manufacturing industry, with 2016 revenues of $5.8 and $10 billion respectively. The merger however would have created a true mammoth, with the formation of the 2nd biggest worldwide specialty chemical firm. So how and why did the deal fall apart? The deal was proposed in May 2017 but faced opposition for months, with the primary objection being the damage to Clariant’s shareholder value, as the deal would expose Clariant to Huntsman’s accumulated debt. The renowned hedge fund manager Keith Meister, who masterminded the deal’s demise, strongly believed that the merger would dilute Clariant’s shareholder value. It would
therefore have been better for Clariant to cut costs, sell off specific parts and continue with their specialty chemical niche instead. Keith Meister’s investment vehicle (White Tale Holdings) increased their stake in Clariant from 10% to 20% in the space of a few months, thus becoming the largest shareholder. Under Swiss law the support of at least two-thirds of shareholders is needed to progress with a deal. However with the objection of White Tale and other shareholders, it became apparent that the deal would not go through. What’s next? CEO Peter Huntsman stated that this deal was first proposed to build strength and scale, and without the merger "there is a real risk of being crushed by the competition." It is now therefore necessary for the specialty chemical sector to consolidate their position. However, in a recent statement, Mr Huntsman stated that they have other options and thus the “future has never looked brighter.” Clariant’s CEO, Hariolf Kottmann, had similar things to say and emphasised the stand-alone value of the company. However, many analysts speculate that Clariant is now a takeover target again. Sembian Balachandran
17
NEFS Market Wrap-Up
COMMODITIES
Agriculture Farmers and commodity traders this week are bracing themselves for a severe weather phenomenon known as La Nina. La Nina, caused by the cooling of the Pacific Ocean, subjects Brazil and Argentina to droughts, and Australia to heavy rains. The previous La Nina of 2012 was known as one of the worst droughts in the past half century in the US Midwest, causing the price of grain and oilseeds to rocket. The coalmines of Queensland, Australia, were subject to cyclones and heavy rain, and coffee prices surged after heavy rain in Colombia caused a deadly coffee fungus to spread. The chance of La Nina striking the northern hemisphere this autumn and winter is estimated to be between 55 – 65%. Despite concerns, traders should be wary that a La Nina was warned of in 2016 that was very similar to this year’s indications, but never actually materialised. However, the prospect of La Nina, as well as increasing global demand for soya-beans and grains, will lead to very sensitive markets. If La Nina does occur, cotton, corn and soya-beans are likely to be affected in Brazil, and wheat harvests could be impacted in Australia.
Cocoa this week has been a concern, as prices still remain low after a four-year slump on the London market. This is a particular problem for smallholder farmers, who are struggling to deal with the current farm gate price of Cocoa. Many big firms, including Mars, have expressed concern with current prices from a sustainability point of view. They have therefore suggested that the industry should do more for Cocoa farmers by supporting crop diversification, as existing land is the only source of Cocoa. Child labour has also been a challenge that the industry has had to overcome, and yet still faces today. However progress has been made after Nestle launched an initiative called “The International Cocoa Initiative”, designed to tackle the use of child labour and help farmers get the support they need to produce a sufficient amount of the crop. Sarren Sidhu
18
Week Ending 29th October 2017
Energy This week’s focus is on China’s possible launch of a crude oil futures contract priced in yuan and convertible into gold by the end of 2017.
China’s own currency is not fully convertible yet, which adds another layer of risk and cost to energy market participants.
As the world’s largest oil importer, China believes that it makes economic sense to price oil in its own currency so as to reduce risk exposure to the US dollar. Crude oil is currently priced relative to benchmarks like Brent crude and West Texas Intermediate (WTI) futures that are both denominated in US dollars. By launching this yuan-denominated crude oil futures contract, China is seeking to gradually reduce its reliance on using US dollars to meet the country’s energy needs.
In energy markets, oil bulls shrugged off bearish reports of crude inventory builds released by the American Petroleum Institute (API) and the US Energy Information Administration (EIA) earlier this week, and pushed crude prices up after Saudi Arabia backed OPEC’s decision to extend the oil output-cut deal beyond March 2018. Both API and EIA reported unexpected increases to US crude stockpiles of 0.519m and 0.856m barrels respectively. On Friday, Brent crude surged to a new 2017 high of $60.63 (see graph below), breaking above the $60 price barrier for the first time since July 2015. This occurred after the release of stronger-than-expected US Q3 GDP numbers before closing at $60.58. WTI crude price also rallied to $54.16, its highest in 8 months before settling at $54.11 for the week, just 2% shy of its January 2017 high of $55.21.
China has also been trying to persuade OPEC’s kingpin, Saudi Arabia, to accept yuan in exchange for its oil. If the Chinese succeed, other oil exporters could follow suit and accept yuan as payments for their oil and hence use the yuan-denominated crude oil futures contract as a hedging tool. Countries like Russia and Iran might also make use of Chinese crude oil futures contracts to circumvent US economic sanctions to trade oil. Despite this, reservations on the viability of China’s plans remain as energy market players would be concerned about the level of state control Beijing would exert on their first-ever crude oil futures contract. Another concern is the fact that
Next week, the key market-moving events are the Bank of England’s interest rate decision on Thursday and the release of US September Non-Farm Payrolls on Friday. Mingli Yong
19
NEFS Market Wrap-Up
CURRENCIES Major Currencies The euro reached a six-day high of $1.1820 on Thursday, having added overnight gains with the European Central Bank’s (ECB) announcement to start reeling in the asset-purchasing scheme for the start of the new year. As expected, the euro experienced volatility in anticipation of Draghi’s formal policy announcement in the ECB press conference. Overall, the latest policy announcement appeared to satisfy speculators, reflected by the release of the euro into forex markets the same day. Between now and Q1 2018, the euro will certainly be one to watch as policy makers prepare for quantitative easing to be halved (to be determined). Bitcoin trading is down 4.42% on Tuesday following a split in its blockchain network with the introduction of bitcoin gold. Although bitcoin is arguably the hottest digital currency in the market given its 400% rise on the previous year, the tables have turned with its latest step towards decentralising the currency after the separation of bitcoin cash earlier this year. Although twenty exchanges will back the new cryptocurrency, markets reflect scepticism in whether splits are good for the future of bitcoin. Given that bitcoin gold’s website has recently been subject to a large-scale cybersecurity attack, perhaps the currency is set to fall further.
The pound climbed up by 0.9% after data revealed that the British economy grew faster than expected in Q3, at 1.3253 against the dollar on Wednesday. The most recent ONS release announced that GDP grew by 0.4% in the third quarter of this year, 0.1% above earlier projections. As the economy appears to be performing in line with expectations with respect to growth, evidence is pointing towards a potential rise in the base interest rate. This would likely push the value of the pound further upwards in weeks leading up to the next Monetary Policy Committee meeting and potentially encourage a sustained upward trend if favourable conditions persist. A similar story was seen for the US dollar this week, with data spectacularly outperforming estimates. The dollar index was up by 0.5% at 95.10 on Friday, after data from the Commerce Department showed that GDP was up 3% in Q3 – 0.4% above forecasts. Recently the dollar has been performing well despite sociopolitical disruptions, and only appears to be climbing higher. Amelia Hacon
20
Week Ending 29th October 2017
Minor Currencies This week the Australian Dollar performed poorly, dropping nearly to its lowest level in over three months against the US Dollar. The rate is now at 0.764 and is expected to decline further. One of the reasons for this decline is the recently published Q3 CPI (Consumer Price Index) data, which reported that inflation had fallen to 1.8%, below its expected rate of 2.0%. This triggered a shift in the Reserve Bank of Australia’s (RBA) monetary policy expectations and an underperformance in the Asia Pacific trade. Another reason for the weakening value of the AUD is the strengthening of the USD, due to President Trump’s promises to cut taxes. However these promises are expected mainly as a stimulus for the economy to increase GDP. Overall the AUD has had a bad week, including falling as low as 76.98 US cents overnight (the first time it has been at these levels since mid-July). It also sustained losses against the British pound (-1.9%), the Euro (-1.3%) and the Japanese yen (-1.1%).
The political situation is putting the NZD under a huge amount of pressure, particularly after news that New Zealand had finally formed a government, with the centre-left Labour party leader Jacinda Ardern as the new Prime Minister. As seen in the graph below, the NZD is dropping further against the US dollar, reaching its lowest value in five months. It now stands at 0.68, having seen a consistent fall from the beginning of the week, when the pair was at 0.692. The Liberal Democratic Party (LDP) won the early parliamentary elections in Japan, with Shinzo Abe, Prime Minster of Japan and President of the LDP stating that the program “Abenomics" is going to continue taking place as one of the major policies of the party. Abenomics is a set of macroeconomic activities aimed to boost Japan from its current stagnation and attain higher growth rates, by stabilising the inflation rate and weaken the Yen. On Friday however the USD/JPY rate closed at 114.18, with the JPY continuing to rise in value. Luigi Longo
The NZD/USD pair has been driven down this week due to positive expectations on the US dollar and by New Zealand politics.
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