Week Ending 3th February 2017
NEFS Research Division Presents:
The Weekly Market Wrap-Up 1
NEFS Market Wrap-Up
Contents Macro Review 3 United States United Kingdom Eurozone Japan Australia & New Zealand Canada
Emerging Markets 10 Latin America China India Russia and Eastern Europe Africa Middle East South East Asia
Equities 18 Financials Oil & Gas Technology
Commodities 21 Energy
Currencies EUR, USD, GBP 23 AUD, JPY & Other Asian
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Week Ending 3th February 2017
MACRO REVIEW United States President Trump is following through on his campaign promises to renegotiate American trade deals. However, by approaching Congress to pay for the wall on the southern border with Mexico, the President is backtracking on his promise to have Mexico pay for the wall. Furthermore, it appears he may be about to create a trade war with Mexico. An interesting fact about the trade relationship between the U.S and Mexico is that goods typically cross the border several times before they are finished. In fact, 40% of the of parts in the average Mexican product originate from the U.S. Contrary to the alternative facts put forward by President Trump, who claims NAFTA is a “one-sided deal�, according to the U.S Chamber of Commerce, 6 million U.S jobs currently depend on free trade with Mexico. In regards to who pays for the wall there are several options available, however the most viable option would be through a border tax on goods. The wall is estimated by Senate leader, Mitch McConnell, to cost between $12 to $15 billion, and as of 2015 the U.S imported $303 billion worth of goods from Mexico. The tax would therefore pay for the wall. However, it is important to note the tax on the goods crossing the border, such as cars, will not actually be paid by Mexican companies. The cost would be passed back onto U.S consumers, who will ultimately pay for the
wall if this plan is enacted. Furthermore, although the 20% tax suggested by Whitehouse Press Secretary, Sean Spicer, on Thursday, would pay for the wall, 6 million jobs would be put in jeopardy. The second option is to impose a remittance tax on Mexicans sending money from the U.S. According to the Bank of Mexico roughly $25 billion in remittances was received in 2015, with over 98% being sent from the U.S. However, there is a significant flaw as such as a law to block or tax certain remittance payments would require the Patriot Act to be rewritten. Not only would it demand legislative action by Congress, it would most certainly affect all non-US citizens, not only Mexicans. President Trump is right about the trade deficit with Mexico, as seen in the chart below. Since NAFTA was implemented in 1994, the US has been running an annual trade deficit with Mexico. The solution however is not a wall, nor is it a trade war. Disun Holloway
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NEFS Market Wrap-Up
United Kingdom Two key developments over the Christmas break will likely reverberate throughout the UK economy in the coming months. The first of those is the commencement of the Trump Administration, which looks set already to effect change – for better, or for worse; the second is the supposedly increased “clarity” we now have over Britain’s exit from the European Union – whether we have any actual tangible information that may inform a more stable route ahead is debatable, but it is clear that the rhetoric has changed, our government is united behind Brexit, and there at least is a general direction. Firstly, the Trump administration, for all its misgivings, has been touted to potentially bring benefits to the UK. Indeed, it makes Theresa May’s bargaining position vis-à-vis trade with the European Union stronger, though as we saw last week, it’s a tricky line to tread between overtly advocating Trumpist policies and simply maintaining a professional political and economic relationship. There are some tangible benefits however. Financial markets in the US have rallied, auguring positively in the UK markets, and businesses are starting to look more confident with the possible UKUS trade deal. New fiscal spending in the US, alongside easing taxes and regulation is very much in line with the Chancellor’s own plans announced in the Autumn budget. Likely, this will stimulate global growth, which will only be positive for the UK economy. Yet this is entirely contingent on variables regarding our post-Brexit future.
now only a 1.9% hit to GDP in 2019 as opposed to the previously predicted 2.5%, it is still indicative of economic issues. Sure to emerge soon is inflation, the effect on consumers of which is still not entirely known. One particular issue of contention is wages; the Monetary Policy Committee have little conviction behind their prediction of modest increases of 3.25%. Theoretically, this is a good thing: wages increase with price inflation, and consumers maintain purchasing power parity. There is commentary, however, suggesting that wage increase may be less fortuitous in light of the structural changes to the labour market, namely the prevalence of zero-hour contracts and the “gig economy” which renders employees less able to demand wage increases (diagram below shows cost of unemployment). Ultimately, then, there are notes of positivity for the UK economy, though as is always the case, the path remains fragile. A lot depends on the impact of Trump, what happens to interest rates and the strength of the pound. Thomas Dooner
Although the Bank of England accordingly upgraded its growth forecast, predicting
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Week Ending 3th February 2017
Eurozone The Eurozone ended 2016 in high spirits, despite uncertainty surrounding the EU’s future following the US presidential election of Donald Trump and the result of the Brexit referendum. In December, the jobless rate fell to 9.6%, the lowest rate since May 2009. The final quarter of 2016 also saw GDP growth in the Eurozone expand by 0.5%, taking overall growth since 2015 to 1.8%. However, it is anticipated growth rates in the Eurozone will not exceed 1.6% throughout both of 2017 and 2018. January has seen further signs of recovery, with inflation rising to a four-year high of 1.8% (see below). This is fantastic news for the European Central Bank (ECB), which had failed to see inflation anywhere near its 2% target inflation rate since spring 2013, and at times had seen the inflation rate fall below zero. This is a large increase from the inflation rate of 1.1% in December, following the 8.1% increase in energy prices. Consequently, the ECB has been called on by Germany to reduce its bond-buying programme, which was originally intended to end in March, yet had been extended throughout April. The programme, which plans to buy €780bn a year in bonds, is anticipated to encourage borrowing and
consumption within the Eurozone, by increasing the supply of money and therefore keeping interest rates low. The ECB however stated that whilst inflation had risen, the core inflation rate (which doesn’t take into consideration external pressures such as energy prices) had remained static at 0.9% (see below). Hence, before any alternation to the bond programme can take place, policymakers will need to see a sustained adjustment in inflation, as well as an increase in the core inflation rate. However, it hasn’t been solely good news so far this year within the Eurozone. A new report published by the International Monetary Fund has accused the 19 Eurozone states of running excessive deficits, distorting budgets and being in poor compliance with the Euro area’s fiscal policy. This has caused fundamental concern over the financial stability of the Eurozone, which is not helping subdue the anti-Euro populist opinions surging throughout Europe. For example, whilst states within the Eurozone are allowed to run a budget deficit of no more than 3% of GDP, Spain, Greece and Portugal remain greatly in breach of this rule. Charlotte Alder
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NEFS Market Wrap-Up
Japan Despite the uncertainties stemming from a renewed attitude of protectionism amongst its major trade partners and from the blow dealt to the giant Trans-Pacific Partnership when the US withdrew its support, the narrative for the sluggish economy of Japan has become sympathetic to growth. The Bank of Japan (BoJ) held its first policy meeting of the new year last Monday and offered an improving economic outlook for the coming year. Projecting ‘moderate expansion,’ the Bank increased its projected growth rate, which remains above the economy’s potential growth trend through 2018. This upwards revision is due to improvements in overseas economies and a weaker yen, both of which help boost exports. The Bank forecasts 1.5% GDP growth for 2017. While expecting low inflation in the near term, the BoJ decided to hold its loose monetary policy position and maintain its negative interest rate policy. The BoJ adopted negative interest rates last January and they are being held at -0.1%. The Bank also reaffirmed its commitment to control the yield curve for Japanese government bonds (JGB) and maintain the yield on 10-year bonds at around 0%. Many analysts expected the BoJ to allow the yield to fluctuate within 0.1 percentage points of its target.
However, last Thursday through to Friday, the 10Y yield soared above 0.1%. On Friday morning, 10Y yields peaked at 0.15%, the highest returns on the bond since the Bank sent yields on government securities plummeting when it implemented negative interest rates. Yields on 10Y JGBs rose out of negative territory last November, following the application of yield curve control policy. The movement in the securities market came after the Bank pledged in its policy meeting to pare back its 5 to 10-year competitive bond purchase from ¥450bn worth – the sale last week – to ¥410bn ahead of Friday’s auction. Given the rising yields, investors expected the Bank to buy a larger amount than it pledged. However, the Bank announced Friday morning that it wouldn’t exceed its previous purchase. This announcement drove the 10Y yield up and saw prices plunge, as in the graph below. A bond’s yield moves inversely to its value. The BoJ intervened in the early afternoon by offering to buy unlimited 10Y bonds with a fixed yield of 0.11%, above the market price. The competitive yield quickly fell below the fixed rate, and traders are now interpreting 0.11% as the Bank’s upper limit. Daniel Blaugher
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Week Ending 3th February 2017
Australia & New Zealand This week we will look at key economic indicators in New Zealand and how they compare to The Reserve Bank of New Zealand goals. Last week, reports for Q4 2016 inflation, measured by the CPI – which includes food and energy prices, revealed an increase from 0.2% to 1.3%. The key drivers were increases in energy prices and housingrelated prices. A 15% reduction in vegetable prices weighed down on inflation. The Reserve Bank of New Zealand has a single mandate that targets inflation to stimulate economic growth. Inflation levels at 1.3% are within the Reserve Bank’s medium-term target range of 1% - 3%, albeit on the lower end. Amid a weakened commodity market that has depressed global inflation levels, New Zealand inflation has significant exposure to volatility in dairy, oil, and steel prices. The Reserve Bank of New Zealand has also identified that the exchange rate is above ideal levels for sustainable economic growth and is taking action to mitigate the exchange rate by adjusting the Official Cash Rate (OCR), which is the interest rate charges to banks for overnight loans. New Zealand’s OCR is down from
2.0% to 1.75%, which is still relatively high compared to other developed economies. Economic theory suggests that investors are attracted to interest-bearing assets leading to an increase in foreign demand for the nation’s assets, which leads to an appreciation in the nation’s currency. The Kiwi/USD index, currently 0.73, demonstrates the gradual appreciation of the New Zealand Dollar (NZD) over the past two years. The strengthening NZD and rising exchange rate can be a problematic for the nation’s growth because it discourages imports. New Zealand is currently boasting a current account deficit (exports minus imports) of 4.89B NZD. However, the country has operated under deficit for most of its recent history, so perhaps the exchange rate is not such a significant of a long-term threat. Next week on Wednesday, The Reserve Bank of New Zealand will release its interest rate decision. In light of this week’s discussion, it will be interesting to see how The Reserve Bank will curb monetary policy to respond to the macroeconomic climate to meet its economic goal. Dan Minicucci
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NEFS Market Wrap-Up
Canada In an ever more uncertain and fearful global political environment, Canada could top the list of countries most at risk from the USA’s Donald Trump presidency. Just over two weeks since the inauguration and the ‘Muslim immigration ban’, one of the most extreme of the President’s campaign promises, has been executed. This does little to qualm Canadian fears over the fate of NAFTA. Canada is still recovering from last year’s oil price crash and suffering from relatively weak growth. Given that the energy industry accounts for 13% of economic activity, this is of little surprise. Thus, their economy understandably remains vulnerable to significant changes across the border with its closest trading partner. GDP growth (QoQ) for the third quarter clocked in at 0.9% (see below), but forecasts for the upcoming Q4 data in March look bleak at 0.5% (Trading Economics). However, Bank of Canada (BoC) governor Stephen Poloz is a little more optimistic for the annual rate forecast, thanks to developments such as a new pipeline being built; “Altogether, we have reason to have a positive (national) outlook … We’re looking at sort of two per cent growth, a little bit more when we get into the new year data.” In January, the bank revealed that it would make a scheduled interest rate announcement and release its economic
forecast to address and combat uncertainty over recent developments. It is widely believed that interest rates will remain at 0.5%, unchanged since mid-2015, though this all depends on the severity of American policy developments, we will most likely have to wait until April. Some sources warn Trump’s policies could cause a 1.5% drop in GDP growth (National Bank) – a replacement of the NAFTA agreement with a 10% American tariff on imports could reduce Canadian exports by 9%, leading to a shock for growth. Yet there are those that doubt an impact this severe, or even that Canada will be so greatly impacted. One argument is that prior to the NAFTA (which involves Canada, the USA and Mexico), Canada and the USA already had their own free trade agreement – some postulate that scrapping NAFTA may just revert to a previous status quo, though this is wishful thinking. Additionally, there is a silver lining to Trump’s immigration ban: migrants and refugees are still going to come westwards, the ban now means that Canada will likely take much more – immigration is expected to account for one-third of the 1.5% growth forecast. As Governor Poloz points out of migrants; “They disproportionately create new companies … The point is, they create jobs.” Jamie Peake
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Week Ending 3th February 2017
EMERGING MARKETS
Latin America The past six weeks have yielded mixed economic data for the economies of Latin America. The peso especially, has performed strongly since December. However, figures continue to prove the underlying weakness in the region, with growth prospects for major economies in the region slashed. President Trump was largely seen as a threat to elusive growth in the LatAm region. However, starting January 20th, the peso has made sizeable gains against the dollar. The Mexican currency rose by 180 bp against the dollar over the course of the day. Before Trump began his inauguration, the peso came close to 22 against the dollar but jumped when Mr Trump spoke of intended protectionist trade policies. However, Mr Trump did not make the direct threats to Mexico that many traders had expected, and the currency closed the day at 21.6, making it the best day since 15th November for the peso. According to Eduardo Suárez, co-head of LatAm fixed income at Scotiabank in Mexico, “it will be a super volatile year [for the peso] but the reality will be much better than [Trump’s] rhetoric”. Ironically, Cemex (a Mexican cement producer) shares reached an 8.5 year high at $18.92 during the inauguration speech.
recover losses from last year? No; or at least not in the short term according to UBS currency strategist Bhanu Naweja. Although his team calculates the currency is already pricing in c.70% chance that the US will impose a 20% tariff on Mexican exports, major risks are still posed to the currency. Naweja asserted that the peso is unlikely to ‘do a Brazil’ (the real was the best performing currency of 2016) because Mexico’s wider economy is especially weak, with the current account deficit rising and negative GDP growth last quarter. Brazil has continued attempts to promote recovery out of deep recession. On January 11th the central bank of Brazil (BCB) cut its key selic rate by 75bp to 13%. The move was predicted by just 4 of 48 analysts surveyed by Bloomberg. This is the latest attempt to stimulate spending and support a collapsing inflation rate (inflation is currently within target, but looks set to drop below the 2.5% lower bound by 2018). Later in the month, the IMF cut its forecast for Brazil’s economic growth to just 0.2%. It seems apparent that the increasingly unpopular President Michel Temer does not have the ability to take the drastic action required to lift Brazil out its worst recession in a century. Alistair Grant
With the peso breaking through the 22 mark, will investors seize the opportunity to
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NEFS Market Wrap-Up
China Recent weeks marked a tumultuous start for 2017, as policymakers anticipated a further slowdown in the Chinese economy, with annual growth forecasts of 6.5% (shown below)–lacklustre for the economic behemoth known for growth rates of up to 14.2% (2007). The veracity of official data remains questionable, however, following the fabrication of figures in Liaoning between 2011 and 2014. Recent data, nonetheless, points to a stabilising economy, as the most recent Purchasing Managers’ Index (PMI) came in at 51.3 (January), emblematic of an expanding industrial sector, albeit at a slower rate than recorded in December.
invest within China to impede outward capital flows/FDI after suffering from a substantial capital exodus in 2016 ($700 billion). The new rulings require companies undertaking investments abroad to the source of their funds and provide further details & investment plans. Many foreign companies complained of delays in repatriating dividends, as banks have slowly doled out approvals to convert currency. Such restrictions are beginning to impede China’s, the world’s largest trader, trade flows. Numerous importers are expected to request extensions on their terms of payment, according to XL Catlin, a political risk and trade credit insurer.
This year marks a shift in policy strategy, as sources claim the Chinese are pursuing a transition from the eminence of rapid growth, towards the mitigation of financial risks – namely debt and housing bubbles, in addition to the stability of the yuan. China is currently experiencing rapidly increasing debt levels that are likely to surpass 285% of GDP this year, according to Gene Frieda, global emerging markets strategist at PIMCO. Policymakers renounced earlier calls for monetary easing, ostensibly given concerns it could exacerbate rising debt levels/speculative activities.
Following Donald Trump’s surprise US presidential election win, the sharp rise in the dollar has exerted pressure upon the Chinese currency, with the yuan falling to eight year lows against the dollar – levels last seen in 2009 during the global financial crisis. Subsequently, China recently reported that its foreign exchange reserves diminished for the sixth-consecutive month, declining by $41 billion in December to 3.011 trillion – the lowest level in over 6 years. Usman Marghoob
The yuan fell 6.6% against the dollar in 2016, and currency strategists expect it could weaken by a further 4% over the course of this year. The central bank has been grappling with a weakening yuan, and the FOREX regulator recently introduced measures to incentivise companies to
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Week Ending 3th February 2017
India There has been plenty of economic news emerging from India towards the end of 2016 and the beginning of 2017. The main developments have been regarding India’s balance of trade situation and the inflation rate. India’s trade deficit narrowed for December 2016 while year on year inflation saw a rise, although this increase was not as substantial as markets had forecasted. Firstly, the size of India’s trade deficit declined to USD 10.37 billion for December 2016 representing progression in this variable from a year ago, where the trade deficit stood at USD 11.5 billion. India’s has traditionally run substantial trade deficits due to the necessity of importing commodities such as crude oil to allow India to experience rapid economic growth in recent years. However, over the past year, India has been able to rely more on its ability to export more with statistics for December illustrating that exports have risen by 5%. The April to December period has been particularly positive for India’s balance of trade situation as exports have increased by 0.75%, while imports regressed by 7.42%. Moreover, consumer prices rose by 3.41% for the month of December which was a slower rate in comparison to November where prices rose by 3.63%. However, the rise in inflation was below the market
expectations which had predicted that consumer prices would increase by 3.57% for December. The diagram below demonstrates India’s year on year inflation rates over 2016. The Indian government’s decision to remove 86% of India’s currency notes from circulation has been one of the key factors that has contributed to the lower than expected inflation rates. The demonetisation campaign, led by prime minister Narendra Modi, has hurt consumer confidence and consumption significantly. India’s economy is largely orientated around cash transactions, especially in rural sectors where the baking sector has not been formalised. Therefore, the chaotic demonetisation programme has been detrimental to consumer confidence which in turn has ensured dampened inflation figures for December. Additionally, consumer prices followed a similar trend in comparison with food prices which rose at a much slower rate than expected. Overall, the cost of food and beverages rose by 1.98% which represents a substantial decline from November figures where food and drink prices experienced an increase of 2.5%. India’s recent inflation figures are reflective of the uncertain economic environment established as a result of the demonetisation scheme. Isher Hehar
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NEFS Market Wrap-Up
Russia & Eastern Europe The increase in world oil prices (shown below) has resulted in a faster-thanexpected recovery of the Russian economy, said a statement issued by the central bank. In its efforts to prevent the strengthening of the rouble which would result from the increase in world prices of oil, Russia has reacted by introducing a plan to spend more than Rbs113bn ($1.9bn) on forex transactions, the finance ministry said on Friday. Weakening the rouble in relation to other currencies in the foreign exchange market describes the decrease in relative value of the currency, which increases the competitiveness of exports and import-competing industries. The ministry has announced that purchases of forex will continue until the oil prices remain above $40 per barrel. The money is to be used to build up forex reserves directly into the government’s reserve fund, rather than the central bank’s ones. Thus, this move appears to reflect a desire to ensure the government’s spending power instead of aiming at Russians’ purchasing power, which has been declining in real terms by more than 10% yearly since the 2014’s currency crisis. The central bank has announced that this would not affect the inflation target
of 4% by the end of 2017, and has kept interest rates intact at 10%. Furthermore, a new ‘budget rule’ was introduced, mandating the storage of excess oil revenue as foreign exchange reserves in order to reduce the deficit. This has positively contributed to inflows into Russian bond funds, as strategists with Citi discussed: “Fiscal prudence remains high, with Putin confirming that excess revenues from higher-than-forecast oil . . . would go towards decreasing the deficit rather than increasing spending.” Combined with the promising prospects of improving relations between Russia and the U.S. after the appointment of Donald Trump for President, it is no wonder why Russia has been increasingly seen as a safe bet from investors recently. Since the election, investors have added about $140m to Russian bond funds, and the trend is likely to continue as bullish in the foreseeable future. a strategist with Brown Brothers Harriman added that “with inflation likely to continue falling and the central bank likely to cut rates several times this year, we think Russian bonds will start to outperform more.” Desislava Tartova
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Week Ending 3th February 2017
Africa Mozambique, a minor economy on Africa’s south-eastern coast, has in the last 2 weeks come to represent much of the continent and its issues. This nation became the first African country to default on dollar bonds since the Ivory Coast in 2011 when it failed to settle almost $60 million. However, this event is in fact symptomatic of a wider problem of debt and bond financing that threatens to similarly topple the continent’s larger economies. Arguably, this potential storm has been brewing for a while. Amadou Sy of the Brookings Institution, a think-tank, wrote almost a year ago that “There won’t be a huge African debt crisis tomorrow,”, but nonetheless went on to contend that “now is the time for governments to get their act together.” These governments did not get their act together. Mozambique appears to be the first casualty of this prophecy, as it said it could not pay its $60 million coupon scheduled for January 18, 2017, as part of a $726.5 million note maturing in 2023. Nevertheless, this is not a national issue but rather a continental one, as wider impacts included emerging-market assets declining, as investors saw Mozambique as an example of Africa’s debt problem, one affecting even its larger economies such as South Africa and Ghana. This stems from the excessive bond provision by these
economies thanks partly to debt cancellation, which brought down external debt in the region from a peak of 76% of GDP in 1994 to 25% by 2008. Consequently, these nations looked to America for funds, issuing large premium bonds. For example, Ghana sold a 15-year bond at a yield of 10.75% in October 2016 whilst Zambia, Angola and Cameroon have also paid more than 9% on new issues. Those boom years were spurred by rising commodity prices and a global hunt-foryield as interest rates in rich countries plummeted, encouraging African governments to sell Eurobonds in record volumes. Unfortunately for Mozambique, with this boom followed a bust, and the slump in raw material and oil prices strained their finances and sent currencies tumbling, making their foreign debts more expensive to pay off. “It’s prompted fears of a string of debt crises across Africa,” says John Ashbourne, Africa economist at Capital Economics Ltd. in London, as “some countries may face difficulties repaying or rolling over bonds sold during the boom years.” Although Mozambique may be the first, there could potentially be a string of defaults to look out for. Mikun Olupona
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NEFS Market Wrap-Up
Middle East Donald Trump’s travel ban was discussed around the world this week, with the focus being on the Middle East whose economies and people will undoubtedly be affected the most by the enforcement of this ban. So far, not all business leaders from the seven targeted countries – Iran, Iraq, Libya, Somalia, Sudan, Syria and Yemen – have vocalised their feelings towards the ban, contrasting with American business leaders, such as Michael Corbat, CEO of Citi, who said, “As a US company… we are concerned about the message the executive order sends, as well as the impact immigration policies could have on our ability to serve our clients and contribute to growth.” Fawaz Gerges, professor of International Relations at the London School of Economics, deems Middle Eastern businesses quietness regarding their thoughts on the immigration ban due to the difference in nature of business in the Middle East compared to the US. He stated that “"Middle East executives are not as independent as their U.S. counterparts because most of their business depends on the goodwill of Middle Eastern governments." And with the similarly Muslim governments of Saudi Arabian, Egyptian and UAE yet to speak out against Trump’s executive order, businesses are keeping quiet too. Gerges added that governments are treading carefully for fear of "alienat[ing] the Trump administration
because they have major investments in the U.S. financial sector." The graph below shows the various forms of employment undertaken by Middle Eastern and North African (MENA) immigrants to the US, and highlights sectors which will be affected by a blanket ban on immigration. Aside from the obvious effect of increasing hostility between the US and its Middle Eastern trading partners, the ban will also greatly reduce America’s income from tourism and spending. According to the US Travel Association, in 2013 America enticed just over one million Middle Eastern based citizens to visit and travel there, spending a total of $6.8 billion, a sum which the US economy will now lose as these travellers look for holidays in different destinations. Ultimately, the effects of President Trump’s travel ban will serve to turn sour its Middle Eastern political relations which will in turn affect business and the economy, both in the US and the seven selected countries. The extent of these effects on Middle Eastern economies will depend on whether they choose to counter the ban or look to new investments in countries outside of America. Nikou Asgari
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Week Ending 3th February 2017
Southeast Asia This week we consider data releases from the end of 2016, and look ahead to likely developments in 2017. We also briefly touch on CPI inflation figures for Indonesia and Vietnam. The Philippines and Vietnam finished 2016 on a disappointing note, as both economies posted sluggish GDP growth figures for the fourth quarter. The Philippine Statistics Authority announced last month that yearon-year GDP grew 6.6%. This was the smallest expansion in a year, as both private consumption and investment declined. Along similar lines, Vietnam’s growth rate of 6.68% fell well short of the 7.7% target for the quarter, and represented the country’s first annual slowdown since 2012. Despite this, the economic outlook for Southeast Asia is generally bright. The OECD is expecting stronger growth for five of the six largest economies in the region in 2017, with only the Philippines projected to grow at a slower rate. Even then, the Philippines is expected to grow 6.2% over the year – the joint-highest figure alongside Vietnam (see table below). Moreover, the report argues that the contraction in real export growth that has occurred in the region over the last few years shows signs of easing. This could provide a valuable earnings boost to struggling countries in the region such as Malaysia, and thus help counteract the impact of ongoing domestic political issues on growth. In other news, this week, Indonesia and Vietnam both released CPI inflation data
for January 2017. Indonesian consumer prices rose 3.49% year-on-year, exceeding both the market consensus of 3.11% and figures for the previous month. In a similar fashion, Vietnamese prices rose 5.22% – the highest rate since January 2014. Health, transport and housing were the primary drivers for both countries, the first of which reinforces long-term concerns about the ability of governments in the region to meet rising healthcare costs. Indeed, these trends coincide with a recent FTCR survey that found increased dissatisfaction in Southeast Asia with the mounting costs of health insurance premiums. We will be able to form a clearer picture of regional growth trends as the beginning of next week, as Indonesia is publishing GDP data for Q4 of 2016. Malaysia and the Philippines are also releasing balance of trade data later in the week. Daniel Pettman Real GDP Growth of ASEAN-6 Countries Country Indonesia
2015
2016
2017
4.8
5
5.1
5
4.2
4.5
Philippines
5.9
6.8
6.2
Singapore
2
1.8
2.9
Thailand
2.8
3.2
3.3
Vietnam
6.7
6
6.2
Malaysia
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NEFS Market Wrap-Up
EQUITIES Financials In this week’s financials, the focus is on Deutsche Bank who posted what was an unforeseen large operating loss. Their inability to match the sharp upturn in trading revenues enjoyed by their rivals – namely Goldman and Citigroup – has vitiated investor’s confidence. Whilst the five biggest US banks enjoyed a 44% surge in revenues, Deutsche Bank shares fell as much as 7% on Thursday in their fourthquarter results. Donald Trump’s election saw a sharp bounce envelop the Wall Street banks, but Germany’s biggest bank missed out and the biggest shock was felt in its equities trading business which saw a 23% decline. Investors are questioning whether Deutsche Bank has enough current assets to pay their long-term liabilities, stemming from their involvement in the 2008 financial crash. On Thursday, it was forlornly announced that the bank suffered net losses of £1.2bn, its second consecutive year in the red, so it seems investor’s worries are far from unfounded. Chief executive John Cryan gave it straight from the hip, conceding 2016 had been ‘particularly tough’. He admitted that market jitters in September had an acute impact on the disappointing quarter. However, this author suggests that the
banks desire to scale back its activities also adversely affected revenue and profit. Jernej Ohmahen – an analyst at Goldman Sachs – agrees, arguing the poor operating results were evidence of ‘franchise damage. How - or perhaps if - Deutsche Bank will fix this and launch a renewed assault on the hermetic stranglehold JP Morgan and Goldman Sachs possess over global investment banking remains to be seen. Nevertheless, after the bad news, it’s only natural to want to bring you some good. This good news came in the form of Sylvie Matherat – Deutsche Bank’s regulatory chief – who vowed they would not be among the initial tranche of financial firms exporting jobs out of London because of the eminent departure of the UK from the EU. Whilst she asserts the bank would ‘follow if necessary’ she also purports that London is sure to fight back and remain an important financial capital. There is still uncertainty regarding what exactly Brexit is going to look like, but at this moment in time, all good news will be duly appreciated. Vincent Egunlae
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Week Ending 3th February 2017
Oil & Gas The oil and gas sector stock prices moved but seemed to have been stuck in a narrow band over the week, driven by the news flow on the prospect of OPEC oil production as well as corporate results. In the United States, the energy stocks were sharply higher on Friday, with the NYSE Energy Sector Index rising over 0.9% to recover a large part of its not-so-large losses accumulated since the beginning of the past week. Industry giant Exxon Mobil (XOM) closed 0.6% higher at $83.45 on Thursday, which was lower than its closing price of $85.51 on the previous Friday. Shares of Chevron (CVX) bounced back to $112.21 on Thursday, though it was still lower than the closing price of $113.79 at the end of the previous week. On the one hand, oil prices have been robust in recent weeks as analysts expect the OPEC members to be most likely to comply with their agreement to cut oil output to shore up international oil prices. On the other hand, however, crude prices are capped by the threat of a ramp-up in shale energy production in the United States. Wood Mackenzie (chart below) estimated that the breakeven prices for new oil wells across various US shale plays to be around 50 dollars and below the
current 12-month average WTI oil futures price. That said, the oil giants have mostly been cautious with increasing their capital expenditure, though the smaller independents have been nimble to quickly increase their investment. Industry giants across Europe are in healthy shape. Royal Dutch Shell (RDSA: LSE) closed 1.44% higher at 2,196.61 pounds per share on Friday. Analysts at Barclays Capital see a potential upside of 28% by setting a target price of 2,800 pounds. It has a 50-day moving average of 2,244.36 pounds and a 52-week range of 1,405 to 2295 pounds. British Petroleum (BP: LSE) gained 0.97% to close at 477.28 pounds on Friday, though it lost 1.82% over the week. Total (FP: EPA) rose 1.41% on Friday to close at 47.15 euros, slightly lower than its closing price of 47.22 euros a week earlier. The energy stocks are expected to continue trading in a range, and investors will be watching out for possible clues from statistics on major economies like the United States as well as East Asia, where a large part of international oil exports are heading to now. Michael Chen
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NEFS Market Wrap-Up
Technology It has been a tumultuous week in the technology sector as many companies disclosed their sales figures for last quarter of 2016. Apple beat analyst expectations on Wednesday as they reported net sales of $78.4 billion, up 3% on last year, and marking its strongest quarter ever. Prior to the holiday quarter, Apple suffered three quarters in a row of falling revenue as they face increasing competition, particularly from Chinese rivals. However, the company is still anticipating stagnant growth in the coming months, as they expect consumers to hold off from upgrading until the new iPhone is revealed. Apple’s shares jumped by about 3% on Wednesday in the after-hours trading to $125, the highest point for 18 months which can be seen from the chart below. Moreover, on Thursday, e-commerce giant Amazon disclosed a disappointing 22 per cent rise in sales from the holiday quarter. The company also anticipates that their revenue may miss expectations in the first quarter of 2017 as increased spending on warehouses, movies, and gadgets have so far failed to translate into faster growth. The company’s shares fell as much as 4.6% in
the after-hours trading closing at $839.95.
on Thursday,
More disappointing earnings reports came from action-camera producer GoPro. The company announced on Thursday that fourth quarter sales rose by 24% to $540.6 million and that first quarter sales this year is forecasted to be $200 million - both missing analyst expectations and reflecting slow demand for its action cameras. GoPro shares fell by as much as 14% on Thursday following their statement. The other major tech story of the week comes from Snap, the owners of the photo messaging application Snapchat. The company has publicly filed for an initial offering, the first US social media company to do so since Twitter more than three years ago. Snap plans to raise as much as $4 billion from the IPO which would result in a total market value of around $25 billion. This would make it one of the biggest US stock market listings since the launch of Chinese e-commerce giant Alibaba in 2014, and the launch of Facebook prior to that in 2012 which was valued at $81 billion. Bunyamin Bardak
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Week Ending 3th February 2017
COMMODITIES Energy US crude has seen a continuous rise in the size of its inventories for the fourth straight week, with the highest climb since October. The news comes ahead of an important week in the oil industry, whereby two of the largest energy groups will reveal their fourth quarter results. BP’s profits are expected to double, in line with the recovery of crude oil whereby this week, it was announced that inventories of US crude rose by 6.5m barrels in the week ending January 27th according to the Energy Information administration. This announcement compared with analysts’ estimates for an increase of 2.6m barrels and was the biggest streak of gains since April. Numbers from ‘Total’ are expected to be more subdued as the French group as been more resilient than its peers through the downturn. U.S. crude ended Friday at $56.60 (as per the graph) a barrel on the New York Mercantile Exchange, up 19% since members of the Organization of the Petroleum Exporting Countries agreed on Nov. 30 to cut their combined output by 1.2
million barrels a day to support prices, which have roughly doubled in the past year. Natural Gas futures for March delivery settled down 12.4 cents, or 3.9%, at $3.063 per a million British thermal units on the New York Mercantile Exchange, closing at the lowest level since November 23rd. Warmer-than-average forecasts for February have weighed on natural gas prices, since the commodity is used to heat half of U.S. homes and is in high demand during cold winter weather. MDA Weather Services predicts higher-than-normal temperatures across the U.S. in its 11-15day forecast which will further reduce the demand for the commodity. Low winter demand has also contributed to high stockpiles of natural gas this season, with storage levels 2.2% above the five-year average, according to the U.S. Energy Information Administration. William Bunnis
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NEFS Market Wrap-Up
CURRENCIES
Major Currencies Central banks, inflation and Donald Trump. All things that drive the major currencies. Stout rates holding from the Federal Reserve and Bank of England, steadied the currencies as Brexit and the bizarre policies of Trump begin to begins to slowly materialise. In the euro space, opening at 0.8479 against the sterling and closing with a steady rise to 0.8602, promising data from the Eurozone PMI indicates decent economic growth in the area. The composite purchasing managers’ index was 54.4, which was the same as December, but above earlier flash readings. Anything above 50 represents growth, with Ireland having the strongest growth this month, whilst German growth slows down, but remaining at a relatively high level of 53.4. However, if you happen to be the head of Trump’s newly formed National Trade Council, which Peter Navarro is, then the euro is “grossly undervalued”. Allegations from the US state that Germany is using an undervalued euro is exploit trade with the US and euro partners. Unsurprisingly, Angela Merkel swiftly and gracefully quashed the absurd allegations.
raise inflation up by 2% as the Fed makes gradual tweaks to the rate. The dollar dipped from 0.9358 to 0.9293 against the euro this week, despite a robust report on US private sector job creation which bodes well for the Friday non-farm payrolls. Trump is unhelpfully confusing the markets with conflicting comments about wanting both a weaker and stronger dollar, which begs to question the economic grounding and rationale of this administration. Theresa May won the Article 50 Commons vote and thus begins the divorce from the EU. The pound held steady the morning after, up 0.3 per cent against the dollar to 1.2685. A more than six-week high after UK MPs voted by 498 to 114 to allow the prime minister the power trigger the exit clause which will start a two-year negotiating process. However, the sterling dipped below 1.26 to close just under the 1.245 mark, following a hike of growth forecast from 1.4% to 2%. Next week, we await the unravelling of the undervalued euro saga and see whether the pound continues to wobble. Robert Tse
Mid-week the Fed held rates, which was expected, but still maintain that the rate will be hiked at some yet to be disclosed point. In a post meeting statement, improvements in consumer and business sentiment would
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Week Ending 3th February 2017
Minor Currencies This week we look at the effect that President Donald Trump’s executive order to impose travel bans on a group of MiddleEastern and African countries has had on the Japanese yen, the Aussie dollar, which appears to be building on its ‘safe-haven’ nature and its performance against the US Dollar, as well as how some other Asian currencies have been fairing against a relatively unstable global political climate. The U.S. dollar on Monday, 27th January, slumped against the Japanese yen and lost ground against other major rivals, as appetite for risk dissipated after President Donald Trump signed an executive order that bans travel from a roster of countries. Trump’s executive order and the protests that followed, stoked fears that he would make good on a protectionist stance that has worried markets. The U.S. dollar USDJPY, tumbled to ¥113.75 late Monday, down 1.2% from ¥115.07 late Friday in New York, as investors generally regard the Japanese currency as a haven asset that retains its value during periods of geopolitical or financial instability. “The yen might continue to weaken against the dollar after today's action,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman.
The Australian dollar on the other hand continued to soar against USD. The AUD has been an outperformer on the currency stage, extending Thursday’s trade datarelated rally when it soared above the 76 US cent-mark and reached a two-and-ahalf-month high, as shown below. Australian Bureau of Statistics data on Thursday showed that Australia’s trade surplus for December skyrocketed 72% to a record $3.5 billion, primarily on the back of surging commodity prices, which explains the rally. The Indian rupee on Friday closed at a twelve-week high against the US dollar as foreign inflows returned to India in the wake of better earnings. INR closed at 67.32—a level last seen on 11 November 2016, up 0.1% from its previous close of 67.38. In general, however, Asian currencies were trading lower against USD. The yen was down 0.31%, Philippines peso, 0.24%, Singapore dollar, 0.22%, China offshore, 0.17%, Malaysian ringgit, 0.11%, South Korean won, 0.07%, and the Thai baht, 0.05%. However, the following currencies were up against USD at the close trading on Friday: the Taiwan dollar by 0.34%, China renminbi by 0.19% and the Indonesian rupiah by 0.06%. Angelo Perera
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usefulnessthe of weekly market wrap-ups. About Research Division
For any queries, please contact Josh Martin at jmartin@nefs.org.uk. The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance SocietyYours, (NEFS, formerly known as NFS and UNIS). It consists of teams of analysts closely Sincerely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. Josh Martin, Director of the Nottingham Economics & Finance Society Research Division 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 Homairah Ginwalla at hginwalla@nefs.org.uk. Sincerely Yours, Homairah Ginwalla, Director of the Nottingham Economics & Finance Society Research Division
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