Week Ending 5th November 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 14
Financials Technology & Health Oil, Gas & Industrials
Commodities 17 Agriculture Energy
Currencies 19
EUR, USD, GBP AUD, JPY, Other Asian
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Week Ending 5th November 2017
MACRO REVIEW United Kingdom This week saw the Bank of England (BoE) raise the base rate, from its record low of 0.25%, back up to its pre-Brexit level of 0.5%. This is the first rise in over a decade (see graph below) and is consistent with the expectations of City investors over the last month.
recent years, 94% of households taking out mortgages have switched to fixed rate mortgages. This suggests that the rate rise will not have an immediate impact on these new borrowers.
The most prominent reason for the rate rise is to combat 3% inflation, which is expected to rise further to 3.2% this month in the wake of a weak pound after Brexit. Other reasons include low unemployment and strong global growth. Mark Carney, Governor of the BoE, stated that the UK will see further gradual rises in the base rate over the next 3 years to 1%. Brexit, and the nature of the deal reached between the UK and EU, will likely play a very important part in the decision over future rate hikes. It is important to note however that UK economic growth is relatively subdued at 1.7%, which Carney stated was due to “Brexit related constraints”.
In the post Brexit and financial crisis world, it is difficult to decipher what a rate hike suggests about the health of the economy. High inflation and low unemployment may have once implied that the economy is experiencing a ‘boom’ period, as they both allude to strong consumer spending and higher wages. Most notably, the last time the base rate was increased up to 5.75% was in June 2007. However this was at a time when the UK was experiencing “the longest period of economic stability and sustained growth”, in the words of Gordon Brown. But today wages are persistently stagnant and growth is “anaemic”, according to Danny Blanchflower (former MPC member). The retail sector is also faltering with reduced consumer spending. This all suggests a weaker economy.
Savers stand to gain from the decision to increase the base rate if retail banks and building societies also increase rates on savings accounts, which Nationwide and TSB have already announced will happen. Those looking to buy annuity for retirement also stand to gain. However, households with variable rate or tracker rate mortgages, which is roughly 50% of UK households with mortgages, may see increases in their monthly payments. In
Deevya Patel 3
NEFS Market Wrap-Up
United States On Tuesday, 8 people were killed and 12 injured, 4 of whom remain in critical condition, after a truck mowed down people on a cycle path in Lower Manhattan. The 29-year-old responsible has been named as Sayfullo Saipov, an Uzbek immigrant who immigrated to the United States in 2010 through the ‘Diversity Visa Lottery’. “I am today starting the process of terminating the diversity lottery program,” President Trump told reporters on Tuesday, calling it "a disaster for our country". Mr Saipov appeared in court on Wednesday, facing terrorism charges. President Trump has nominated Jerome Powell to serve as the next Chair of The Federal Reserve, succeeding Janet Yellen. Powell, 64, has unusually produced no stream of research and is not a trained economist, instead earning his fortune through investment management. However, he is seen as highly intelligent and five years’ experience on the Fed’s Board of Governors has made him well equipped for the role. Powell’s five years on the board has trained him on Monetary Policy, to which Powell brings a dovish approach like his predecessor, Yellen. A cautious approach to interest rates is likely to remain, however a different approach to the position of Chair may exist. “A consensus builder" is how Shai Akabas, who worked with Powell at the Bipartisan Policy Center, a public policy think tank, describes him.
Akabas also noted that Powell "was always trying to glean insights from those around him, and use that to form opinions." In the house of representatives, the Republicans finally unveiled their first tax reform bill. The $1.5 trillion plan will deliver huge tax cuts to corporations, and modest cuts to middle-class families. The cut that is bringing the most optimism to the markets is the corporation tax cut, which is proposed to come down from 35% (see chart below) to 20%. For individuals, the plan establishes 3 tax brackets – 12%, 25% and 35%. However, it is looking like the Republicans may leave the top rate of tax, 39.6%, for those earning more than a million dollars a year. On the stock market, U.S equity benchmarks continue to rise, with Dow up 0.5% for the week, Nasdaq up 0.7% and S&P up 0.2%. Shares of Apple Inc climbed 3%, closing in on a valuation of $900 billion as their new model, the iPhone X, was released. Being the largest stock on the market, the rise from Apple’s shares had a considerable effect on the equity indexes. Edward Turner
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Week Ending 5th November 2017
Europe According to economic data published on Tuesday, the Eurozone has beaten expectations with steadfast third-quarter growth of 0.6%. The stronger currency has not negatively affected the positive three months of economic recovery as analysts anticipated, with unemployment dropping to its lowest level since January 2009. Investors confidently reacted to this announcement as most markets closed higher, with Mr Schmieding (chief economist at Berenberg) stating: "The fall in core inflation is mainly down to one-off factors, it isn't the start of a new trend. But there are no convincing signs of a pick-up in inflationary pressures, and that fully vindicates the ECB's decision to proceed with a slow end to its bond-buying". The positive reports received thus far, from the resolution adopted last week by the ECB to downsize the asset-purchasing programme, has provided a great signal for European policymakers to increasingly diminish support and start a process of structural reform. Mr Juncker’s growing urgency to approve an agreement between South America’s Mercosur free trade bloc and the EU (see graph below) is causing consistent concern among some European farmers. While this deal may induce European investments in large economies like Argentina and Brazil, it may also negatively reshape social, health and environmental norms, as well as blister the
sensitive interests of firms operating in both beef and ethanol industries. CopaCogeca, the European farmers and agricultural cooperatives association, warned that: “It would devastate the EU beef sector, growth and jobs in rural areas and undermine EU food safety standards”. This comment was made regarding the safety aspects of meat production in some Mercosur countries, which uses hormones and growth promoters that are prohibited in the EU. After invoking exceptional powers by taking advantage of article 155 of the Constitution, the Catalan government has been dismissed and the parliament dissolved in order to restore stability and legality to the region. Mr Puigdemont and Catalan officials could face sentences of up to 30 years in jail according to the Spanish justice system for breeding a rebellion against the Government. After failing to testify in Madrid, the Catalan independence leader and other regional officials – who fled to Belgium earlier this week – are refusing to make their return to Catalonia until provided with sufficient guarantees about their safety. In the meanwhile, according to IHS Markit, Spain’s manufacturing sector is maintaining strong economic growth with the increase in its PMI to 55.8, hitting a two-year high last month. Giovanni Cafaro
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NEFS Market Wrap-Up
Japan & South Korea It was confirmed on Thursday that South Korea’s state run energy group, Korea Electric Power Corporation (KEPCO), had given the go-ahead for the north-east Asian energy ‘super grid’ plan. The super grid plan is to connect the electricity networks of South Korea, China, Japan, Mongolia and Russia in order to bolster the region’s energy security. A super grid would allow north-east Asian nations to share energy supplies, particularly in the event of natural disaster. The South Korean President, Moon Jae-in, has sought to use the initiative as a foundation for deeper regional economic and security integration, by bringing nations together in a region on edge over North Korea’s nuclear provocations. All countries in the region must be prepared to always find a common ground on any unforeseen circumstances, such as the issue of the THAAD installation in South Korea for the past year that has caused South Korean companies to be boycotted by China. An analyst at Korea Investment & Securities, Kang Seung-kyung, also questioned the project’s viability stating: “It is not technically impossible and could boost energy security. But it will take a long time to reach a political agreement and actually establish the energy network.” It is a growing concern that these multilateral deals would take years, pointing to the precedent of much-discussed but ultimately unfulfilled plans to develop an overland gas pipeline from Russia to South Korea via North Korea. In addition, South Korea has yet to develop cables that can carry the necessary 800 kilovolts of direct current thousands of kilometres along the seabed.
The Mizuho financial group, one of Japan’s three megabanks, announced that it is considering shedding up to a third of its global workforce over the next 10 years. It is expected to produce a blueprint this week that could see greater use of information technology, which could lead to an equivalent of 19,000 jobs from its 60,000-strong workforce being phased out. The long-term cuts aimed at thinning the ageing workforce (see graph below) is to improve profitability of the company, especially after the Bank of Japan warned in a report later last month of the ‘striking’ low profitability of the country’s regional banks compared to international peers. Mizuho is also facing various challenges, such as the rise of financial technology (fintech) since the Japanese government abolished the law that prevented Japan’s biggest banks from owning more than 5% of a technology company. Increasing regulations is also acting to hamper Mizuho, as are the central bank’s negative interest rates that have had a negative effect on the the traditional loans business of Japan’s banks. To deal with such challenges felt across the Japanese market, Mistsubishi UFJ Financial Group announced in May that it would streamline its operations and increase the use of technology. Hayati Sharir
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Week Ending 5th November 2017
Australia & New Zealand Positive data released in New Zealand this week suggest that much of the postelection uncertainty is coming to an end. However, the New Zealand Dollar is yet to recover suggesting that the markets are still concerned. In Australia, figures have been notably disappointing and there have been major developments in the Australian Government which may have serious consequences for the future. Statistics New Zealand revealed on Wednesday that the unemployment rate in New Zealand has fallen to its lowest rate since 2008, from 4.8% in Q2 to 4.6% in Q3. To further this, the number of individuals in employment has risen by 4.2% over the past year, giving New Zealand the fourth highest employment rate in the OECD. This is due to a boost in working-age migration, which suggests that the current issue of poor wage growth may end as the country edges towards their full employment rate. The nominal wage rate growth, as measured by the labour cost index, rose by 1.9% for the year. However, real wages did not grow as year-on-year inflation also stood at 1.9% CPI. This suggests that real wages may grow in the future, as the new government has promised to raise the minimum wage and tackle immigration, which has suppressed many lower-end wages.
Meanwhile, in Australia, there has been large-scale controversy this week as the High Court declared that the Deputy Prime Minister, Barnaby Joyce, is ineligible to stand in parliament as he has dual citizenship. The government has consequently lost their majority, meaning that there is now currently a hung Parliament. The Prime Minister, Malcolm Turnball, has dismissed calls for MPs to disclose their eligibility to parliament, calling this a “witch hunt�. This is amid concerns that this could cause the government to lose further MPs, which would cause either another election to occur or force the incumbent government to rule with a minority. The government has currently got a working majority as Turnball has gained support from some independent MPs. Retail sales figures have also been disappointing this week. According to the Australian Bureau of Statistics, nominal sales growth was 0.00%, hence missing the expected rate of 0.4% as polled by Reuters. This is largely due to stagnant wages for consumers and rising costs, most namely utility bills.
Nicholas Gladwin
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NEFS Market Wrap-Up
EMERGING MARKETS
Africa The global market today is unlike any other time in history, due to the vital role of technological advancements. Economic superpowers lead the market due to their ability to invest in innovation, and hence find new and more efficient ways to progress. Those without the ability to invest unfortunately lag behind, like many African nations. However Africa’s technological revolution is beginning and Rwanda is one of the leading examples of this. Like most African nations, inaccessibility to healthcare has limited Rwanda’s economic development. The lack of information concerning sexual and reproductive health has caused Africa to have some of the highest rates of teenage pregnancy worldwide and an epidemic of sexually transmitted long-term illnesses. However the new app “Tantine”, developed by two Rwandan medical students and recently released, is looking to breakdown information barriers to important sexual and reproductive health and rights information. Primarily set up in Mahama Refugee Camp, centers with tablets provide the residents with information they previously had very limited access to. Though it is a recent venture, it could significantly reform the nation’s healthcare. The resulting influence on expanding employment and
education options would reflect positively in increasing economic growth. In June 2017, RURA reported that Rwanda’s mobile phone penetration rate had fallen by almost 7 percentage points since December last year. Mobile phones and internet access are vital to economic development and growth, for example, with mobile technologies forecast to account for 24.9% of Egypt’s GDP growth between 2010 and 2020. However, with limited access to electricity and Wi-Fi in rural areas, the spread of mobile devices can be difficult to address. An entrepreneur, Henri Nyakarundi, is tackling this issue through solar mobile kiosks. These mobile carts, offering both solar power to charge phones and Wi-Fi access, are operating in six districts across the nation. With more accessibility to Wi-Fi and mobile phones, people will have better access to information which will in turn lower entrance barriers to the labour market and could even serve to reduce geographical inequality. Furthermore, these technological advancements will boost communication links, which will create new markets such as the app economy and online shopping. It is therefore clear that by boosting mobile phone and Wi-Fi accessibility, economic growth in Rwanda will inevitably follow. Laura Leng 8
Week Ending 5th November 2017
China Last week, the German academic trade publisher, Spring Nature, withdrew access to some of its articles in China in accordance with censorship demands. The articles include topics such as Taiwanese independence and critical studies of the Cultural Revolution. The FT estimates that access to at least 1,000 articles was removed. A similar incident occurred two months ago when Cambridge University Press’ China Quarterly revoked a number of topics in China, a move the journal later reversed. Both publishers were accused of pursuing profit over academic discipline. Increasingly, China has threatened to limit access to its domestic market if its censorship demands are not met. Yet by exerting control through soft-power, economic might, and pervasive internet controls, the party-state risks stifling creative forces. China needs inventive individuals not only to bring prosperity through pioneering new technologies, but also to implement difficult reforms. Stephen Morgan of the China Policy Institute argues that ‘a market place of ideas’ fosters these kinds of individuals. Without the ability to voice opposition, the potential rises for the large R&D budget (which is 2% of GDP) to be distributed inefficiently. The party-state is aware of a need for the exchange of ideas and the perils of overreliance on top-down planning. Premier Li quipped in July, ‘Have there been any major scientific discoveries in human history that took place as scheduled?’ Since the 13th Five Year Plan was announced last year, many policies
are planned to address issues such as redundancy and corruption in the allocation process for research funding. Greater transparency would also serve to increase the translation of R&D expenditure into economic growth. However, examples abound of China taking immoderate approaches to admittedly sizeable issues. The massive Three-Gorges Hydroelectric Dam and the project to channel water to North China seek to address similarly massive problems – respectively, a reliance on coal-fired power plants and a scarcity of water – but do so at high costs in not only monetary terms, but also environmental and human terms. For example, by 2016 construction costs on the South-to-North Water Diversion Project rose to USD $80 billion and displaced 300,000 people. Jon Barnett writing in 2015 for Nature alleged that the project is unsustainable, and a better solution could be found in local water management, including pollution monitoring and irrigation infrastructure. The party-state bought a short-lived solution, but it missed an opportunity to oversee the development of novel technological solutions. Daniel Blaugher
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NEFS Market Wrap-Up
Latin America This week, the Venezuelan government has publically stated its plans to restructure and refinance its debt. The country, which is currently facing a humanitarian crisis, is on the verge of default with no definitive solution in sight. Meanwhile in Mexico, estimates of economic growth have been released. The Venezuelan president, Nicolás Maduro, has announced that the state oil company Petroleos de Venezuela SA (PDVSA) will pay its $1.1bn bond payment, however added that he wants to restructure and refinance the country’s global debt (approximately totals $100bn). The move could see the Venezuelan economy default due to its tight liquidity problems, a sentiment echoed by the market. Following the announcement, Venezuelan bonds, already trading at deeply discounted levels, fell by around 19 cents (see graph below). Furthermore, sanctions imposed by the USA against investing in new Venezuelan bonds limit the opportunities of Venezuela refinancing its debt. The economy is heavily dependent on oil, which accounts for about 95% of its export revenues. Furthermore, PDVSA makes up 25% of Venezuela’s GDP. However, falling oil prices have resulted in several problems, including extremely volatile revenue. Previous earnings from oil have been used to finance social programmes and food subsidies set up by the socialist government. The decline in oil prices, accompanied by unsustainable policies such as price controls, have led to a severe economic and social crisis. This has been exacerbated by hyperinflation, which is around 750% (the highest in the world), and an extremely weak unofficial exchange rate. Maduro is now facing the
tough choice between debt repayments and helping to alleviate food and medication shortages experienced across the country. In other news, a preliminary official estimate has shown a contraction in Mexico’s economic growth in the third quarter of 2017. The contraction (-0.2% economic growth) is the economy’s first contraction in four years. Two major earthquakes hit Mexico in September, along with a string of hurricanes, causing devastation across the country. The government has announced that the process of rebuilding homes and buildings damaged by the earthquakes will cost around 48bn pesos ($2.5 bn). However, central bank officials claim the economy should bounce back once reconstruction begins. Preliminary data also shows that the contraction in economic growth stems from declines in the industry and services sectors (-0.5% and -0.1% respectively). Jessica Murray
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Week Ending 5th November 2017
Russia & Eastern Europe This week saw Russia’s biggest private bank, Otkritie, in the spotlight once again due to its large amount of international debts. Otkritie has previously been under fire for having to be bailed out by Russia’s central bank for a 450bn ruble ($7.6bn) debt it accumulated in international investments. Not only did this negatively influence the Central Bank of Russia, as it was not able to pay back Otkritie’s debt due to not having the necessary capital, but now Otkritie has terminated loan debts of $500m which it acquired from “shadow banks” (financial intermediaries facilitating the creation of credit across the globe, but whose members are not subject to regulatory oversight) in Ireland. OFCB, an Irish intermediary company that processed loan notes to Otkritie, reported on Tuesday that the bank would not be paying its $300m debt or the interest of $7m. BKM Finance, another vehicle used by Otkritie based in Ireland, also reported the bank’s refusal to pay back its debt of $200m and further interest of $4.7m. This is surprisingly unexpected from a bank such as Otkritie, which has been supposedly directly supported by members of President Vladimir Putin’s inner circle with considerable amounts of capital. This has allowed it to surpass even Lukoil’s diamond business, making it the biggest private bank in Russia.
This will leave a negative mark on Russia’s banking. It could also hurt Foreign Direct Investment into the country, as there is still uncertainty surrounding Russia’s policies for unofficial financial transactions with other countries and businesses. This uncertainty would most likely hurt Russia’s effort to expand its economy through international bonds, as foreign investors would not be assured of financial security for their purchased assets. Russia should therefore implement new policies that would aid Foreign Direct Investment and bring confidence back into its financial sector. Primarily however it should focus on paying back the debts it raised from bailing out Otkritie. These events will also affect Ireland, however the consequences that it will have on Ireland’s shadow banking industry, one of its biggest business sectors, is yet to be determined. For now, the only damage done to Ireland by Otkritie is the debt that is yet to be paid and the blow to Ireland’s business reputation. Mario Pucinelli Filho
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NEFS Market Wrap-Up
South Asia Following Indonesia’s ‘Tech in Asia Jakarta 2017’ conference on the 1st and 2nd of November, this week we explore Indonesia’s plans for becoming South Asia’s biggest digital economy. Indonesia has a digital strategy for growing its digital economy which was set out two years ago by a collaboration between the Indonesian Government and idEA (Indonesian Ecommerce Association). Topics in this plan include the proposed adoption of E-payment, cyber security and reducing barriers to entry into the digital economy. Indonesia currently has the fourth largest population of any country in the world, a strong economic growth rate of 5% and an overwhelmingly young populace. All of these factors will prove useful for it to become a strong force in terms of the Internet Economy. In addition to this, Indonesia’s internet usage throughout the population is growing by the rapid rate of 19% per year (see graph below). During the conference in Jakarta this week, Lis Sutjiati, a member of the Indonesian Ministry of Communication and Information Technology, as well as many other industry experts and government officials, laid out plans to implement greater use of technology and the internet in order to reduce inequality in the country and grow the economy. The country’s current Gini coefficient is approximately
0.39 which, compared to countries such as South Korea where the Gini coefficient is 0.34, is fairly high. This therefore represents an unequal society. The Indonesian Government has hopes that Small and Medium Sized Enterprises could hugely benefit from entering the digital economy, which would therefore reduce inequality in the country by redistributing wealth away from just large companies. Another exciting development in the Indonesian Digital Economy is the potential for Bitcoin to be adopted throughout the economy. With 80% of the population currently unbanked, Indonesia could in theory more easily adopt Bitcoin or other crypto currencies. In addition, the quick growth of smartphone usage in Indonesia could provide good conditions for Bitcoin to take off. Bitcoin could prove useful in eradicating corruption for Indonesia, a country with a history of Government problems. Looking forward, the Indonesian Government hopes that this strategy will help 8 million Small and Medium Sized Enterprises to become ‘digitally empowered’ by 2020 and will grow Indonesia’s digital economy into a large power in Asia. Abigail Grierson
Population of Indonesia
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Middle East This week will be focused on the IMF’s most recent outlook on the Arab Gulf States. In the IMF’s most recent economic outlook, the growth forecast for the Gulf Cooperation Council (made up by Saudi Arabia, the United Arab Emirates, Kuwait, Oman and Bahrain) was cut down to 0.5% for 2017. Growth is expected to rebound however in 2018 to 2.2%. Earlier in the year, the IMF predicted growth to be at 0.9% for 2017 and 2.5% for 2018. One reason for the reduced growth forecast is due to the region still feeling the effects of low oil prices, with the IMF stating that the agreement amongst OPEC oil producers to cut back production is holding back growth amongst exporters within the region. Non-oil growth is set to improve to 2.6% this year from 1.8% in 2016, and is forecasted to reach 2.4% in 2018. However this is much lower than historical averages, with an average of 6.7% between 2000-2015 during the period of high oil prices. The Gulf States have implemented spending cuts and applied measures in order to raise non-oil revenues from 2018, such as value added taxes. They have also raised around $30bn from
international markets during the first half of 2017. This is in order to help finance budget deficits, with oil exporters across the Middle East region having experienced an increase in budget deficits from 1.1% of GDP in 2014 to around 10.6% of GDP in 2016. This is projected to fall to 5.2% this year, due to a recovery in oil prices and a reduction in the deficits of the Gulf States. This was a result of the IMF encouraging the region to continue diversifying their economies away from being dependant on oil revenues. Another reason for the reduced economic growth outlook are the geopolitical issues that have arisen, in particular the recent Gulf dispute between Qatar and four Arab states. The IMF have stated that the Gulf dispute has had a “limited impact on growth in the region”, with Qatar having reduced the risks by fast-tracking efforts to diversify imports and financing. However the IMF have warned that if the dispute continues in the long run, it could slow integration progress, thus hurting the confidence and investment levels in Qatar and across the Gulf Cooperation Council. Abdul Akhtar
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EQUITY AND DEALS NEFS Market Wrap-Up
Financials In Asia-Pacific markets this week the Nikkei 225 continues to grow from strength to strength, with companies like Honda and Sony releasing encouraging full year earning projections. Sony shares soared to a nine year high, as the company hiked its full year profit outlook by 26% from an earlier forecast. The Republican driven tax reform bill announced on Thursday had muted effects on American markets, as the S&P 500, the Dow and Nasdaq still closed the week on a high. The three indices have been on a rise with technology stocks leading the pack. Apple’s strong predicted revenues from sales of the newly released iPhone X raised the company’s share price to $172.50. The company is very close to becoming America’s first Trilliondollar company. The biggest loser this week in American markets was the insurance company AIG, whose share price fell over 4% on Thursday after the company posted bigger than expected third quarter losses of $1.7bn. Recent disasters in Florida and Texas have cost the company $3bn, making this one of the largest insurance claims in the industry. The company was also forced to increase its reserves to cover claims on policies sold years ago, which pushed its share price down even further. We are yet to see how these weak results will affect the company’s ratings.
On Wednesday Standard Chartered shares dropped by 7% following disappointing third quarter results. Standard Chartered saw falling revenue in all of its markets except China and North Asia. The company has suspended dividend pay-outs since 2015 and its falling capital ratio is threatening to prolong the suspension. On Thursday however Standard Chartered saw its shares rally as Deutsche Bank upgraded its stock rating from “sell” to “hold”. Citigroup analysts believe that the weakness presents an attractive buying opportunity. The Madrid listed stocks of IAG (International Airlines Group) fell 6.3% on Tuesday, whilst its London shares fell 6.9% on the FTSE 100. The decline in stock prices is a bit surprising considering that the company hiked up its earnings targets for 2018-2022. However investors and analysts were left disappointed after the company announced that it wouldn’t be increasing its 15% return on invested capital targets. Changu Maundeni
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Week Ending 5th November 2017
Technology & Health In this week’s wrap-up, big pharma brings action against the NHS, and tech stocks grow in the face of adversity. More than a decade ago, doctors discovered that a generic anti-cancer drug Avastin was just as effective in combating macular degeneration (slow-onset blindness) as its licensed counterpart, Lucentis. The manufacturer of Avastin did not apply for a license, even though a 2012 NHS study showed the two medications to be just as safe and effective. As the administration costs of Avastin are vastly lower than those of Lucentis, the cheaper drug could save the NHS £84 million a year. However this week, two pharma giants Novartis and Bayer (the advertisers of Lucentis) have threatened the NHS with legal action, if the NHS pursues offering Avastin as an alternative treatment for patients. Share prices of Novartis have been sensitive since July 2015, with their price falling from 101.40 CHF to 83.60 CHF (with a low at 68.15, November 2016). Public disgruntlement against big pharma holds bad news for share prices, but potentially positive ramifications for healthcare availability. 2 weeks prior we thought about whether Apple’s extremely low iPhone 8 sales might indicate decreased demand that would extend to the iPhone X. At present, iPhone X demand is in fact soaring – customers are queueing overnight and pre-orders sold out in minutes. The resale market is seeing units with a 50% or greater mark-up. This has resulted in a
19% rise in Apple’s share price, reaching a record high at $172/share. Apple’s share price has been reverberating at around $160/share since August. Apple is now worth over $868bn, closing in on it becoming the world’s first $1tn company. In the social media world, American election interference by state-backed Russian operatives has put intense pressure on Twitter, Google and Facebook to identify and disclose the ways that the interference occurred. 146m users may have seen Russian misinformation on Facebook’s platform alone. Facebook’s shares responded to the Congressional grilling with a 2.1% fall, whilst Google and Twitter shares responded negligibly, by +1% and -1% respectively. Yet Facebook’s quarterly revenue is up 47% - the political scandal a mere hiccup. Pressure from Congress and tighter regulations – or firms themselves having to increase spending on ‘policing’ their sites – could put downward pressure on long-run business strength. However, markets never seem to respond sensitively to social media firms in the face of political scandal. Whilst it is unlikely that regulations will have much of an effect on Facebook, Twitter and Google shares, investors should be wary of public opinion regarding heavier scandals. Problems concerning regulation are amongst the largest dilemmas facing social media firms, whether or not they seem small at first. Matthew Chapman
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NEFS Market Wrap-Up
Oil, Gas & Industry This week, NES Global Talent announced that 60% of over 3,000 oil and gas employers they surveyed intend to hire a substantial amount of people over the next year. Their report predicts a higher number of hires than redundancies in 2018 – a four-year first for the industry. The uncertainty around workers’ willingness to return to a volatile industry however is recognised as a problem amongst industry executives. The two North Sea deals finalised on Wednesday 1st indicate improvements in confidence in the potential of the U.K.’s basin and in the future of the country’s oil and gas industry. Chrysaor’s $3.8bn acquisition of Shell assets (representing 7% of UK’s oil and gas production in the North Sea), together with Ineos’ $250m takeover of BP’s interests in the Forties Pipeline System, can “act as catalysts for fresh investment” as Deirdre Michie commented. As reports of third-quarter earnings from global oil and gas giants continue to beat expectations (see graph below), due to both partial recovery in crude prices and cost reductions, the oil markets seem to be rebalancing. Following Total SA and Exxon, Royal Dutch Shell informed on Thursday 2nd about a forecast-beating 50% increase in net profit from last year. BP reported a profit of $1.87bn this week – double the $933m figure from a year ago. The firm’s announcement of a share buyback programme (for the first time since 2014) suggests increasing “financial and operating momentum”, according to analysts at Barclays, and is an additional indicator to the industry’s recovery. Brent (ICE EU) futures experienced a modest gain this week, maintaining above
$60 a barrel and closing at $61.21 on Friday 3rd, whilst WTI Crude (NYMEX) reached $55 a barrel for the first time since July 2015. Natural Gas (NYMEX) recovered from last week’s low and settled at $2.989. BP’s chief financial officer revealed he expects prices to stabilise “within the $5060 per barrel range”. BP announced a reduced break-even point of $49 a barrel this week, whilst other oil giants also “proved they can work at $50 oil”, according to analysts as Allianz Global Investors. The break-even point has become a common measure for success for oil companies. Nonetheless, although cost reductions improved profitability, the cuts originated mainly from the cancellation of new oil and gas developments. This has fallen from a total of 35 a year between 2010-2014 to 12 a year between 2015-2017. Total’s chief executive therefore advocates for urgent investment increases in the industry “if a supply crunch [and an accelerated shift to renewables are] to be avoided in the 2020s.”
Net income, Q3 2017
Felicia Bogdana Cornelia Ababii
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COMMODITIES
Week Ending 5th November 2017
Agriculture Bunge, the agricultural trader and processor, could possibly be floated in an IPO shadowing a failed attempt to find buyers for a stake in their Brazilian sugar mills. The eight sugar mills have already been “financially separated” following a separate set of results from the rest of Bunge’s divisions. Bunge’s CEO, Soren Schroder, explained the sugar mills will “remain part of Bunge, but with a financial set-up that allows us to separate from Bunge Limited very quickly when the appropriate time comes”. Bunge acquired Brazilian Moema, a sugar mill operator, in 2010, following high sugar and fuel ethanol demand present at the time (see graph below).
one of the largest producers behind Raízen Energia, Cosan and Biosev. Poor cane harvests and a fall in sugar prices however led to the mills making a loss. Thomas Boehlert, Bunge’s CFO, said the mills were now expected to report an annual operating profit of $75m. He stated: “Up until now the Brazilian equity market and the economy was under a lot of flux. Things are turning for the better, and so the window for acting on something like that [selling a stake in the sugar mills] may be opening up”. Bunge has recently looked at cutting profit targets following harsh trading conditions especially for grain and sugar. The reduced targets achieved a total operating profit of $758m for the year, considerably less than the previous year of $955m, estimated by J.P. Morgan. Bunge reported Q3 earnings of $92m, down from a previous $118m the year before. Along with many other agricultural traders, Bunge has faced harsh times following poor grain and oilseed trading. This has been primarily due to high supplies and volatile prices. Sarren Sidhu
The sugar mills together are capable of crushing 23m tonnes of sugar cane per year. Their capability had made Bunge
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NEFS Market Wrap-Up
Energy The spotlight this week is turned back to OPEC again as Saudi Arabia took energy markets by surprise in slashing its breakeven crude oil price further from $96.60 in 2016 to $70 in 2018 (see graph below). It seems like a counter-intuitive move by the Kingdom after OPEC and Russia’s oil output-cut deal succeeded in lifting oil prices to its highest in two years last week. However, in hindsight, Saudi Arabia’s decision to cut its break-even crude oil price for 2018 is actually a plan to reduce its reliance on using crude oil exports to meet the country’s fiscal needs. The Kingdom is currently looking for ways to revitalise its oil-export dependent economy by exploring other initiatives. This includes making Saudi Aramco public and building a US$500bn economic zone with Jordan and Egypt in order to diversify the sources of its government revenues. OPEC members have been relying on high oil prices in the past to keep their economies churning and use break-even oil prices (the minimum crude price level needed) as a measure to meet their annual government budgets. But global crude oil prices have largely been trading below these break-even price levels for the past two years, which has resulted in the current poor economic conditions in the Persian Gulf region.
According to Bloomberg this week, Bahrain has just asked for financial assistance from Persian Gulf allies in order to boost its foreign exchange reserves, and has warned investors of the risk of a possible currency devaluation. S&P Global, a US credit rating agency, had already downgraded Bahrain’s credit outlook in June 2017 from stable to negative. A large currency devaluation would further hamper Bahrain’s ability to tap the global bond markets to meet its government budget. Buoyed by last week’s strong price rallies, crude oil prices continued to march higher this week as Brent crude posted yet another new 2017 high of $62.20. The $60 price resistance that capped Brent crude price for more than 2 years turned into a strong price support level this week. WTI crude price finally printed a new 2017 high of $55.73 on Friday, after the US added 261,000 Non-Farm jobs in September, before closing at $55.62. Looking ahead, the key market-moving event next week is the Bank of Japan’s Monetary Policy Meeting on Monday. Investors will be looking for hints from the speech by Haruhiko Kuroda, the bank’s Governor, as to a possible taper of its bond-buying spree in 2018. Mingli Yong
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Week Ending 5th November 2017
CURRENCIES Major Currencies Monetary policy has undeniably been one of the biggest influencers on major currencies this week. News that the Bank of England (BoE) will tighten monetary policy for the first time in 10 years has caused a stir for sterling. With the latest policy announcement and inflation report hitting markets on Thursday, the pound tumbled sharply against the majority of global currencies (as low as 1.3042 against the dollar), although it has since regained stability as we head to the end of the week (see graph below). Such a sharp drop in value comes as a surprise, given that the rate rise was widely anticipated and the MPC’s growth forecasts are largely unchanged since August. Nonetheless, speculators predict that the market should continue to stabilise while short-term volatility clears out, but there are mixed opinions regarding the future of interest rates and therefore where the pound will settle. While the euro has been on an upward trend this week, having risen from 1.1602 on Monday to 1.1667 on Friday, the EUR/GBP rate has fallen. This comes following the BoE’s aforementioned policy announcement, as well as the release of
the Services PMI (Purchasing Manager’s Index), which suggested that expansion in the services sector has been its fastest in six months between September and October. This complements previous data, which indicates that UK economic performance is relatively strong going into Q4. Despite this, the euro is slowly and quietly pushing upwards under the shadow of US and UK monetary policy. In contrast to its positive performance in recent weeks, the dollar has fallen by 0.3% since the start of the week in anticipation of the Federal Reserve’s monetary policy statement on Wednesday. Reports of declining unemployment, growth in household spending and a rise in overall economic activity have seen the dollar begin to steady itself, as the base rate remains unchanged as expected. However the dollar index has not yet returned to Monday’s high of 94.90, instead fluctuating to 94.70. The week’s initial blip would not be expected given the dollar’s strength as of late, but the dollar appeared to be on track in correcting itself at the time of writing. Amelia Hacon
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NEFS Market Wrap-Up
Minor Currencies This week the Australian Dollar (AUD) fell sharply against the G10, with some of the steepest losses relative to the Pound (see graph below). Whilst UK Pound has had a strong week following recently released inflation data, the AUD fared weakly after it was reported that the nation’s retail sales had missed forecasts in September. Following two months of contraction, sales growth has now stalled at 0.0%. Whilst AUD sales were expect to rise at a monthon-month pace of 0.4%, the figures stopped at their reduced level after aggressive price discounting hit the AUD value of goods sold. The Norwegian Krone (NOK) has enjoyed one of the most violent upswings of any currency this year, as it has piggybacked on the strengthening Euro under hopes that interest rates in Europe may soon be on the rise. However the NOK recently sharply declined against the dollar and has now become trapped in a tight range between 8.200 and 8.100. This fall however was very unexpected, considering the strength of the Norwegian economy at the moment. The Norwegian wealth fund has performed exceptionally well, oil prices have risen, the Eurozone is maintaining its upward trend and Sweden, Norway’s closest neighbour, has been posting world record growth. Yet the NOK has still failed to perform.
55% or more. Such dramatic policies all suggest that New Zealand’s markets are very likely to slow down. Since the election in October, the NZD has weakened by over 4.5%, due to the growth concerns associated with the policies of the parties within the new government. However Jason Wong, an Auckland-based foreign exchange analyst at the Bank of New Zealand, stated that the NZD is likely to rise despite the negative views. Nevertheless, against the NZD, the Pound, Dollar and Euro rose by 2.75%, 2.25% and 1.66% respectively this week. Only the Turkish Lira and Mexican Peso fell more than the NZD. Jeremy Whiskard
Finally, the value of the New Zealand Dollar (NZD) has fallen this week, following the election of a new government with views adverse to a strong currency. Proposed policies, which have been seen as harmful to the success of the NZD, include proposals to limit foreign investment in New Zealand property and to cut immigration by at least
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Week Ending 5th November 2017
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Charlotte Alder at calder@nefs.org.uk. Sincerely Yours, Charlotte Alder, Director of the Nottingham Economics & Finance Society Research Division
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