View
221
Download
4
Embed Size (px)
DESCRIPTION
Â
Citation preview
Week Ending 21st February 2016
1
NEFS Research Division Presents:
The Weekly Market
Wrap-Up
NEFS Market Wrap-Up
2
Contents Macro Review 2 United Kingdom
United States Eurozone
Japan Australia & New Zealand
Canada
Emerging Markets
8
India China
Russia and Eastern Europe Latin America
Africa Middle East
Equities
14
Financials Retail
Technology Pharmaceuticals
Oil & Gas
Commodities
Energy Agriculturals
Precious Metals
19
Currencies 22
EUR, USD, GBP
Week Ending 21st February 2016
3
MACRO REVIEW
United Kingdom
Office for National Statistics (ONS) figures
published on Wednesday showed that there
has been an increase in the number of people
in work to 31.42 million, which is the highest
figure the UK has seen since records began in
1971. The UK currently has one of the lowest
unemployment rates in the European Union at
5.1%, following only Germany and the Czech
Republic.
Despite this, pay growth remains subdued.
Average weekly earnings in the last quarter of
2015 was just 1.9%, down from 2% in the
previous quarter. A few temporary factors seem
to be suppressing wage growth, such as an
increase in lower paid jobs, low CPI, a decline
in the average number of hours worked per
week, and a higher proportion of people new in
their jobs relative to the recession. However
there is also a larger underlying structural factor
- weak productivity. The current unemployment
rate of 5.1% is close to the UK’s ‘natural rate’ of
unemployment, which is the rate at which
inflationary pressures should increase as
employers find it more difficult to find workers,
therefore wages rise. Due to low productivity
however, this is not happening.
Weak wage growth also has implications for the
base rate. Sam Hill, an economist at RBC
Capital Markets, said that “even if average
earnings growth does pick-up towards 3% this
year…it seems unlikely to be enough to
provoke the Bank of England to tighten policy
before early 2017”.
Currently, low CPI (0.3% in January) is
protecting workers from the consequences of
low pay. George Osborne, the Chancellor of the
Exchequer, hopes that the introduction of a
‘National Living Wage’ in April will help pay and
inflation to rise. The 50p increase to £7.20 per
hour will be the largest annual increase in a
minimum wage rate across any G7 country
since 2009. The rate will then rise to over £9 per
hour in 2020. However this highlights the trade-
off between pay and employment growth, as
employers may look to increase productivity of
existing workers rather than hire more workers.
Subtle signs of this are already starting to show
as the unemployment rate remained at 5.1% in
December, as shown on the graph below,
although economists had forecasted a fall to
5%.
Shamima Manzoor
NEFS Market Wrap-Up
4
United States
US consumers are panicking in a mad rush to
refinance their borrowings as uncertainty
surrounding interest rates has amplified in
recent times. In a recent report, the Mortgage
Bankers Association stated that the refinance
volume is now at the highest level in over a
year. The total mortgage applications are 8.2%
higher on a seasonally adjusted basis this week
compared to the previous week. Borrowers with
large loans tend to be more sensitive to a drop
in interest rates given a higher potential gain
from refinancing. Hence, it comes as no
surprise that big banks have engaged in a bit of
an arms race to secure the business of wealthy
clients. In some cases, jumbo loans and an
explicitly lower rate is being offered to new
clients who pledge a certain amount of assets
to be managed by the bank – one of the most
popular avenues to get clients through the door.
In other news, the economy witnessed a fall in
consumer sentiment amid signs of slower
economic growth and winds of turmoil from
abroad. As shown on the graph below, the
Index of Consumer sentiment hit 90.7 in
February's preliminary reading, slumping down
from 92 in January. This figure has drawn
interest especially due to the retail sales gaining
momentum earlier this year, which is an
indicator that usually moves parallel to
consumer confidence. Despite the steady drop,
consumers expect low inflation to transform
meagre wage growth into real income gains.
Such economic times are incredible examples
to us economists of how the basis of consumer
actions have evolved over the years.
As the presidential race gets underway,
Republican candidate, Mr. Donald Trump
seems to have mastered the art of positive
messaging and conveying optimism to the US
voters. With the wounds of the Iowa election
results still afresh, Mr. Trump reported a
landslide victory in New Hampshire last week.
The voters in New Hampshire delivered a
resounding rebuke to the US political
establishment on Tuesday, with strong wins for
left-wing Democrat Mr. Bernie Sanders and the
radical Republican that is Mr Donald Trump.
The presidential race has taken an interesting
turn with the first week of March being labelled
a “decider week” as voting takes its full swing.
Vimanyu Sachdeva
Week Ending 21st February 2016
5
Eurozone
Europe’s new banking watchdog has ordered
the biggest Eurozone banks to boost their
capital levels by 0.5 percentage points on
average after a year-long assessment of their
risks.
The Single Supervisory Mechanism (SSM) that
was established in late 2014 as part of Europe’s
efforts to combat its debt crisis, warned in a
report published on Friday that overall risks for
the roughly 130 large Eurozone banks it
supervises have “not decreased compared to
2014.”
The report highlighted that many banks were
still recovering from the 2012 financial crisis
and “they continue to face risks and
headwinds.” The biggest risk consists of
adapting their business models to a new
environment of low interest rates. It is the first
time that the Eurozone’s single banking
watchdog has reviewed the riskiness of the
bloc’s biggest banks based on a common
standard. The task previously fell to national
regulators, who took different approaches to
capital levels and business risks.
Europe’s battered banking sector needs to
have confidence driven back into it but this has
also come under renewed pressure in recent
weeks amid broader concerns around the
health of the global economy. The MSCI
Europe Financials Index has fallen more than
15% so far this year.
Core Tier One ratios are a key measure of a
bank’s balance sheet strength, comparing
equity capital to risky assets and the Eurozone
banks need to boost their core Tier One capital
ratios to 9.9% on average this year from 9.6%
last year, and set aside an additional 0.2% of
capital as a buffer against the risk posed by
systemically-important institutions.
The report shows that five banks didn’t have
enough capital to meet the current
requirements, including one that fell
significantly short. The review provides “a
holistic view of banks’ risk profiles,” and uses
forward-looking elements such as stress tests,
said Korbinian Ibel, Director General at the
European Central Bank responsible for micro-
prudential supervision. Mr. Ibel said that the
SSM had hired more than a thousand staff
since its establishment in late 2014 and was
now “the biggest supervisor in the world.”
The SSM is housed within the ECB in Frankfurt,
and the banks it supervises account for around
85% of all Eurozone banking assets.
Erwin Low
NEFS Market Wrap-Up
6
Japan
The prospects facing Japan’s economy have
scarcely improved since last week’s article; just
before the week began it was reported that
Japan’s economy shrank at an annualised rate
of 1.4% in the fourth quarter of 2015. This figure
came as no surprise, released as it was after a
dismal few weeks for Japan, in which stagnant
wages, a strengthening yen and global market
uncertainty decimated any hopes the BoJ had
of achieving their inflation target of 2% in the
near future. As usual, Japanese officials were
quick to come to the defence of the economy,
with Yoshihide Suga, Japan’s chief cabinet
secretary, blaming an abnormally warm winter
for weakness in consumption. He claimed that
the economic fundamentals in Japan are good
and said that the government was expecting a
steady recovery in business conditions.
On Wednesday, it was announced that Japan’s
trade surplus for January was ¥119bn, the
highest it has been in four years. This is
somewhat good news for officials as external
demand is supposed to be one of the driving
forces of the Abenomics stimulus, however, the
figure does not directly reflect the fact that
exports, although rising by 0.6% compared to
December, fell by 12.9% year-on-year. Part of
the reason why there is a trade surplus despite
this is that falling oil prices have lowered the
value of one of Japan’s main imports (see graph
below). Going forward, this trade surplus is in
danger of disappearing, as the recently
strengthened yen has its effect on the
competitiveness of exports and as demand
from China weakens even further.
We also learnt this week that machine orders in
Japan, which are a popular proxy for capital
spending, fell by 3.6% year-on-year in
December. This, along with the fact that the
index of all industries’ activity, which reflects the
total value of goods and services purchased by
businesses, fell by 0.9% month-on-month in
January, will further cement worries that Japan
is stuck in secular stagnation and raise the
likelihood that officials will take action over the
coming weeks. What form this action would
take is not clear; it’s unlikely that the
government will intervene in currency markets,
as this would be politically toxic and Mr Abe has
ruled out a supplementary budget. Therefore,
we’re left with the possibility that the
government will postpone the planned rise in
consumption tax or that the BoJ will cut interest
rates further into negative territory.
Daniel Nash
Week Ending 21st February 2016
7
Australia & New
Zealand
The Economic and Political Outlook 2016 report
from the Committee for Economic Development
of Australia (CEDA) was released this week but
was not optimistic. Business confidence was
predicted to be a “significant issue” despite the
fact that the economy is much stronger than
surveys suggest. This is partly due to the
political election which can sway business
sentiment. The fall in the mining industry from
its 2012 boom and the worst of its effects are
said to be over, as 60% of job losses have
already been incurred but there are still fears of
further turmoil.
The Treasury and Reserve Bank admitted that
Australia’s trend rate of growth is in fact closer
to 2.75% than 3.25%, so the incomes of
taxpayers and the tax base will grow slower
than the economy has previously experienced.
The economic chapter described that a
weakness in income can spell disaster for the
economy. This is because “households want to
defer spending”, businesses will reduce
investment and governments are experiencing
growing budget deficits, implying they are
inclined to use stronger contractionary fiscal
policy and so the economy won’t experience
high levels of growth.
China’s slowdown in economic growth was also
mentioned, as it means the global economy
faces significant risks. But the report stated that
Asia’s rising middle-class provides
“unprecedented opportunities for Australia’s
non-resource sectors”, a key opportunity that
political and business leaders should focus on.
In other news, New Zealand’s Prime Minister,
John Key, announced that the government is
continuing with tax cuts, despite a slowdown in
recent economic growth. It was speculated that
the size of the economy is expected to be
NZ$17 billion lower over five years than
expected by the Budget in May 2015, partly
caused by weak dairy prices.
Continuing with such plans would result in
“slightly less tax revenue, slightly lower
operating balances and slightly higher debt”
than the Budget predicted. These forecasts
would not hold the government back from
continuing with their restrictive approach by
having a tight hold on government spending,
whilst trying to pay national debt, focusing on
public services results and return excess
revenue to taxpayers.
In addition, Mr Key reassured the population
that despite lower forecasts, the economy
continued to expand, as the Treasury
forecasted an average of 2.7% over the next
five years. Figures also showed that incomes
are growing faster than inflation, and growth in
employment continues.
Meera Jadeja
NEFS Market Wrap-Up
8
Canada
The Candian inflation rate has reached its
highest level since November 2014. Consumer
prices in Canada increased at a rate of 2.0% in
January 2016. As evident from the graph of the
Canadian inflation rate over the last four years,
the inflation rate rose by 0.4%, from 1.6% in
December 2015 to 2.0% the following month.
The rise in the inflation rate was above the
market expectations of 1.7% increase in
consumer prices.
In seven of the eight major components used
for calculating the Canadian inflation rate prices
increased over the one year period from
January 2015 to January 2016. The largest
increases was in food and transportation prices
- food prices rose by 4.0% whilst transportation
prices increased by 2.2%. If we look at food
prices in more detail we can see that a large
proportion of the increase in food prices is due
to a rise in the price of fruit and vegetables. In a
basket used for calculating the price of fruit and
vegetable which contains peppers, cauliflower,
celery and broccoli, prices rose by more than
22%. One of the factors causing the large
increase in the prices of food is the weak value
of the Loonie (the Canadian dollar). This
generates higher food prices because a large
proportion of Canadian food is imported.
Clothing and footwear prices declined by a
small 0.3% over the one year period. All the
provinces in Canada recorded higher inflation
rates in January 2016 than in January 2015.
In other news this week, it was announced that
the Organisation for Economic Co-operation
and Development (OECD) has cut the growth
forecast for the Canadian economy in 2016
alongside the global growth forecast. The
OECD have stated that their new projection for
the Canadian growth rate is 1.4% (the same
prediction as the Bank of Canada). This is
revised down from the previous prediction of a
growth rate of 2.0% in 2016. For 2017 the
OECD are now predicting a growth rate of 2.2%
decreased slightly from 2.3%. The OECD
stated that investment and trade has been
weak in the US and Canada contributing the
revised figures, alongside low inflation and the
large fall in the price of oil in Canada. The
recent weak trade figures and the fall in the
price of oil have been particularly important as
the OECD described the Canadian economy of
being too reliant on export commodities. The
world economy grew by 5.0% in 2015, the
lowest rate since 2010.
Kelly Wiles
Week Ending 21st February 2016
9
EMERGING MARKETS
China
Chinese markets re-opened this week after the
week-long Lunar New Year holiday. The risks
of deflation in China in 2016 were emphasised
recently and this week’s consumer price index
(CPI) and producer price index (PPI) data
highlights this. There is also trade balance data
this week which should somewhat demonstrate
how well China’s accommodative policies have
performed so far.
Data released by the National Bureau of
Statistics showed that CPI year-on-year came
in at 1.8%, just missing a forecast of 1.9%. This
was a notch higher than last month’s figure of
1.6%. The main driver of the gain in inflation can
be attributed to food prices, rising 4.1%
compared to 2.7% in the previous month.
However, food prices are subject to supply
shocks and seasonal blips, such as the recent
Lunar New Year. PPI year-on-year came in
better than expected at -5.3%, slightly higher
than last month’s figure of -5.9%, as shown in
the figure below. The forecast for the month of
January was -5.5%. Producer prices are often
regarded as a proxy for medium-term inflation
and as such, can have an effect on inflation
expectations. Prices of mining products
declined the most by 19.8%, raw materials by
9.1% and means of production by 6.9%.
Overcapacity still remains a large problem.
From an international trade perspective, the
world’s biggest trading nation’s trade balance
rose to CNY 406 billion from the previous
month’s reading of CNY 382 billion. This
month’s figure was higher than a forecasted
CNY 389 billion. It was the largest trade surplus
on record. Despite this seemingly positive data,
the underlying figures should be examined
carefully. Exports in US dollar terms from a year
earlier declined by 11.2%, well below last
month’s fall of 1.4% and a forecasted -1.9%.
This suggests that the central bank’s efforts to
boost competitiveness in the export market has
not taken effect. Moreover, imports fell by
18.8% from a year earlier, representing the 15th
straight month of declines. This could signal a
weak domestic economy, one in which the
Chinese were keen to pursue.
As mentioned before, it is important not to look
too much into figures around Chinese New
Year due to potential distortions. Nevertheless,
the Chinese economy still remains at weak
levels compared to the last two decades or so.
The Chinese government may want to inject
fiscal stimulus as soon as possible to drive
consumption and investment.
Sai Ming Liew
NEFS Market Wrap-Up
10
India
In the past couple of weeks, I have primarily
highlighted and discussed the internal and
external difficulties that India faces in terms of
maintaining its impressive yet somewhat
questionable growth figures. Despite the fact
that India must address its own macroeconomic
imbalances as well as dealing with a fragile
global economic situation, reports published
last week by the Organization for Economic
Cooperation and Development (OECD) and
Moody’s, a global ratings agency, were much
more optimistic, stating that India would not be
negatively affected by the global slowdown as
the country’s economic outlook would be
determined instead by strong domestic
demand.
Both reports also predicted that the South Asian
nation will continue to see robust growth over
the next two years, with the OECD upgrading
its 2016 forecast for the Indian economy to
7.4%. Moody’s prediction for the next fiscal year
was even more cheerful at 7.5%, as it stated
that India is less exposed to external
headwinds, such as China’s slowdown and
global capital flows. It also expects India to
continue to gain from lower commodity
prices, despite speculation that the benefits
enjoyed as a result of lower prices could dry up
within the next year. Amid low growth in global
trade in goods, another source of resilience is
provided through India’s large services export
sector, with IT services accounting for around
18% of total exports. Moody’s also maintained
an optimistic tone in regards to the forthcoming
24% increase to public sector salaries, which
has been criticised by some who believe it will
only contribute to inflation within the economy.
Instead, the agency believes that the
government will cut spending in other parts of
the budget in order to maintain the deficit
broadly in line with the 3.5% of GDP target,
thereby mitigating some of the inflationary
effects.
The optimism shown through these reports is in
direct correlation with the positive sentiment
currently present within the county, after “Make
In India Week”, which closed on Thursday,
garnered $222bn worth of investment pledges
from firms all over the world. The event was a
part of the government's push to create jobs by
increasing the share of manufacturing to GDP
to 25% over the next decade, from the 16-17%
now.
Although there is still plenty of room for
improvement, India must also be applauded for
the continuing stability that it displays in spite of
an unaccommodating global economic climate.
Homairah Ginwalla
Week Ending 21st February 2016
11
Russia and Eastern
Europe
In a UN Development Programme report
published this week, it has been noted that
despite Eastern Europe having made terrific
advances in economic growth over the past 10
years, the size of its middle class is greatly
under threat. Unfortunately, whilst many people
are rising out of poverty, they are then being
prevented from moving to higher income levels.
As a result, wealth inequality is worsening and
having a detrimental impact on potential
economic growth. Several factors have been
postulated as possible causes for the reduced
income and employment opportunities, such as
falling commodity prices, slowing economies
and shrinking remittances. Whilst many hope
that oil prices will eventually stop falling and
consequently bring economic opportunities
back to Eastern Europe, this is uncertain.
Another solution would be increasing
investments into training already employed
workers with new skills to enable them to attain
higher income jobs, as well as creating new
employment prospects. However this would be
extremely costly and many argue it would be
wrong to invest money into helping workers
achieve a higher income, when there are still
issues of poverty and unemployment. More
effective schemes could also be provided to aid
citizens with saving money and property
ownership. Finally, global measures could be
initiated to increase the amount of remittances
being sent back to Eastern Europe.
Subsequently, with the economies of Eastern
Europe growing rapidly, it has hence become
vital that the middle classes are allowed to
expand accordingly and wealth inequality is
kept to a minimum.
With regards to falling oil prices, Russia has
temporality halted the deterioration of its
economy following a deal on Tuesday with
various OPEC leaders, most notably Saudi
Arabia. Along with Qatar and Venezuela,
whose economies are also struggling with the
low oil prices, the nations have agreed to freeze
oil production at current levels. By holding
supply constant, it is hoped that increasing
global demand will cause oil prices will rise.
This has led to a spark of confidence in the
Russian economy, which briefly saw a large
increase in the value of its share prices (see
Figure 1), specifically in the oil industry. Across
Eastern Europe, it is greatly hoped that by
increasing commodity prices and accelerating
growth, the problem of a shrinking middle class
may cease to exist.
Charlotte Alder
Figure 1: Russia MICEX Stock Market Index (14. Feb – 19. Feb)
NEFS Market Wrap-Up
12
Latin America
On Wednesday Mexico’s central bank
unexpectedly increased the key lending rate by
half a point to 3.75 in an attempt to nip in the
bud the prospect of rising inflation. The bank,
which followed the US Federal Reserve in lifting
rates in December when it lifted rates by a
quarter of a point, and had been expected to
stay in step with the US, stressed its decision
was not the start of a rate raising cycle.
On Wednesday the peso, which has tested
historic lows against the dollar, persistently
surged almost 5% on the rate rise news, up to
18.2 against the dollar. It had shed almost 10%
so far this year against the dollar. Mexican
authorities until now have said the plunging
peso would not spark an inflationary spiral, but
the Bank of Mexico (Banxico) said in its
statement that international market volatility
had increased since December, and the outlook
for the Mexican economy had “continued to
deteriorate”. Analysts believe the impact of that
on the peso had increased inflation prospects
so that they were no longer in line with the
permanent objective of 3%. A further factor and
one that Mexico has very little influence in is
that emerging market traders have hammered
it because it is used as a proxy, due to it being
the most liquid emerging markets currency.
The unexpected rate rise comes as Mexico is
preparing to make new cuts in public spending
for next year’s budget and to throw a financial
lifeline to Pemex, the state oil company, where
stagnating oil production and a plunge in
international prices has pushed the company
into a financial crisis. So in the same vein as the
rest of Latin America, 2016 may prove to be a
painful year for Mexico, which brings me on to
a previous article in which I commented on the
possibility that Venezuela may have the
possibility of a default.
Furthermore, Venezuela’s debt woes are
compounded by the fact that the economy is
forecast to shrink by almost 5% this year after
8% in 2015. Furthermore, annual inflation is
predicted to be around 180%. However the crux
of the default issue is the exorbitant servicing
costs which are around 20$bn a year which
equates to 90% of all Venezuela’s oil exports.
Max Brewer
Week Ending 21st February 2016
13
Africa
At the African Transformation Forum (ATF) in
Kigali, this Monday, economists, policymakers,
investors, and civil society are trying to plan
ways of breaking the dependence of many
African countries on raw natural resources. The
case is now more urgent than ever for resource-
based African economies to diversify.
The downside of dependence on raw natural
resource exports is being felt around the
continent: for example, Nigeria, which has been
dependent on oil exports for 70% of
government revenue, faces a huge budget gap
in the face of dropping oil prices; Zambia had
lost some 80% of the value of its currency
against the dollar as China’s demand for the red
metal cooled down, resulting in prices half of
what they were a few years ago; Angola has cut
its budget by 40% from two years ago, resulting
in reduced public services.
One of the main topics to be discussed by
Africa’s top economists, policymakers and
business leaders at the first African
Transformation Forum (ATF) in Kigali is how to
use agriculture as a base for the continent’s
economic transformation. A surplus-generating
agricultural sector can provide cheap food,
ensuring adequate nutrition for the population,
including its workforce, and also increase the
amount of disposable income left to individuals
and families after the food bills have been paid.
This generates demand for other goods and
services, creating direct and indirect jobs.
The Bank of Mozambique has once again
increased its key interest rates in its struggle to
bring down inflation. A statement issued by the
Bank's Monetary Policy Committee on Monday,
after its monthly meeting, announced an
increase of 100 base points in the Standing
Lending Facility (the interest rate paid by the
commercial banks to the central bank for
money borrowed on the Interbank Money
Market). This rate thus rises from 9.75% to
10.75%. This is the highest interest the Bank of
Mozambique has charged since September
2012.
The Monetary Policy Committee said it has
increased the interest rates because of “the
probable impacts of the adverse international
conjuncture, as well as the expected effects of
drought in the South and centre of the country
and floods in the North”. In addition, the
Mozambican Gross Domestic Product was
growing at less than the initial forecast, while
“projections for domestic inflation show the
prevalence of pressure in the short and medium
terms”.
Sreya Ram
NEFS Market Wrap-Up
14
Middle East
A perfect storm is about to smash into one of
the most sensitive areas of Egyptian policy –
the bread subsidy programme. The government
sells bread to its people at 0.05 Egyptian
pounds a loaf, a programme that is expected to
cost an enormous US$4.8 billion dollars this
year. While local farmers have planted enough
wheat this year to ensure an estimated harvest
of 8.1 million tonnes by the end of June, the rest
must be imported from abroad.
But as stated last week Egypt is currently
experiencing a foreign currency reserve crisis,
meaning it has been having problems financing
these imports. For example, the government
has delayed letters of credit for wheat suppliers,
causing shipments to be delayed. This made
traders somewhat reluctant to sell wheat to
Egypt.
With a low supply, an increase to the price of
bread may be the only option left. However a
sharp hike in the price of a loaf in 1977,
designed to take pressure off the government’s
budget, backfired dramatically when riots broke
out across the country overnight, causing the
government to quickly reverse the price
increase. For the future, I believe the
government must persevere to maintain the
subsidy programme and restart wheat imports
if a situation similar to 1977 wants to be
avoided.
In other news, the drop in oil prices to below $30
a barrel has fuelled fears among the younger
Saudi generation of what a future of cheap oil
will mean in the Arab world’s largest economy.
Low oil prices have knocked a chunk out of the
government budget and now pose a threat to
the unwritten social contract that has long
underpinned life in the kingdom.
For decades, the royal family has used the
kingdom’s immense oil wealth to lavish benefits
on its people, including free education and
medical care, generous energy subsidies and
well-paid (and often undemanding) government
jobs.
The shift is already echoing through the
economy, with government projects delayed,
spending limits imposed on ministries and high-
level discussions about measures long
considered impossible, like imposing taxes and
selling shares of Saudi Aramco, the state-run oil
giant.
For Saudis below 35 — shown by the graph to
take up over 70% of the nation’s population —
the oil shock has meant a lowering of
expectations as they face the likelihood that
they may have to work harder than their
parents, enjoy less job security and receive
fewer perks.
Harry Butterworth
Week Ending 21st February 2016
15
EQUITIES
Financials
After what has been a frantic two months, with
financial markets crumbling, we begin to see
things settling down. The performance of the
financial sector is seemingly improving from the
offset of this turmoil, and this brings hopes of
rising stock prices for investors. It therefore
makes sense to review how some of the largest
financial bodies have coped so far this year,
with some having obviously struggled under the
pressure.
Focussing on two major central banks: Bank of
China, Bank of Japan, as well as the second
largest financial influencer in North America:
the Bank of America, whose shares all
plummeted to an annual low last week, we are
beginning to see a rebound in this drop. This is
shown by the figure below, which depicts the
past month’s variations in stock prices of these
three. With the very cause of the poor
performance in financial markets arising from
alterations in central bank’s policy, it’s no
surprise to have seen both the BoC and BoJ
suffer themselves (whilst BoA was hugely
impacted by the adjustments), and hence all
incurred a loss of confidence from investors.
This turnaround saw Bank of America rise 7%
since its downfall, whilst Bank of Japan
recouped a massive 17%, and Bank of China
climbed a minor 3% from last week. These
gains are a strong indication of a recovery
within this market, and with them being from
major influencers in the financial markets we
see an upsurge in investors’ confidence in this
sector.
This is shown by a pattern that is forming all
across the financial market, with the majority of
companies showing some form of recoup from
the sector-wide plummet in stock prices on the
11th of February. Morgan Stanley’s stock price
had fallen 8% on the day from $23 to $21.23,
and has since made a 13% gain to close this
week at $24. Further to this, J.P. Morgan
experienced a drop of 5.5% on the same day
from $56.0 to $52.92, but has recovered 9.4%
since. The recovery is not just unique to US
financial firms either, where improvements are
being seen across Europe, with Deutsche Bank
recovering 15% from last week’s €13.12 low to
closing this week at a higher €15.20.
This surge in stock prices seemingly concludes
better financial equities than what was the case
last week, and with firms’ performance gaining
traction; we see high expectations from
investors and companies alike for this trend to
continue in hopes of establishing higher valued
stocks.
Daniel Land
Figure: Bank of America, Bank of Japan, Bank of China
BoA
BoJ
BoC
NEFS Market Wrap-Up
16
Technology
This week’s technology news has been
dominated by the privacy dispute between
Apple, the FBI and The US Department of
Justice. The FBI would like to investigate the
contents of an iPhone belonging to the San
Bernardino Shooter. However, this requires
Apple to unlock the iPhone, which the
technology giant is unwilling to do due to
privacy issues. The US DoJ has got involved in
the debate, supporting the FBI and accusing
Apple of putting “brand marketing concerns
ahead” of legal obligations.
Elsewhere, telecoms firm T-Mobile has
increased its market share in the US market by
attracting 917,000 new customers in Q4 of
2015. The company points to the new services
they have launched to improve user
experience, such as allowing customers to
watch streaming websites, including Netflix and
Hulu, without eating into their data allowance.
Furthermore, the new Jump on Demand service
allows customers to change their handsets up
to three times a year. Earnings per share of the
company exceeded market analyst
expectations by 126% in the quarter, while net
profits were at $297 million. However, although
the share price did momentarily increase on
Wednesday, as shown below, due to the
company’s high debt to earnings ratio of 2.5, the
share price has remained relatively constant.
Game maker, Ubisoft saw its share price
increase 21% this week to 23p after it
announced a plan to increase revenues 60% by
2019. This plan was announced in an attempt
to fight off a rumoured acquisition from rival
company, Vivendi. Vivendi, controlled by
notoriously aggressive businessman, Mr
Bolloré, had already launched a takeover bid of
Gamesloft – a company similar to Ubisoft. As a
result, Ubisoft will shift its attention to producing
multiplayer games to create “more predictable”
revenues. The company announced it expected
to free up €300m of cash flows once changes
had been implemented. Although there was a
strong response from the market, the founders
of the company, the Guilleot family, only have a
9% share in the company, leaving them more
vulnerable to a takeover, therefore, I would be
cautious in investing in Ubisoft shares.
Sam Ewing
Week Ending 21st February 2016
17
Retail
Retail equities have slightly improved given
positive early year results and improving
sentiments over prospects for the sector. They
have benefited from positive January results,
boosted by clearance sales, as reported by the
British Retail Consortium. The Dow Jones
Consumer Goods index rose by 2.9% before
Friday’s trading and the FTSE 350 General
Retailers index also had an upbeat week, rising
by 4%.
As shown below, Walmart's share price took a
5% hit last Thursday, despite gaining
approximately 10% in the last four months. Its
price had previously declined since the start of
2015 by around 32% up to November given that
it had warned of a reduced sales growth
outlook. Thursday’s results marked the
company's worst sales performance in 35 years
due to a plethora of factors including mounting
online competition from the likes of Amazon
and the impact of a strong dollar affecting the
profitability from overseas trade. In response,
Walmart announced that it is closing 269 stores
globally as they failed to become profitable. In
the UK specifically, the company, which owns
Asda, also reported its sixth consecutive
quarter of decline, with sales dropping 4.7% for
the full year. One factor which is worrying
investors on Walmart’s outlook is same store
sales, which missed the already low estimate of
1% by 0.4%. As food prices are related to the
price of oil, Walmart has argued that food
deflation has had a large impact on its
performance, yet investors remain sceptical
and wonder whether this is an example of wider
shifts in consumer behaviour or specific issues
related to Walmart’s management.
In response to its extended poor performance,
Asda has announced cuts to hundreds of jobs
at its head office in Leeds. Having identified that
consumers are shopping in a more fragmented
way, without so much bulk buying, Asda had
hoped to adjust to this structural change by
lowering regular prices in order to maintain its
position as part of the 'big four' supermarkets.
As single large-shopping trips are less
common, German discounters Aldi and Lidl
have been able to nab 10% of the market.
A rise in footfall and sales for the start of the
year has been broadly based on post-
Christmas price cuts but has also been helped
along by cheaper energy costs, which have
helped to boost confidence and spending. It will
be interesting to see if this trend is set to remain
over the coming months.
Sam Hillman
Walmart’s share price since the 19th November
NEFS Market Wrap-Up
18
Pharmaceuticals
This week we have seen the FTSE 350 Index -
Pharmaceutical & Biotechnology increase by
3.41% and the NASDAQ Biotechnology Index
increase by 4.33%. The Pharmaceutical &
Biotechnology sector has been stable and this
week’s increase is in line with the S&P 500,
which also rose 4.7%.
Shire, a London-listed drug maker has put a
stop to the $50bn acquisition spree it had
accumulated over the past three years as the
company looks to focus on integrating assets
and launching new products. Shire had
acquired Baxalta for $32bn and two other US
biotech companies, NPS and Dyax for more
than $5bn over the past year. Revenues in 2015
were up 7% from 2014 at $6.4bn and Shire
predicts a double-digit percentage increase in
sales and growth in earnings per share from 7%
to 10%. All in all, Shire’s shares have fallen by
over 30% in the past 6 months but this is due to
a wider sell-off in biotech shares across the
sector.
GlakoSmithKline (GSK) has been fined £37m
for illegally preventing the launch of a cheap
rival drug making it the largest penalty levied so
far by the new UK’s competition policies. The
Competition and Markets Authority (CMA) said
that GSK was guilty of having this so called
‘pay-for-delay’ deals where the generic
manufacturers seek to break the market
exclusivity of a branded medicine by
threatening to challenge its patent in court.
GSK’s share price has fallen 2.7% from
£1423.40 to £1384.50 in the last week. GSK is
unlikely to be affect by this penalty and will still
remain as one of the top British Pharmaceutical
companies in the world.
Pfizer Inc. has agreed to pay $784.6 million to
settle claims over Medicaid rebates, resulting in
the drug company’s downward revision of its
fourth quarter results. As a result of this
settlement, Pfizer revised its fourth quarter
results to a loss of $172 million, or 3 cents a
share. In other news, the world may be just a
few weeks away from a viable Zika virus test,
but the vaccine is still many months away from
large-scale trials as reported by the World
Health Organization. Some of the companies
working on the vaccine are French-based
pharmaceutical company Sanofi and Iowa-
based NewLink Genetics.
It was a good week for the Pharmaceutical &
Biotechnology sector as share prices increased
by an average of 3% to 4%. IPOs in the sector
are predicted to slow down this year but on the
flip side, there is a greater possibility of larger-
scale Mergers and Acquisitions this year.
Samuel Tan
NASDAQ Biotechnology Index (NBI) Credits: Yahoo Finance
Week Ending 21st February 2016
19
Oil and Gas
Since the last update, there has been word from
OPEC: the world’s petro states have come
close to organising a production freeze at
January output levels. Number one oil producer
Saudi Arabia and number two Russia, initiated
the accord, contingent on the other big oil
producers backing the freeze. Qatar and
Venezuela have since come on board, but
Tehran’s withdrawal on Wednesday has proved
an element of hesitancy in amongst
dealmakers.
Credit rating agency Standard & Poor’s,
however, are sceptical about the deal and are
not predicting any effect on its oil price
assumptions. Indeed, the financial services
group went on to downgrade Saudi Arabia by 2
points from A+ to A- on Wednesday. This is a
real issue, considering that this leaves the
country only 4 rungs away from non-investment
grade territory. To put this in perspective, this is
often referred to as “junk”. In addition, Bahrain’s
credit level was downgraded as a direct
consequence of its now 20 month-long decline
in oil prices. Brazil, Kazakhstan and Oman also
had their levels lowered.
Ultimately, the actions taken by S&P illustrate
quite clearly the massive risk that the oil price
slump is having on the global market. Investors
are worried; oil has typically been a relatively
safe investment – this is, however, no longer
the case. Concern has been raised over the
economic effects; it is quite possible that the
Saudi riyal will have to be unpegged form the
US dollar.
The Gulf Kingdom is not the only region to be
ailed by this so-called ‘Dutch Disease’
(overreliance on one export). Norway, too, is
feeling the pinch as the PM Erna Solberg
acknowledges that “None of us can be sure
where the oil price will go.” She went on to say
that “The Norwegian economy has to diversify.”
Unfortunately, for economies such as the
aforementioned and those in the Gulf Kingdom,
diversifying is a long-term endeavour; it is
unlikely that now that the negative effects have
already been felt, that they could be reversed.
Surpluses have dwindled and are now
transformed into gaping budget deficits which
will have ripple effects not only in the domestic
economy but globally.
Below is a graph showing the decline in the
price of Brent crude of which the effects are
being felt globally.
Tom Dooner
NEFS Market Wrap-Up
20
COMMODITIES
Energy
Oil dropped markedly on Friday, but is still likely
to make its first weekly price rise in a month.
Earlier in the week, four of the main oil
producing countries - Russia, Saudi Arabia,
Venezuela and Qatar - agreed to freeze their oil
production by maintaining their output at
January levels. The oil market, on balance, took
this as negative news. Despite the fact that
keeping supply constant will allow demand to
catch up to rebalance the oil market, Russia
and Opec’s production was already at multi-
year highs, so supply is being frozen an at
extremely high level. Additionally, the market
believed that Iran was planning to increase
production to its pre-sanction levels, and
therefore the sentiment was that global supply
was unlikely to tail off any time soon.
However, surprisingly late on Wednesday,
Iranian Oil Minister, Bijan Zanganeh, expressed
his support for a deal to hold supply constant,
provoking a rally in oil price. The deal agreed by
Russia and Saudi Arabia would only have held
if other large exporters, mainly Iran, joined.
Hitting $32.40 on Wednesday, the news caused
Brent Crude to rise to over $34 overnight and
continue up to around $35.40 during Thursday.
The volatility continued on Friday, as prices
dipped overnight in response to news that US
crude stocks had hit record highs. Inventories
of US crude rose by 2.1 million barrels last week
to reach a height of 504 million barrels.
However, there was also some good news on
Friday from Iraq, Opec’s second-largest oil
producer. The country’s Oil Minister gave
verbal support for measures undertaken by
Russia and Saudi Arabia to restore ‘normal’
prices, he also stated he ‘welcomed’ the
participation of Russia as a non-Opec country.
Oil prices have risen throughout the day on
hope of a wider deal to curb production, with
Brent crude expected to close around the
$34.00 mark above the open this week of
$33.15.
William Norcliffe-Brown
Brent Crude Price Chart (Source: MoneyAM)
Week Ending 21st February 2016
21
Agriculturals
Much of the major news in the expansive sector
of agricultural commodities revolves around
Egypt, in much the same vein as last week,
largely to be expected given the country’s
influence on global wheat and grain markets.
Whilst the author last week speculated as to the
reaction of traders to Egypt’s recent
contamination furore, it appears that merchants
are exercising a degree of flexibility and
extending a hand to Egypt, lowering the risk
premiums demanded to make trades with
Gasc, the country’s grain authority.
As a result, Gasc made its biggest order since
October, purchasing a total of 240,000 tons of
wheat, with an additional 30,000 tons of US
hard red spring wheat, a variety high in protein,
representing the first purchase since 2010. The
reduction in risk premium comes after a written
document was released by Egypt, outlining its
specifications. Despite this, the number of
tenders was remarkably low, at 5, compared to
the usual 20 or so. As a result, the value of
wheat futures on the Chicago Mercantile
Exchange rose 1.0% this week.
Elsewhere in the agricultural commodities
sector, broker VSA Capital predicted that cocoa
futures are set to rally past the $3000 a ton
level, breaking the earlier 2016 sell off which
caused the New York exchange to fall around
10%. Much of the forecasted rally is supposedly
due to the intrinsic nature of the cocoa market,
with concerns over the West African crop being
compounded by sub-optimal weather forecasts
which are set to keep the Ghanaian crop at
approximately last year’s disappointing levels,
and significantly less than VSA Capital’s
previously forecasted output.
As a result, the net long position from Hedge
Funds and other speculators increased
significantly within cocoa futures, adding
supportive evidence to VSA Capital’s forecasts
and elucidating the sizeable market impact of
the predicted fall in output and thus supply. Due
to similarly inclement weather conditions, other
crops, such as soybeans, may also exhibit
fluctuations in output, and by extension supply,
affecting markets in a similar manner to cocoa
futures. As such, agricultural commodities
remain an interesting and dynamic group of
markets to follow in coming weeks.
Jack Blake
NEFS Market Wrap-Up
22
Precious Metals
The outcome of the Federal Reserve meeting
on the 17th February implies a turning point in
adjusting the interest rates as soon as March.
Certainly, this change would have a significant
effect on turning the appreciation of precious
metals towards the opposite direction. The key
factors raising concerns include sinking oil
prices, slowly declining inflation rates (relatively
low already) and volatility in equity markets.
According to the Fed's Bullard, raising the
interest rates now is most likely to hurt the US
economy.
This forecast cannot be called unexpected as
earlier. On 10th February, J. Yellen, the
chairwoman of Fed, suggested that the rise in
the interest rates should be delayed. The
economist added that the main factor initiating
financial market volatility is increasing
uncertainty on China’s exchange rate policy. M.
Perez-Santalla, the VP of business
development at Bullionvault, reflected that in
the upturning event, strengthening China’s
economic position, gold would certainly
depreciate.
While we continue waiting for a further increase
in interest rates this year, the Bank of America
Merrill Lynch is already changing its prediction.
The Bank suggests that increases of the real
interest rate should be reduced to 2 times rather
than 3-4 times as forecasted earlier.
Similarly, the EU is observing a worsening
distribution of economic performance. On 15th
February M. Draghi, the President of ECB,
commented on depreciating banking stocks
and weakening emerging market economies.
The main worry for banks is decreasing
commodities prices, mostly affecting the banks
financing suppliers, due to the increasing risk.
Discussions raised had a negative shock on
metals prices. The value of gold topped on the
11th at 1246.70 USD/t. oz. and, after a slight tip
on 16th (Figure 1), slightly strengthened by the
19th to 1232.48 USD/t. oz. A short period of
depreciation could be explained by a slowing
demand in physical gold purchases on early
trade. In the meantime, the demand for physical
silver on ready trade remained relatively stable.
In other metals markets the situation is also
similar. Silver also peaked on the 11th and
remained depreciating up to 19th Feb., from
15.794 USD/t. oz. to 15.405 USD/t. oz.
Meanwhile, Platinum fell from 960.20 USD/t.
oz. to 943.28 USD/t. oz.
Regression analysis by Dennis Boyko,
GoldMinerPulse Stock Researcher, projects a
1/3 chance for Gold ending the year with an
overall appreciation. Otherwise, 2016 is likely to
end without a clear trend. As evident in the
Figure 2, Gold entered 2016 at just above 1060
USD/t. oz. and sees a slight upward trend in the
1st quarter.
Goda Paulauskaite
Figure 2 Gold
Figure 1 Figure 2
Week Ending 21st February 2016
23
EUR/USD 16.-19. February
CURRENCIES
Major Currencies This week the USD was fuelled by higher-than-
expected US CPI, which triggered a higher
demand of USD. The core inflation at a yearly
basis rose to 2.2%, above expectations of
2.1%, while on a monthly basis, it advanced
0.3%. The core inflation is a surprise in the face
of declining oil prices. Inflation plays a major
role for the monetary policy of the Fed.
Recently, the market expectation of further
increases of the interest rate by the Fed slightly
rose again. However, the majority is still
expecting that there won’t be a further increase
this year. Additionally, the surprisingly strong
performance of the US-industry backed the
USD. Hence, after the USD was worth 0.898
Euro on Wednesday, it was expected to
increase its worth to 0.9005 Euro today.
This week the EUR/USD declined resulting in a
2-week low. As the graphic below shows the
EUR/USD went down to 1.10859 on Friday. On
Tuesday EUR/USD lied at 1.1166, on
Wednesday at 1.130 USD. As for the ECB a
decision for its next meeting on March 10th has
not been made yet. However the ECB may
decide to act if the recovery of an inflation near
under 2% is endangered. “The main thing for us
discussing our decisions is the prospect for
inflation going forward. We don’t expect to
reach our goal in a short time, but to go in that
direction”, said ECB Vice President Vitor
Constancio to Reuters. The ECB is trying to
boost inflation with the help of QE. However,
low energy prices, stagnating growth and weak
lending still keep the inflation rate far away from
the ECBs target.
The Euro to Pound exchange rate is currently
between 0.7776 and 07817. The GBP/EUR
exchange rate softened and is currently trading
around 1.2846 mainly because of rumours,
comments and speculation on the second day
of EU reform talks, where David Cameron is
currently battling for Britain’s national interests
as he said in a recent statement. However, the
Prime Ministers hopes of securing a reform to
Britain’s EU membership have been already
diminishing after several Eastern European
countries rejected proposals to restrict child and
in-work benefit payments to EU migrants.
Italian Prime Minister Matteo Renzi stated
“some timid steps forward on migration, some
steps back on a UK deal… I’m always
confident, but a bit less optimistic than when I
arrived.”
Alexander Baxmann
NEFS Market Wrap-Up
24
The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly known as NFS and UNIS). 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 Josh Martin at [email protected]. Sincerely Yours, Josh Martin, Director of the Nottingham Economics & Finance Society Research Division
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.
As featured on:
Sponsors: Platinum: Gold:
About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly known as NFS and UNIS). 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 Jack Millar at [email protected] Sincerely Yours, Jack Millar, Director of the Nottingham Economics & Finance Society Research Division