Week Ending 10th December 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 Middle East China Latin America Russia & Eastern Europe South Asia
Equity and Deals 13
Financials Technology & Health Oil, Gas & Industrials
Commodities 16
Agriculture & Resources Energy
Currencies 18
EUR, USD, GBP AUD, JPY, Other Asian
2
Week Ending 10th December 2017
MACRO REVIEW United Kingdom On Monday, the Confederation of British Industry (CBI) forecasted that growth in the UK would remain sluggish for at least the next two years. It predicted that GDP growth would be 1.5% in 2017 and 2018, before falling to 1.3% in 2019. The short to medium run causes of this lacklustre growth include uncertainty surrounding Brexit and squeezed household income, with longer-term cause being the persistently low levels of productivity that have held back the UK’s supply potential. However Alpesh Paleja, a principal economist at the CBI, suggests that the UK should take advantage of the weaker pound and the “upturn” in global growth to expand its exporting industry and hence strengthen GDP. Even though the CBI’s forecast of slow GDP growth is undesirable, things could be worse. Given the uncertainty that taints the UK economy at the present moment due to frustratingly slow progress in Brexit talks, it wouldn’t be unreasonable to expect macroeconomic indicators such as growth, inflation and unemployment to be exhibiting volatile movements. This hasn’t been the case however. Unemployment remains at a record low and inflation has
remained steady at 3%, with a fall anticipated towards the Bank of England’s 2% target. Furthermore, assuming there are few exogenous shocks to the economy, it does not seem likely that Britain’s growth will fall into negative figures in the foreseeable future. The primary long-term goal should therefore be efforts to improve productivity, through increased infrastructure spending and greater investment in R&D. In other news, after last week’s announcement by RBS to close 259 branches, this week similar news emerged from the industrial sector, with General Electric announcing its plans to cut 12,000 jobs. In the UK this is expected to result in 1,100 job losses, affecting jobs in Stafford and Rugby the most. However, given that General Electric employs a total of 18,000 workers in the UK (6% of the UK labour force), the overall impact from these job losses is likely to be minimal. The rationale behind the jobs cuts is to increase competitiveness, following recent slumps in the global gas and coal market that negatively affected General Electric.
Deevya Patel
3
NEFS Market Wrap-Up
United States Positive figures released this week in the US suggest that the long-term economic outlook is positive and that the current levels of growth will continue, despite the uncertainty surrounding the tax reform bill and NAFTA agreement with Canada. Statistics released on Friday 8th by the Labor Department indicate that unemployment figures remained at 4.1% for November, despite an increase of nonfarm payrolls by 228,000. The increase in nonfarm payrolls was largely attributed to growth in the business, healthcare and manufacturing sectors. However average hourly earnings only grew by 0.2% for November. This low level of growth has caused concern for some economists regarding the highly speculated rate hike next week, by reducing inflation expectations and thus the necessity for a rate hike. The Commerce Department on Tuesday 5th announced that the US trade deficit had increased in October by 8.6%. This brings the deficit up to a nine-month high of $48.7billion. This was largely due to an increase in the price of oil, which traded at $47.26 on average per barrel, hence increasing the cost of imports to the US. On Saturday 2nd, the Senate narrowly passed their own tax reform bill in response to the bill passed by the House of Representatives in November, with 51 voting in favour and 49 against. This will begin a period of arbitration whereby the two houses will begin negotiations over a final tax reform bill.
Meanwhile the Bank of Canada held interest rates constant at 1% on Wednesday 6th, despite speculation of a further increase. The bank held rates constant due to the job market beating expectations and the uncertainty surrounding NAFTA, which consequently make future forecasts for inflation extremely difficult. Uncertainty surrounding the NAFTA agreements continued this week as negotiations stalled over a revised deal. This was due to new demands from the USA such as tougher quotas on car imports and disagreements over softwood exports from Canada, which Canada claims would be harmful to all members. As a result of the breakdown in talks, Canadian Prime Minister, Justin Trudeau, suggested that Canada could revert back to their pre-NAFTA trade agreement if talks do not progress. This prompted increasing pressure on Trudeau from the Business Council of Canada and many CEOs to complete agreements on the Trans Pacific Partnership (TPP) trade deal, which would boost Canadian exports considerably. Nicholas Gladwin
4
Week Ending 10th December 2017
Europe “I believe we have now breakthrough we needed”
made
the
Jean-Claude Juncker, the president of the European Commission, was optimistic following Thursday’s meeting regarding Brexit negotiations. In the subsequent press conference, Juncker stated that Theresa May had negotiated in a “generous” manner and made “significant commitments” on the main issues in the latest round of negotiations – including a ‘hard border’ for Ireland and the rights of EU citizens. The latter of these issues is one that has been highly speculated upon by both the media and the general public, raising concerns for EU citizens who have established their livelihoods abroad. May assured that the new agreement would guarantee the rights of these three million citizens, likely motivated by preventing outflows of high-skilled or highlydemanded labour. Donald Tusk released a statement on Friday morning in response to the earlier press conference, asking that the UK respect its budgetary commitments and EU law (including new laws) during the remaining two years of its transition period. Tusk also nudged forward the idea of commencing discussions about the UK’s future with the EU, although this issue is likely to come much further down the line given that May remarked that the two leaders “ran out of time, essentially” in this week’s meeting.
In the background to this news, macroeconomic data continues to shed a positive light on EU performance as we reach the end of the year. Earlier in the week, Eurostat (the statistical office of the European Union) announced that seasonally adjusted GDP rose by 0.6% during Q3 of 2017 and by 2.6% during Q3 of 2016. Roania, Malta and Latvia reported the highest growth between quarters, whilst GDP fell by 0.6% in Denmark. Euro area annual inflation is expected to be 1.5% for November, an increase of 0.1% from the previous month. By considering the main components of euro area inflation, we see that this rise is largely driven by growth in energy prices (1.7%), as well as other influencers such as services (1.2%) and non-energy industrial goods (0.4%). Reported data in recent weeks has been consistently positive for EU performance, hence corroborating the notion of a strong start for Q1 2018. Amelia Hacon
5
NEFS Market Wrap-Up
Japan & South Korea In recent months, Japan’s economic growth has looked more promising with Q3 of 2017 showing economic growth at an annualized rate of 2.5%. Two of the main drivers of this growth have been tourism (up 21.5% in the year up to October) and trade. Tourism largely came about through more relaxed visa regulation, whilst trade has been driven by strong demand for high-tech products (one of Japan’s major exports).
The system in place currently requires foreign businesses looking to set up in Japan to obtain a business management visa alongside other pre-requisites, such as putting up more than 5 million yen as capital. Tokyo and Fukuoka however were granted a special status, which has meant foreign investors can found startups and are given six months before needing to obtain a business management visa.
It is no surprise therefore that the Japanese government are looking to maintain this strong trade growth through a new EU trade deal. This Friday, terms were agreed for a free trade deal between the two economic powers that, if ratified by all 28 members of the EU and the European parliament, would create the “world’s biggest open economic area” according to the BBC. The EU is currently Japan’s third largest trading partner; a free trade deal would therefore boost trade even further and encourage greater economic growth.
Reports have suggested this visa could expand beyond these two economic zones and extend to one-year visas. The relaxation of regulation for businesses would be a major attraction to potential foreign investors. An increasing number of foreign businesses in the nation and economic migrants (also boosted by working visa relaxations earlier this year) would filter through to boost domestic consumption and business investment. This would represent an important move away from government spending as the main domestic driver of economic growth. The boost in economic migration would also help Japan fight against the on-going battle against a shrinking population.
Japan is also looking to boost foreign direct investment into the nation. In turn this would hopefully increase domestic consumption and local business investment – two key drivers of economic growth. Japan is also reported to be launching a one-year start up visa program in 2018, which would look to extend a pre-existing six-month program currently available in Tokyo and Fukuoka.
Laura Leng
6
Week Ending 10th December 2017
Australia & New Zealand On the 7th December, the Australian Securities Exchange (ASX) released the news that it plans on replacing its current clearing and settling technology, CHESS (Clearing House Electronic Subregister System), with the innovative technology that is Blockchain. This move aims to significantly reduce costs of trading for customers, as well as speed up transactions. The ASX will be the leader in using Blockchain technology in mainstream equity markets, however it is thought that NASDAQ, LSE and the Japan Exchange Group are likely to follow in the near future. Blockchain is technology that was invented by an anonymous group that calls itself Satoshi Nakamoto. Originally created for the digital currency Bitcoin, the technology is a way of logging data through a digital ledger of transactions and agreements that are verified by everyone. Blockchain is designed to cut out the middleman who would usually verify transactions – i.e. Banks and Credit Card providers. Due to this threat, every major bank around the world is currently carrying out blockchain research. It is thought that 15% of banks are currently implementing the technology. The ASX announced through a Media Release that “the new system will be operated by ASX on a secure private network where participants are known,
‘permissioned’ to have access, and must comply with ongoing and enforceable obligations”. The statement also detailed how they have carried out two years of research into the technology, thus confirming “[their] confidence in the functional, capacity, security and resilience capabilities’” of the new system. Many large financial institutions believe that Blockchain represents the future of financial transactions. It is thought to be a particularly transparent system as the ledger is stored across thousands of computers across the world, thus everyone can always have access to the newest version of the ledger. Similarly, details of the transaction are not stored but just the fact that it happened, hence making it less susceptible to hackers and fraud. But despite how secure this technology is hoped to be, there are always risks. Just this week, the Bitcoin mining marketplace, NiceHash, was hacked and lost $60m. When technology like this is part of an institution’s core infrastructure and the risks are further emphasised, Exchanges like the ASX will have to remain vigilant. By March 2018, the Australian Exchange hopes to fully transition to the new system.
Abigail Grierson
7
NEFS Market Wrap-Up
EMERGING MARKETS
Middle East On Tuesday 5th December, the Gulf Cooperation Council (GCC) summit was held in Kuwait. It brought together representatives from the six-nation bloc for the first time since the Qatar crisis erupted six months ago. The summit involved Qatar’s emir and representatives of the three GCC member states currently boycotting Doha – Bahrain, UAE and Saudi. The Kuwaiti emir, Sheikh Sabah Al Ahmed, urged the six countries to engage in unity, thus assuring the representatives of his confidence in the resilience of the 38-year old institution. Additionally, he called for the formation of a committee that would look into modifying the GCC’s statute to establish a clear mechanism for resolving disputes between member states. Meanwhile, UAE and Saudi Arabia have just launched an economic and military partnership. This is seen as a move to threaten and further weaken the GCC, the Arab world’s only functioning trade bloc. Saudi Arabia and UAE, the Gulf’s largest economies, have been forging a deeper alliance in recent years and have pursued increasingly assertive foreign policies.
Doha posed large risks for Qatar’s financial sector. It is estimated that about $30 billion has flowed out of Qatar’s banking system, with Qatar’s trade, tourism and banking sectors having been the worst hit by the restrictions put in place. Qatar’s stock market also took a big hit, with about 10% ($15 billion) of its market value lost over the first four weeks of the crisis. Yet Qatari banks have still been able to increase their regional exposure in recent years, with Qatar National Bank (QNB) having around 210 branches in Egypt and 27 branches in the UAE. Nevertheless the fall in trade also poses a very significant threat to Qatar, with Qatar dependent on imports for the basic needs of its population. About 40% of Qatar’s food comes through its border with Saudi Arabia, yet Qatar’s trade balance with Saudi Arabia, Egypt, Bahrain and UAE has fallen significantly in recent months (see graph below). Hayati Sharir
Since June this year, economists noted that this unprecedented stand against 8
Week Ending 10th December 2017
China In this week’s wrap-up, we grapple with China’s debt-centralised economy. In earlier weeks we posed a question regarding China’s rising debt levels. A recent report by the IMF has warned about the risk that the world’s second-largest economy poses to global financial stability. It reports that credit has been outpacing GDP by 25% above trend. After stress tests by the IMF, 27 out of 33 of the banks administering these loans needed to raise more funds (although complying with capital reserve standards under Basel III regulation). According to the IMF, whist household debt is low, it has risen by 15% of GDP over the last 5 years and is therefore a significant indicative factor in asset-price bubbles. One saving grace of China’s debt bubble is that it has led to GDP growth, but not necessarily stably. During Thursday’s Fortune Global Forum, Peking University Finance professor Michael Pettis stated that he believed this GDP growth was no indicator of financial strength, and that it essentially ignores the debt-oriented base of this growth. Tsinghua University Economics professor, David Li, argued in return that a large proportion of GDP is being stably used in the funding of public good sectors, such as building infrastructure. Whilst this is arguably a good proximate growth strategy, it is quantifiably negligible in contrast to a debt level that is 250% of GDP. Dr. Pettis claimed that local governments are ‘encouraged to borrow the necessary (amounts) in order to generate GDP growth’.
China has long extended finance to failing state owned enterprises. Government liabilities totalled around 70 trillion Yuan in 2015, up 70% from 2010. Ratna Sahay, a deputy director within the IMF, recommends that ‘implicit guarantees to state-owned enterprises’ be removed gradually and carefully. China cannot sustain enterprises that consistently use greater debt to drive performance. Chinese SEOs are mainly clustered in the manufacturing and raw materials industries. Last week however we introduced the importance of consumption-led growth: if a great source of both production and consumption results from manufacturing, curbing funding in this industry could pose significant risk to the economy. A reliance on these ‘smokestack industries’ is even more problematic when taken in light of China’s anti-pollution measures. China topped the World Health Organisation’s 2016 list for deadly outdoor air pollution. A recent policy to reduce coal consumption by 30% led to a switch to natural gas, but this switch resulted in a record high price hike for the season. China is consequently facing a heating crisis, with millions left without proper heating. Reform has wider implications if not implemented thoughtfully. China’s economy relies on SEOs and smokestack industries. Yet their debt and environmental ramifications must be mitigated. Careful reform must take place. Matthew Chapman
9
NEFS Market Wrap-Up
Latin America This week we will assess the political crisis facing Honduras, as well as the Brazilian central bank’s decision to cut its benchmark interest rate to its lowest point since 1986. Honduras has been experiencing political unrest in the last two weeks following the presidential election on November 26th. At the time of writing, no official results have been released. However, according to the latest count, the incumbent president Juan Orlando Hernandez has a lead of around 53,000 votes against opposition candidate Salvador Nasralla Following suspicious delays during the count, Nasralla has accused vote counters of manipulating the results after it was shown he had taken an early lead. The accusation has sparked street protests across the country, as Nasralla and protestors demand a full recount or a runoff election. These protests reportedly caused 11 deaths and have led to the government enforcing curfews from 6pm to 6am, although curfews have now been lifted in some areas of the country. Members of the police however have refused to “repress” citizens through the enforcement of curfews, therefore going on strike last Monday. Despite experiencing its worst political crisis in a decade, Honduran bonds seem
to have not been affected. After an initial decline following the confusion of the vote, the country’s bonds have rallied. Investors have favoured the country over the past four years due to Hernandez’s positive impact on the nation’s fiscal deficit, which has fallen from 7.9% of GDP in 2013 to 2.6% last year. In contrast to Hernandez’s market-friendly approach, Nasralla represents an alliance of opposition parties and promises to raise minimum wage and increase taxes on luxury goods. On Wednesday, the Brazilian central bank cut the Selic benchmark interest rate by 50 basis points to a record low of 7%. The unanimous and widely anticipated decision follows continuous reductions in interest rates over the past year, as shown in the graph below. The central bank has suggested it could make a further cut at its next meeting in February, however stated that “the behaviour of inflation remains favourable”. Friday saw the release of November’s inflation rate being 2.8% yearon-year, which was below the market expectation of 2.88%. The lower-thanexpected inflation rate reaffirms suggestions that further cuts could be made at the next meeting.
Jessica Murray
10
Week Ending 10th December 2017
Russia & Eastern Europe Ukraine is said to have realised more reforms since the pro-European uprising of 2014 than it had in the previous 20 years. The changes, aimed to reform the economy and stop prevalent corruption, include reorganising the police force, modernising the banking sector and introducing a wealth-reporting system for officials. Yet, over the past months, Ukraine has showed signs of complacency vis-à-vis the reforms initiated in 2014. This week’s article will examine Ukraine’s current economic situation and its development prospects. On Thursday 7th the Ukrainian government approved next year’s draft budget, which is “balanced and realistic” and meets the country’s fiscal obligations to the IMF, according to the finance minister. The projections for next year involve a 9% inflation rate, revenues of 914 billion hryvnias (roughly $33.7 billion) and economic growth of 3%. The deficit is expected to be 2.46% of GDP (marginally higher than IMF’s target of 2.4%), due to “strengthening budget discipline”. Though Ukraine plans to meet the fiscal target, which is a pre-requisite for the $17.5-billion funding program offered by the IMF, the delays in corruptioncombating reforms (such as the implementation of an independent anticorruption court) will stall the $2 billion loan that Ukraine anticipated this year. Analysts at Reuters remarked that policymaking is currently driven by “political rather than fiscal calculations”. The evident shift in focus, away from possible economic improvements, can be attributed
to the upcoming elections.
2019
presidential
Anticipated laws have also been postponed. On Thursday 7th, the agreement on agricultural land sales – a policy crucial to the sustainable long-term economic growth of the country and key to receiving further funding from the IMF – was delayed again after a vote in the Ukrainian parliament. Reuters reported that the delay will continue to limit “productivity and…private and foreign investment”, as 100 acres of land was hence prevented from being released onto the market, given that it is split into smaller areas that can only be rented. Furthermore, a representative from the non-governmental Anti-Corruption Action Centre revealed that a proportion of the already-agreed reforms, including the changes in the energy and judicial sectors, were “faked” by the political elite. The slow progress on reforms that have yet to be implemented, as well as the questionable sustainability of the alreadyimplemented reforms, led to a phone call on Thursday 7th between Ukraine’s president and the head of the IMF. Christine Lagarde urged President Poroshenko to accelerate the implementation of planned reforms. In the current context of a conflict-ridden Ukraine, where 3 million people are in need of humanitarian assistance that the UN is now committed to not providing, development initiatives are crucial.
Felicia Bogdana Cornelia Ababii
11
NEFS Market Wrap-Up
South Asia As the Indian government focused on the outcome of a second round of voting in Nepal’s parliamentary elections, China concluded a free trade agreement (FTA) with the Maldives, the island country in the Indian Ocean. The FTA was rushed through the Maldivian parliament on the 29th of November, likely reflecting the political influence of China. The agreement will reduce tariffs to zero for more than 95% of goods and will increase the quantity of fish exported to China, thereby improving its current account. The import-dependent Maldives run a large trade deficit. The deficit worsened after 2013 when the EU upgraded its status from being a Least Developed Country, hence denying it special tariff status under the EU Generalised Scheme of Preferences. India will look on this development as concerning. As the second such deal China has concluded in South Asia, it appears more likely that China will pursue similar deals with Sri Lanka, Nepal and Bangladesh. These developments, along with the broader Belt and Road Initiative, are seen by India as simple tools for expanding Beijing’s regional hegemony. During a state visit last month, Indian PM Modi agreed to work together with Japan on an Indo-Pacific strategy, which broadly seeks to promote a rules-based trade structure in the region and aims to prevent
China's aggressive interpretation of maritime freedoms. However Chinese officials will argue that its infrastructure agreements are merely meeting demand. The Asian Development Bank forecasts that infrastructure investment will need to total US$1.7 trillion per year to maintain growth in Asia, which would require filling an investment-infrastructure gap that is equivalent to 2.4% of projected GDP. The Reserve Bank of India (RBI) voted last Wednesday to hold the repo rate steady at 6%, deciding not to heed the advice of the government to lower the rate further and bolster growth. The economy recorded dismal growth in the quarter ending in June, lengthening a declining trend in growth rate (see graph below). However, GDP growth rebounded in the July-September quarter to 6.3% annualised following strong expansion in manufacturing. The RBI also predicts inflation to climb from 3.58% in October to between 4.3-4.7% by March of next year. Both factors contributed to the bank keeping a neutral stance on economic outlook. Analysts at Capital Economics expect that with ‘growth strengthening and core price pressures building’, the bank could begin tightening its monetary policy in the second quarter of 2018.
Daniel Blaugher
12
Week Ending 10th December 2017
EQUITY AND DEALS
Financials On Thursday the S&P 500 finally took an upturn after 4 continuous days of substandard performance. This improved performance was mainly due to growth in the industrial and technological sectors, with key players such as Facebook climbing 2.3% and Google’s parent company Alphabet gaining 1.2%. Rallying crude oil and energy stocks also helped to bolster Thursday’s growth, as energy stocks rose 0.2% after gaining back some of Wednesday’s losses. American markets have been in flux this week, partly due to the uncertainty that the tax reform bill poses. Investors have consequently been trying to shift to areas of the market that they believe will benefit the most from the upcoming reform. It seems that stocks will continue to shift until investors get more clarity on what the final tax proposal will be. Following the volatility displayed by American markets, the Nikkei 225 was also down 2.9% by Wednesday. However the market seemed to rally on Friday to close the week at roughly the same level it opened at on Monday.
Australia’s main stock exchange, the ASX 200, also experienced falling shares on Tuesday. This was due to declining commodity prices that came amidst concerns about the outlook of the Chinese economy, one of the world’s largest commodity consumers. However the index showed signs of improvement on Thursday, hence managing to close the week near its 6000-point milestone. Despite a minor setback on Thursday, the FTSE 100 managed to close the week 96 points higher, with financials driving most of this week’s growth. The growth comes following the adoption of new banking regulations that were kinder to European banks than feared. Lloyds, Barclays and HSBC consequently rose 3.8%, 2.5% and 1.2% respectively. Real estate investment trusts were also among the best performers of the week, as Hammerson and Land Securities group gained over 2.5%. It will be even more interesting to see how British, European and international markets react to Friday’s Brexit negotiations. Changu Maundeni
13
NEFS Market Wrap-Up
Technology & Health This week saw several Health companies make large investments and Tech markets being presented with unique opportunities. Sony, the multinational technology titan, has reported selling 2m units of its PlayStation VR headset, making it the top seller in a rather niche market. Sales for the PS4 have reached 70.6 million since its launch in 2013, hence maintaining a lead over Microsoft’s Xbox (with a two-toone sales ratio in favour of Sony) and holding its own against Nintendo’s Switch. Considering the growing popularity of smartphones and tablets, as well as the resurgence of PC gaming, this is a great number of sales for Sony. Overall more than 12.2 million games have been sold for the PlayStation VR, which has 150 titles available, and 617.8 million games for the PS4. VR is looking like a sound sector to invest in for the long-run. Moving on to health, a US-based life sciences fund plans to invest $1bn to create a large biotech company in the UK. Four other companies are already planned for the next ten years, with total investment amounting to £20bn. This could lead to greater English independence and a slight strengthening of the British Pound. However, with many other prominent pharmaceutical companies all around Europe, competition could be rather fierce in terms of international pharmaceutical trade.
The pharma-industry in the post-brexit scenario is expected to see high investments by several leading pharma companies, including GlaxoSmithKline (GSK), which is expected to invest tens of millions of pounds in the early stages of brexit to promote new drug discoveries. Finally, Nestle announced on Tuesday its plans for a $2.3bn acquisition of Atrium Innovations - a Canadian nutritional products company. This has been the boldest move into consumer healthcare by Nestle’s chief executive, Mark Schneider. This deal will allow Nestle to expand into probiotics, plant-based protein nutrients, meal replacements and multivitamins. The consumer healthcare market has been in Nestle’s radar for quite some time according to Mr Schneider, who told investors at a conference in September that the sector’s promise comes from an increased interest in self-medication, strapped state healthcare, and baby boomers’ desire to “age healthily”. Overall, the over-the-counter market, accounting for a range of products from vitamins to painkillers, has been growing at a compound annual rate of 5% for the past five years globally. This makes it a very good sector to consider investing in.
Mario Pucinelli Filho
14
Week Ending 10th December 2017
Oil, Gas & Industry This week the world’s third largest ship builder, Samsung Heavy Industries, lost over 25% of its value (see figure below) following expected operating losses in 2017 and 2018 of Won490bn ($449m) and Won240bn respectively. In addition to this, Samsung Heavy also revealed proposals to raise Won1.5tn ($1.4bn) from the sale of new shares. The news comes as no surprise considering the struggle South Korean shipyards have faced in the past two years, where billions of dollars have been lost due to poor business. Both Daewoo Shipbuilding & Marine Engineering and Hyundai Heavy Industries fell by 3.3% and 4.3% following Samsung Heavy’s announcement respectively. The radical transformation of General Electric by the former CEO, Jeff Immets, has been successfully implemented by his successor, John Flannery. This has involved cutting 12,000 jobs in General Electric’s power equipment business. The
business, which makes equipment for coal and gas plants, has been struggling to gain momentum since 2015 after the increase in popularity for renewable energy. The cuts account to 4% of General Electric’s total work force as of the end of last year. Most job losses will be in Europe, with minimal job losses in the US. It is thought that Europe has been particularly targeted after the acquisition of Alstom, an energy business that did not live up to expectation. This is the second biggest move by Mr Flannery who was appointed in August; a month ago, the company’s dividend was reduced for the 2nd time since 1938. It is expected that these cuts will help to achieve a planned reduction of $3.5bn in costs for the whole General Electric group during the current fiscal year.
Sarren Sidhu
15
NEFS Market Wrap-Up
COMMODITIES
Agriculture & Resources China’s taste for iron ore is shifting to high-grade, due to the government’s wish to restructure its steel industry and crackdown on pollution. China is the world’s largest consumer of iron ore, with an annual demand that is 7 times greater than the world’s second largest consumer, Japan. Rio Tinto, the Australian-British mining giant, believes they will profit from China’s change in preferences thanks to their high profit margin and superior ore quality. Furthermore, with China’s longterm construction initiatives and government investments that all suggest a long-term sustained increase in iron ore demand, Rio would strive to expand its production in order to meet the growing demand. As such, they have hinted that other miners who focus on low-grade ores could find themselves in a very difficult position, with falling demand in the longterm. Rio Tinto has performed well this year, with a 21% reduction in net debt, a 93% Year-on-Year net earnings increase, and an underlying earnings increase of 87% to $5.6bn from iron ore. Looking ahead into 2018, Citi believes that the commodity market will remain bullish – the Bloomberg Commodity Index increased by 10% from June and raw material AUM increased by 20% to $417bn through end-October. But there are concerns from China, due to the sluggish demand growth that is the result of stricter environmental standards and
overcapacity elimination. President Xi is attempting to transform China’s economy from ‘fast pace’ to ‘quality’, hence making slower future growth expected. Sir A L Smith, a former New Zealand commissioner, said this week that Brexit could actually offer Britain an opportunity to improve its agricultural productivity and quality, by encouraging competition and abolishing the EU’s protectionist policies. He stated that there had been a 161% increase in the amount of New Zealand sheep meat exported against the number of sheep farmed since New Zealand’s subsidies were lifted in 1993. However British farmers have expressed their concerns, stating they do not feel confident competing against countries like the US and Australia. The UK would therefore have to decide whether it would still provide income support to farmers or remove them in the post-Brexit era, but so far this is not clear. Subsidy removal would result in higher domestic competition and lower prices, but some less efficient farms would suffer. Sheep farmers in Wales, who export 90% of their lamb to the EU, have consequently said that altering the demand focus (from EU to importers further afield) would make it impossible to have a smooth transition.
Ang Gao 16
Week Ending 10th December 2017
Energy The Korean state-owned energy firm, Kepco, is expected to take over construction of reactors in England’s north-western region of Cumbria. Kepco has been confirmed as the preferred bidder after beating off competition from China General Nuclear (CGN), with its ambitious plan of overseas expansion. The deal, which is part of the government’s industrial strategy, is expected to include two APR-1400 reactors that have a combined capacity of up to 3GW. Kepco’s managers will likely negotiate with the government for a guaranteed price for power from Cumbria’s reactors, which is expected to be lower than Hinkley’s agreed price. In the meantime, the UK government is due to release up to £100m in funding, in order to make the UK compete further in technology and clean power markets. The funding aims to create small modular reactors, which produce a tenth of the power of large nuclear plants but at a faster pace and lower price. Rolls-Royce, which has been lobbying the Department for Business, Energy and Industrial Strategy (BEIS), states that future energy demand will be pushed by electric cars, hence making small modular reactors (SMR) crucial to meeting this demand. Paul Dorfman, a research fellow at University College London, argued: “The real question the government must ask is this: given the ongoing steep reduction in all renewable energy costs, and since SMR research and development is still very much ongoing, by
the time SMRs comes to market, can they ever be cost competitive with renewable energy? The simple answer to that is a resounding no.” The Competition and Markets Authority is going to investigate the merger of two of the UK’s biggest energy companies, SSE and Npower, which threatens to damage households. Rachel Reeves, chair of the BEIS committee, stated: “The energy market isn’t working for consumers. The proposed merger between SSE and Npower risks damaging the development of a more competitive energy market, reducing consumer choice, and threatening to be a bad deal for energy consumers.” As a consequence, the watchdog’s investigation will research possible impacts on the markets, including risk of reduced competition. Tesla’s Powerpack battery system, the world’s biggest lithium-ion battery, has finally been switched on and has started dispatching power into South Australia’s energy grid. The project, which has been subsidised by the government, has the capacity to supply 30,000 homes for one hour, with an incredibly higher power than any other batteries currently used.
Giovanni Cafaro
17
NEFS Market Wrap-Up
CURRENCIES
Major Currencies After a long week of political wrangling between Britain and EU representatives, we finally saw “white smoke billowing from a chimney” in the first phase of Brexit negotiations as parties on both sides confirmed that a Brexit deal had been struck. Following a night of negotiations on Thursday, the UK Prime Minister, Theresa May, guarantees that there will be “no hard border” between the Republic of Ireland and Northern Ireland. The agreement also guarantees that the three million EU citizens living in the UK will have their rights to live, work and study protected. The Prime Minister further reported that British taxpayers will also foot a divorce bill in the range £35-39bn. Sterling traders turned bullish following the conclusion of the first phase of Brexit talks as GBP started chalking up gains against other major currencies in late week. EUR/GBP found strong resistance at £0.88 and looked to continue its trend lower in the near term. GBP/JPY put up over 2% gains following the breakthrough in the Brexit negotiations when it rallied more than 300 pips off the weekly lows at ¥150. GBP/USD also bounced off its weekly support at $1.3320 to trade as high as $1.3520 on Friday.
However there are already early signs of trouble in the second phase of Brexit negotiations on trade. The President of European Commission, Jean-Claude Juncker, warned on Thursday that UK’s trade negotiations with EU would be in the hands of the leaders of 27 other EU nations. Mrs May is aiming at an ambitious trade deal like that of the EUCanada trade agreement, where tariffs are eliminated on 98% of the products travelling between the two parties. But Brussels will be seeking ways to prevent the UK from obtaining any economic competitive advantage and hence will only accept a “level-playing field” with the EU instead. On a side note, Bitcoin investors are experiencing what the Nobel-prize winning economist, Robert Shiller, called irrational exuberance. This occurred as buying mania saw prices rise by 40% this week, to reach an all-time high of $17,029.17 (see graph below). Looking ahead, markets expect that the BOE will keep interest rates at 0.5% next week. Investors will again be focused on Mario Draghi’s speech as they look for any hints on changes to the ECB’s monetary policy. Mingli Yong
18
Week Ending 10th December 2017
Minor Currencies Despite a general risk appetite building, the NZD remains very low. Traders see the pattern of NZD/USD as one that could spell a market swing. Identified as an inverse head-and-shoulders pattern, the current downtrend of NZD/USD is due a return. The potential for a swing comes with a breakthrough, where a neckline of 0.6925 has been identified. The Australian Dollar’s (AUD) long downtrend against the US Dollar (USD) shows no sign of breaking (see graph below). Currently trading at 0.75061, downbeat Australian data from Q3 growth showed that the economy expanded by a mere 0.6%, compared to the 0.9% increase seen in Q2 and the 0.7% that was expected. This is primarily due to weaker iron-ore prices that continue to undermine the sentiment around the AUD, as well as the optimism surrounding the US political climate and the USD broadbased hike. On Friday, courts ruled that President Jacob Zuma’s appointment of a state prosecutor (who would decide whether to reinstate corruption charges against him) was not valid. The news was positive for the Rand (ZAR), which has previously responded well to news reporting Mr Zuma’s weakened position. On Friday, the rand was up 0.66% to 13.6400 against the USD, hence putting it on course for gains
of around 0.75% against the USD this week. However South Africa’s political and fiscal problems maintain. Consequently the global investment bank, ING Group, believe that the Rand will see another tough year in 2018: “EMEA high yielders will continue to face challenges in 2018. Both the TRY and ZAR are very cheap, but to recover will require resolution of political challenges as well as appropriate policy responses”. The Canadian Dollar weakened slightly against the USD as the U.S. employment report strengthened the dollar. The Canadian currency lost 1.3% over the course of the week, with the main losses occurring on Wednesday after the Bank of Canada surprised some with its subdued reaction to a strong November US job report. "The Bank of Canada has clearly signalled they're still cautious at this point," said Eric Theoret, a currency strategist at Scotiabank. Finally, the Mexican Peso (MXN) strengthened by about 0.2% on Friday, after U.S. job growth posted solid gains in November but wages rose less than expected. However the hike in the USD proves too strong as the MXN/USD trades at 0.05282, down from its December high of 0.05382. Edward Turner
19
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.
20