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NEFS Market Wrap-Up
2
Contents Macro Review 3 United Kingdom
United States Eurozone
Japan Australia & New Zealand
Canada
Emerging Markets
10
China India
Russia and Eastern Europe Latin America
Africa South East Asia
Middle East
Equities
17
Financials Oil & Gas
Retail Technology
Pharmaceuticals
Commodities
Energy Precious Metals
Agriculturals
22
Currencies 25
EUR, USD, GBP AUD, JPY & Other Asian
Week Ending 31st January 2016
3
THE WEEK IN BRIEF
Global growth
remains an issue
Amid sustained slow growth in China, low
growth rates continue to persist among
economies across the globe. While China’s
growth rate was 6.9% for 2015 was roughly in
line with the targeted rate of “around 7%”, the
pace of the economy has showed a significant
slowing at the back end of last year and into the
start of 2016, and is impacting heavily on
growth rates across the board. Africa’s exports
of raw materials to China have fallen
significantly, hindering producers across the
continent, particularly those in the mining
industry. Meanwhile, falling demand from China
is affecting exports out of countries ranging
from India to Australia, dragging on their
economic growth performance. With the
outlook for China seeming gloomy, it seems
that growth figures of those countries that
depend on China for exports (of which there are
many) could be restrained for some time.
Oil price slump
worsens…
Before Christmas, the dramatic fall in oil prices
amazed many, and as the price of Brent Crude
Oil dipped below $40 per barrel, down from a
peak of $112 per barrel in 2014, it seemed as if
the price could go no lower. Yet since then,
price falls have showed no let up, and this
month we have seen prices plunge, even
dropping below the $30 per barrel price for a
short period. While the price recovered to some
extent later in the month, the World Bank has
cut average price forecasts by over a third for
2016 from $52 per barrel to $37 per barrel.
Given that current oil prices have remained so
low for what is becoming a long time, pressure
is increasing on OPEC to come to a deal with
Russia to reduce oil production, in order to
boost prices.
… Continuing to
restrain inflation
Such low oil prices are continuing hold down
prices across the board in a global economy
that is already experiencing a low level of
inflation. It seems that we could still be waiting
a while longer for any sign of an increase in the
interest rate by the UK’s Bank of England.
Across the pond, while Janet Yellen initially
indicated that there could be up to three or four
increases in the Federal Reserve’s interest rate
in the US this year, given that inflation seems to
be restrained, it appears that further rate hikes
may be somewhat later than many had
predicted at the end of the last year. Perhaps
most significantly, the Bank of Japan surprised
most of us on Friday, voting to cut interest rates
on reserves held by financial institutions with
the Bank to -0.1%, demonstrating the difficulty
that it is facing in guiding the economy to its
inflationary target of 2%. Unless oil prices begin
to return to more normal levels, it seems hard
to imagine Japan, or indeed many other
countries, including the UK, to achieve inflation
targets any time soon.
Jack Millar
NEFS Market Wrap-Up
4
MACRO REVIEW
United Kingdom
Since December, the Bank of England’s (BoE)
Monetary Policy Committee (MPC) held their
monthly meeting to make their decision on the
Bank Rate and money supply that should be set
for the UK. Predictably, interest rates were held
constant at 0.5% for the 82nd consecutive time
since March 2009.
The BoE’s monetary policy objective is to
deliver price stability, which is defined by the
Government’s inflation target of 2%. CPI
inflation, shown on the below chart, was just
0.2% in December 2015, improving slightly
from 0.1% in November. Oil prices have been
falling since mid-2014 due to global supply
exceeding global demand. The price of a barrel
of crude oil fell to under $30 last week, for the
first time in 12 years. Alongside China’s
slowdown in growth, this has meant that
inflation has been subdued in many countries,
in addition to the UK.
Mark Carney, the Governor of the BoE, stated
last week in his “The Turn of the Year” speech
that a rise in Bank Rate would be considered
when inflation, GDP, and average wage growth
rise to normal levels. He added that the MPC
aim for inflation to be on target in two years,
hinting that a rate rise would not be any time
soon. In response to his dovish speech, pound
sterling fell to $1.42, a seven year low.
One of Carney’s first moves as Governor of the
BoE in 2013 was to announce his Forward
Guidance policy, which was not to raise Bank
Rate from its current level of 0.5% at least until
the headline measure of the unemployment
rate reached the 7% threshold. Unemployment
fell more quickly than anticipated, as shown on
the second graph below, leading to revisions of
the policy and eventually rendering it
unsuccessful. Unemployment is currently at
5.1%, far below the 7% guideline the MPC were
hoping for. Yet wage growth has not
accompanied the employment increase, and
this is one of the factors holding back an interest
rate rise. The ONS released their Labour
Market Statistics report last week, stating that
average earnings is around half the rate it was
pre-crisis. This has been due to a combination
of factors: higher employment in low paid jobs;
low inflation - firms consider 2% growth in pay
a generous offer in a 0% inflation climate; slack
in the labour market, giving workers bargaining
power; and ongoing effects of the 2008 financial
crisis, as workers sacrifice their pay in order to
hold on to a job.
Shamima Manzoor
Week Ending 31st January 2016
5
United States
Following the encouraging economic signs and
the strengthening US jobs market as discussed
in the pre-Christmas market wrap-ups, in a
unanimous voting decision the US Federal
reserve raised the short-term interest rate for
the first time in nearly a decade since the
economy was struck by the worst financial
crash of modern times. The Fed announced a
quarter point increase in the target range for the
federal funds rate to 0.25% - 0.5%, a small but
mighty change. The initial Federal Open Market
Committee's forecast implied three or four more
increases through this year, to end at around
1.25%, however, if the inflation remains as
weak as it appears, rates could rise much more
slowly.
As per the numbers, the biggest challenges
facing the US economy are coming from
abroad, as the drastic fall in commodity prices
has contributed to a slowdown in overseas
growth. The Fed has to tread carefully with its
decision on the interest rate as the US
exporters still seem very vulnerable to currency
appreciation. The Fed’s actions have led to an
appreciation in the greenback, which has
caused a significant drop in US exports by
nearly 2.5% as goods become relatively more
expensive to consume internationally.
The relatively poor expectations among oil
producers have led to a global fall in oil
investment, which has consequently eroded the
demand for drilling-related equipment. The
American manufacturers have faced a knock on
effect given such uncertainty within the global
energy market. The collapse in price of crude
oil has led to investment falling by 2.5% as the
US crude plummeted by 17.9% in the fourth
quarter of 2015.
Optimists may argue that the rise is a sensible
approach to stay ahead of inflation and avoid
the zero-rate liquidity trap. The economy has
added 13.6m jobs since it bottomed in 2010 and
despite signs of further improvement, the
concerns regarding slow wage growth means a
slowdown in growth cannot be neglected. The
chairman of the Federal Reserve, Janet Yellen,
said the committee was confident the economy
would "continue to strengthen" but
acknowledges that there is "room for
improvement".
Vimanyu Sachdeva
NEFS Market Wrap-Up
6
Eurozone
European equities rebounded as the European
Central Bank said there were "no limits" to the
stimulus measures it might take to boost the
Eurozone economy.
After plunging by 3.5%, London, Frankfurt and
Paris were modestly higher in early afternoon
trading, ECB chief Mario Draghi said the bank
is "determined" to do what it takes to steer
Eurozone inflation back up towards its target of
2%.
"We have the power, willingness and
determination to act. There are no limits how far
we are willing to deploy our policy instruments,"
Draghi told a news conference after the
Eurozone’s central bank held its key interest
rates unchanged at its first policy meeting of the
year.
That stance was expected as inflation is stuck
at low levels in Europe and both the ECB and
the Bank of England will probably keep
borrowing costs at very low levels for a while
longer. "The ongoing decline in the price of
crude oil, weakening outlook for growth in
emerging economies and further softening of
inflation expectations have all increased
downside risks to the outlook for inflation in the
Eurozone," noted Lee Hardman, currency
analyst at Bank of Tokyo-Mitsubishi UFJ.
Last month council also cut the interest rate on
deposits at the central bank from commercial
banks by 0.10 percentage points to negative
0.30%. The idea is to make banks pay for
leaving money unused and push them to lend it
instead, thus increasing capital flow in the
market.
"With new downside risks to economic growth
and a significant drop in oil prices depressing
the near-term outlook for inflation, chances
have risen that the council may then agree to
an additional stimulus," Schmieding added.
Weak inflation is a sign of a sluggish economy,
and falling prices can hurt growth if they
become entrenched. The ECB focuses on
inflation because that's its legal mandate under
the European Union agreements that
established the euro.
Central bank stimulus can have far-reaching
effects on businesses, investors, savers and
consumers. The ECB stimulus has meant a
stronger dollar against the euro, adding a
headwind for US exporters to Europe. It has
also slashed returns on savings in conservative
investments such as bonds, insurance policies
and bank accounts for people looking ahead to
retirement.
With the Eurozone bogged down by the refugee
crisis and stagnant growth, it is hopeful that
quantitative easing would drive an increase of
capital and spending in the market.
Erwin Low
Week Ending 31st January 2016
7
Japan
The Bank of Japan (BoJ) voted on Friday to
reduce interest rates on excess reserves held
by financial institutions with the BoJ to -0.1%.
This move, which follows in the footsteps of the
ECB and others, comes as a surprise to many
as the governor of the BoJ Haruhiko Kuroda
had previously denied that the central bank was
considering negative interest rates. This is a
bold step by the BoJ, which demonstrates its
willingness to do what it takes to achieve their
inflationary target of 2%, and the cut comes
after the expected time frame for reaching this
target was pushed back for the third time in less
than a year. As a result of this news the Yen
plunged 1% against the euro and yields on
Japanese government bonds fell. The bank claims that it is moving because of the
recent slowdown in China and the fall in energy
prices rather than because of weakness in the
domestic economy, however many will point to
the fact that the growth in household spending,
at -4.4%, was much lower than expected.
Although unemployment remained low at
around 3%, companies have opted not to
increase wages, which is good news for
investors but may add to the deflationary
pressure. Indeed, a slew of other weak data for
December may also have spurred the BoJ into
making this announcement; retail sales at -
1.1% were lower than expected, industrial
production at -1.4% also failed to meet
forecasts, and both imports and exports fell. Mr
Kuroda did, however, claim that underlying
inflation was strong and pointed to a price index
that excludes energy prices, which reports
inflation as 1.3%, as evidence of this.
By instigating negative interest rates the BoJ
hopes that borrowing cost for companies and
households will fall and that this will increase
the demand for loans and encourage
investment in higher yielding assets. Critics
argue, however, that this will only promote “tit
for tat” currency devaluations, deprive
commercial lenders and their customers and
encourage fiscal indiscipline by the
government.
In other news, Akira Amari, one of the key
players in the ‘Abenomics’ programme, a
strategy designed to end the age of stagnant
prices (see diagram) in Japan, resigned over
corruption allegations. This will be a blow for
Prime Minister Shinzo Abe as it may make it
more difficult for him to implement some of his
key economic policies and could therefore
jeopardise the aforementioned move by the
BoJ.
Daniel Nash
NEFS Market Wrap-Up
8
Australia & New
Zealand
A combination of economic events arose during
the festive period in Australia. Westpac’s
consumer sentiment measurement declined
from 3.9% to -0.8% in December, with a further
depreciation by 3.5% towards the end of
December, driven by family finances and
international factors including spill over effects
on financial markets. Australia’s seasonally
adjusted unemployment rate remained
unchanged at 5.8%. This was slightly below
market consensus with 1000 jobs were lost, the
smallest decline since May 2010. But local
newspapers advocate that young Australians
are pessimistic about finding jobs and are
reluctant to take entrepreneurial risks. Flat
exports and a 1% rise in imports resulted in a
further decline in the trade deficit from -2.40
billion to -3.31 billion, stumping forecasters who
made a -2.61 billion prediction. The main drag
on trade was an unexpected reduction in
exports of metal, along with non-monetary gold.
JP Morgan analyst, Tom Kennedy, stated that it
was merely “temporary” factors which resulted
in a lower Australian trade deficit.
This week Australia awaited for the CPI inflation
figures to be released. There was a marginal
decrease by 0.1%, presenting itself at 0.4% in
the three months through December, with the
annual rate at 1.7%. Tobacco along with
domestic and international vacation travel were
the main contributors to the rise in consumer
prices, although slightly offset by falling prices
of motor fuels and telecommunications
services.
In New Zealand, the reserve bank lowered the
official cash rate from 2.75% to 2.50%, as
expected by forecasters in December. CPI
inflation was below the 1-3% target (a result of
the strengthening of the New Zealand dollar
and a 65% fall in world oil prices in 2014) and
so the country’s monetary policy needs to be
accommodative to this.
During the holiday season, the trade deficit
improved from -905 million to -779 million. This
week, we saw another significant improvement,
from -799 million to -53 million, indicated by the
graph below. Causes include an increase in the
value of imported goods by $1.3 billion,
although the total value of petroleum products
fell by $2.5 billion. Consumption goods such as
clothing, toys and games led the rise of imports
through a $1.5 billion increase, while capital
goods imports rose by $526 million, mainly in
machinery and plant capital goods.
Meera Jadeja
Week Ending 31st January 2016
9
Canada
The forecast for GDP growth in Canada has
been reduced for the second time in the last
month, from 1.7% to 1.3% for 2016, by one of
the largest banks in Canada, CIBC Markets.
One of the major contributions to the reduction
in the prediction of GDP growth is the fall in the
price of oil. In 2014, oil exports out of Canada
were valued at $128.6 billion and accounted for
27.2% of Canada’s total exports. This indicates
that oil exports are a significant contribution to
GDP values in Canada. In the year to
December 2015, oil prices declined by 40%
which was one of the main reasons cited by
CIBC for their first reduction in the prediction for
GDP growth.
It has also been announced that Canadian GDP
growth increased to 0.3% in November, this is
in comparison to zero GDP growth in October
and a decline of 0.5% in September 2015. This
comes as good news after Canada performed
weakly last year, entering a recession at the
beginning of 2015, after GDP growth declined
for two consecutive months.
The Federal agency states this increase in GDP
growth was mainly accounted for by
improvements in the performance of retail and
wholesale trade, manufacturing and energy
extraction. Wholesale trade increased by 1.3%
in November after decreasing for four
consecutive months. Retail trade growth rose
by 1.2% and manufacturing by 0.4%. Natural
resource extraction increased by 0.6% and gas
extraction by 2.1% in November 2015.
However, despite this improvement in the
Canadian economy, GDP growth for the final
quarter of 2015 may have only increased by a
fractional amount. The senior rates strategist at
T D Securities, Andrew Kelvin, stated that the
increase of GDP growth in Canada puts GDP
growth for the final quarter of 2015 at zero. This
is exactly what the Canadian central bank had
predicted previously. For the Bank of Canada,
"it doesn't change anything there," Kelvin said.
Consequently, whilst the slight improvement in
GDP growth is a reason for some hope, the
Canadian economy is still performing weakly
and there still a long way to go to recover from
the technical recession of early 2015.
Kelly Wiles
NEFS Market Wrap-Up
10
EMERGING MARKETS
China
The global market selloff over the last month
can be largely attributed to the sentiment
present within and around the Chinese
economy. Locally, major equity indices in China
are down by approximately 20-25% since the
start of the New Year.
The Caixin manufacturing purchasing
managers index (PMI) for December was
released at the start of the new business year
with a dismal reading of 48.2. This was below a
forecast of 48.9, representing yet another
month of declines in manufacturing. A survey
figure below 50 indicates a contraction in the
sector, and is a leading indicator of economic
health. The release of this data preceded the
triggers of the newly implemented circuit
breakers. Trading was halted for 15 minutes on
the first trading day after the CSI 300 fell by 5%
before closing early for the day after it fell
further to -7%. The circuit breakers were
activated once again later in the week after just
30 minutes of trading. Designed to limit market
swings, the ineffectiveness of the mechanism
led to its suspension.
China recorded gross domestic product of
about $10 trillion in 2015. Inflation-adjusted
fourth quarter GDP figures came in at 6.8%,
representing a full-year growth rate of 6.9%, the
slowest rate since 1990, but this was roughly in
line with China’s target of ‘around 7%’. The
services sector, comprising sectors such as
finance and healthcare, accounted for
approximately 50% of GDP. Consumption
contributed to 60% of growth. The target growth
rate for 2016 has been set at 6.5%. There is a
consensus that China’s maximum potential
growth is slowing as an aging population
shrinks the labour force and growth from a
shifting labour force to the modern economy is
exhausted. President Xi Jinping has
established that policy in 2016 will focus on
supply-side reforms. However, demand-side
stimulus from the central bank will still take
place, evident in the recent devaluations in the
Yuan.
The recent devaluations in the Yuan have also
rocked global markets. It is worth remembering
that the Chinese have kept the Yuan relatively
strong in recent years to facilitate the
economy’s transition from a manufacturing and
investment-based one to one that is driven by
services and consumption. Credibility of its
growth figures still remains an issue.
Improvements in transparency of the economy
and less market intervention can help turn
China into a country the world can trust.
Sai Ming Liew
Week Ending 31st January 2016
11
India
Aside from the optimistic growth rate reported
in November, the rest of the holidays were
disappointing for India, as the country’s trade
deficit widened further and the inflation rate
shot up to a fifteen-month high of 5.61%. The
unstable global economic climate also
increased concerns about India’s exposure to
external shocks, with the recent Fed rate hike
as well as volatility surrounding China being the
leading causes of uncertainty.
Although investors believe that India is much
better placed in terms of growth than its
emerging market peers such as Brazil and
Russia, a recent poll conducted by Moody’s
showed that 35% of the respondents saw
external shocks as the key hurdle to the
economy. Dried up demand from India’s largest
customers, the US and Europe, coupled with
China’s slowing economy and the recent
devaluation of its currency can be attributed to
the continuing decline in India’s exports. This
has led to fears that reaching the once
comfortable $300bn mark this fiscal year is
merely a remote possibility.
There are also still concerns regarding India’s
currency valuation. The Fed rate hike
announced in December coupled with the
general optimism surrounding the recovery of
the US economy has led to large cash outflows
from emerging markets as investors seek
higher interest rates elsewhere. A weaker
rupee and stronger dollar may also erode the
positives that India has been enjoying from
external factors such as falling world oil prices,
a benefit which will have limited effects this year
anyway. In light of this fading boost to the
economy, the spotlight will once again settle on
government policies and macroeconomic
fundamentals.
Concerns regarding external issues was
followed by 32% of respondents viewing
sluggish reform momentum as the biggest
threat to growth and 19% are worried most
about infrastructure constraints. Alongside calls
for more rapid reform, as discussed in previous
weeks, the government has also come under
pressure to encourage more private sector
investment and as a result have recently
announce the ‘National Investment Grid’
initiative as a part of the Invest India scheme.
This will allow the private sector to contribute
more towards growth and ensure that the
burden does not fall solely upon public
investment, which is unsustainable in the long
run.
Homairah Ginwalla
NEFS Market Wrap-Up
12
Russia and Eastern
Europe
With reports published over the Christmas
period confirming last year’s economic growth
rates throughout Eastern Europe, it is a fair
conclusion to draw that 2015 has seen a very
mixed bag of results.
Russia’s financial situation has continued to
worsen, with GDP shrinking by 3.8%
throughout the year (as shown on the graph
below). The Ruble has lost more than half its
value in the past 18 months, leading to very
expensive imports and high inflation rates.
Wage growth is at a new low, and as
consumers adjust to lower real disposable
incomes, Russian retail consumption has fallen
by 8.9%. Investment rates have fallen
throughout the year, with a drop of 8.7% in
December. With increasing unemployment and
government unable to take economic action
against falling oil prices, social discontent is
rising rapidly.
Unfortunately the Belarusian economy is not
much better. After 20 years of positive growth,
2015 saw Belarus fall into recession (3.9% drop
in GDP). Whilst some argue it is due to Belarus’
loss of a strong trading partner (Russia), others
suggest that Belarus faces a structurally
unsound economy that will require large
economic reforms to amend. Ukraine is also in
a difficult position, despite its EU free-trade
agreement. Tax evasion and corruption
amongst the elites has prevented economic
meltdown, however Ukraine still faces
particularly low GDP growth rates (1% in 2015),
and increasing inflation rates.
On a more positive note, Bulgaria did extremely
well in 2015. It greatly surpassed expectations
by reaching growth levels of 3%, and it is hoped
that growth will reach 4.5% in 2016. The Czech
Republic has also been successful, with
unemployment at a low level in comparison with
other European countries (at 10.5%). 2016
looks positive for Slovakia and Romania, with
continued high levels of growth predicted. In
Hungary, the government introduced growth-
enhancing measures, which should ensure
GDP growth levels of 2%. Unfortunately
however, some fear that these measures are
unaffordable, and will worsen the economic
divide between the dynamic centres of western
and central Hungary and the struggling Eastern
regions. Finally, Poland has continued to do
well, with 2015 growth reaching a four-year high
of 3.6%. This should be sustained throughout
2016, with increasing trade and rising private
consumption levels.
Consequently, whilst the coming year will be
turbulent for Eastern Europe, particularly in
Ukraine and Russia, many economists predict
that various states will see a successful year of
economic growth and reform.
Charlotte Alder
Week Ending 31st January 2016
13
Latin America
The Christmas break has seen some
interesting developments within emerging
markets, particularly in Latin America, where
we have seen the likes of Mauricio Macri take
power in Argentina. Meanwhile, with Brazil
facing its highest levels of inflation since 2002,
the country’s central bank has been left with
some challenging decisions, as policymakers
struggle to curb rising inflation amid a deep
contraction. Considering this, Brazil’s central
bank left its benchmark interest rate unchanged
at 14.25% at its January 20th meeting; the Selic
rate was left on hold at a 9-year high for the
fourth straight meeting.
Argentina’s new centre-right government has
been busy with a 30% devaluation of the
Argentine peso, shortly after Mr Macri took
power, alongside the removal of stringent
capital controls put in place by Ms Fernández
de Kirchner in 2011. However this move fuelled
inflation fears even though economists at
Barclays described the move as “perfectly
orchestrated”.
Yet, although the new market-friendly
administration has made a “strong start”,
including a well-received devaluation, many
serious challenges lie ahead. These include
tackling inflation of about 30%, a fiscal deficit of
almost 8% and a decade-long legal dispute with
creditors in the US that are blocking Argentina’s
access to international capital markets.
However, progress is being made: in an effort
to end the debt saga, Argentina will make a
proposal to the group of hedge funds led by
Paul Singer, a US billionaire, by next week, say
government officials. The approach is sooner
than many analysts had expected and could
open the door to economic normality for
Argentina. ”. Further deals are being negotiated
and the government is expected soon to
announce a $5bn loan from a group of
international banks, led by JPMorgan and
HSBC, to boost central bank reserves which
had been depleted by the previous leftist
administration.
The future is looking more promising for
Argentina, as last week the new finance
minister announced plans to reduce the primary
fiscal deficit by 1% and bring inflation down to
between 20 and 25%. The opposite could be
said for Brazil, and it could be in for a very
painful year even with the Olympics set to take
place over the summer.
Max Brewer
NEFS Market Wrap-Up
14
Africa
Years of rapid economic growth across sub-
Saharan Africa fuelled hopes of a prosperous
new era where economies no longer depended
on the fickle global demand for Africa’s raw
resources. However the recent slowdown of the
Chinese economy and as its once seemingly
insatiable hunger for Africa’s commodities
wanes, many African economies are tumbling
quickly.
The outlook across the continent has grown
grimmer, especially in its two biggest
economies, Nigeria and South Africa.
The International Monetary Fund, on
Tuesday, has sharply cut its projections for the
continent. They also predicted an increase in
the unemployment rate of 0.8% in the 1st
quarter of 2016. As Africa’s biggest exporter of
iron ore to China, South Africa is suffering from
a slump in mining as well as in other sectors like
manufacturing and agriculture. The economy
of South Africa is expected to slide into a
recession this year.
South African Reserve Bank governor
announced on Thursday a 50 basis-point
increase in the repo rate to 6.75%, in line with
the consensus and therefore the prime lending
rate will be 10.25%. Lending rates have
increasing continuously since 2015 owing to
expectations of higher inflation. Inflation is still
expected to breach the upper end of the target
set by the central bank.
Nigeria, Africa’s biggest oil producer, is reeling
from the further fall in crude prices this week.
With oil accounting for 80% of government
revenue, the government may also lack the
resources to quell potential unrest in the Niger
Delta, the source of the country’s oil. In addition,
weakening currencies make it harder for
Nigeria and many other African governments to
repay China for loans used to build large
infrastructure projects.
But experts also see bright spots on the map.
While previously high-flying commodity
exporters, like Angola and Zambia have been
hit hardest by China’s slowdown, other
countries are showing greater resilience.
The International Monetary Fund has urged
Kenya to diversify its economy to take
advantage of new promising sectors with huge
opportunities for growth in the face of gloomy
projections for world growth. IMF Kenya
representative cited the need to enhance
productivity in the country's agricultural sector
which will lead to new business opportunities in
other sectors. Eventually this would translate
into deeper insertion of Kenyan products in
global markets, especially when the ongoing
investment in infrastructure upgrades start to
pay off.
Sreya Ram
Week Ending 31st January 2016
15
South East Asia
Indonesia, Southeast Asia’s largest economy,
continues their ongoing struggle to promote
economic growth and enhance living standards.
It comes after the central bank of Indonesia cut
its 2016 forecast GDP growth for the second
time this year and now expects yearly growth of
5.2%-5.6%, with Trading Economics predicting
that the slowdown could be far greater,
estimating that growth could reach a decade
low of 4.1% in 2016, shown in the graph below.
Additionally, Singapore who were facing an
economic crisis by being in touching distance of
technical recession in 2015 now have a greater
positive outlook with annual GDP growth of 2%.
Moreover, Vietnam, Asia’s fastest growing
foreign direct investment location, continues its
astonishing rapid growth, at 7.01%.
Indonesian President Widodo has vowed to
speed up infrastructure development to boost
India’s struggling economy due to the country’s
poor record; many companies are discouraged
from outsourcing in Indonesia and many
projects have been dropped in recent years due
to difficulties in land acquisition, environmental
and political disputes. This is highlighted by this
staggering statistic; Indonesia received 155
foreign direct investment projects last year in
comparison to 241 FDI projects in Vietnam.
There have been signs that Indonesia will put
China as their driving force to revive growth,
after they put Japanese investors to one side
and agreed a $5 billion contract for a high speed
rail link to China. However in the past month,
agreements have stagnated after the chief
executive of the joint venture running the
project announced construction would not
begin until the correct permits were issued. The
railway project, known as the Jakarta-Bandung
link, China’s first project in South East Asia, is
seen as a test of ability of Chinese companies
to operate with other complex democracies. It
is being closely watched by other South East
Asian countries including Malaysia and
Singapore, who are considering the potential
gains of Chinese high-speed rail.
To conclude, it seems Indonesia have an
underlying problem in their infrastructure,
meaning that Vietnam have an advantage in
foreign direct investment. Permit problems are
persistent among foreign investors in Indonesia
and Widodo must address this to avoid being
left behind by their neighbouring countries.
Alex Lam
NEFS Market Wrap-Up
16
Middle East
Generating economic growth in the Middle East
is crucial to defeating extremism, Iranian
President Hassan Rouhani said on Tuesday,
putting forward his country as a regional trade
hub and pillar of stability. This comes as
Rouhani makes a four-day trip to Italy and
France, looking to rebuild Iranian relations with
the West some two weeks after financial
sanctions on Tehran were rolled back following
the implementation of its nuclear deal with
world powers.
Italy announced some 17 billion euros of
business deals with Iran on Monday. Sizeable
contracts are also in the offing in France,
reflecting EU countries' keenness to cash in on
the diplomatic thaw with the Islamic Republic.
One particular highlight is the ongoing
negotiations with European aircraft maker
Airbus to buy 114 planes, in what would
represent an upgrade for a fleet that has an
average age of 25 years and includes some
aircraft that predate the 1979 Islamic revolution.
Underscoring the growing warmth, Rouhani
said he expected Italian Prime Minister Matteo
Renzi to visit Iran in the coming months to help
boost bilateral economic alliances. "We are
ready to welcome investment, welcome
technology and create a new export market,"
Rouhani told a business forum, saying Iran had
ambitions to develop its own economy after
years of curbs and hardship. As the graph
below shows, Iran has struggled with a wide
scale deterioration of its economy for the past 4
years, directly as a result of Western sanctions
to its past nuclear ambitions. With Iran’s GDP
per capita having fallen 10.7% since 2011,
Rouhani is hopeful that these new deals will
begin a much needed revival of the domestic
economy amid the strife of Islamic State in the
region.
"If we want to combat extremism in the world, if
we want to fight terror, one of the roads before
us is providing growth and jobs. Lack of growth
creates forces for terrorism. Unemployment
creates soldiers for terrorists," Rouhani said.
However problems have arisen with Iran's
emergence from the diplomatic cold. Sunni
arch-rival Saudi Arabia – alarmed at these new
deals with the Western Powers – has sought to
deflate hopes that Tehran would be a bonanza
for foreign investors. The two powerhouses of
the gulf have ended all diplomatic and
economic relations in response to the recent
execution of Sheik Nimr al-Nimr, a popular
cleric and activist against the Saudi elite.
Harry Butterworth
Week Ending 31st January 2016
17
EQUITIES
Financials
On January the 29th, Tullet Prebon announced
it is to cut 7.5% (70 people) of staff within
Europe and North America. The move,
combined with a higher profit margin forecast,
pushed the company’s shares up by 8% over
the following day, establishing a solid start to
the year with a positive prospective forming for
shareholders. This future outlook sees share
prices forecasted at an annual median of 383p
on the London Stock Exchange, representing
an impressive 14% rise of the current value.
Furthermore, dividends of 17p are expected
over the following fiscal year, representing a
rise of 0.9%. This positive potential for this
company intrigues investors, who are holding
onto shares in the meantime. But the low
returns offer a reasonable excuse for not
buying.
Earlier this week, the Bank of Japan shocked
investors with a surprising announcement of
adopting a negative interest rate, with rates
being cut to minus 0.1%. This ended what was
a month of volatility surrounding the central
bank and as a result have seen equity
benchmarks jumping, alongside a plummet in
the yield of 10-year Japanese government
bonds with a drop of over half to 0.10%, settling
a record low return.
The monetary attempt to encourage economic
spending saw Bank of Japan’s shares tumble,
with their shares valued at 41,000 JPY at the
start of January, and finishing the month on a
less satisfactory 38,200 JPY. Comparisons to
the Nikkei 225 stock index (the price-weighted
average of Japans top 225 performing
companies) present a predictable story, where
the index has followed in a similar pattern to the
Japanese bank’s performance, with it beginning
the month at 19,000 JPY and now falling to
around 17,500 JPY. The figure below describes
the infliction the bank’s performance is having
on Japans economy, with the last third of the
graph representing the month of January, which
witnessed a correlated plummet for the two.
The bank’s announcement of contractionary
policy had also spread its impact beyond the
Tokyo Stock Exchange to international
markets. This simply furthers what has been a
difficult January for the global financial sector,
with Wall Street’s S&P 500 index having fallen
7.4% over the past month.
Daniel Land
Figure: BoJ vs Nikkei 225 Index
NEFS Market Wrap-Up
18
Oil and Gas
Before the Christmas break, the oil situation
was bad – not dire. Now, one month on you’d
struggle to find anyone optimistic. Prices have
plummeted; ongoing is, to put it bluntly, a glut.
What’s more is that the effects are being felt;
producers’ equities have fallen further at the
start of this year.
So disastrous is the current nature of oil prices
that the governor of Alaska is in favour of
introducing what will be the first state income
tax in 35 years. This is designed to compensate
for the losses in oil-related tax revenue, which,
in Texas, has amassed to approximately 50%
in both oil and gas. Last year over 17,000 oil
and gas workers were laid off in the US – this is
a significant amount especially when we
consider that the Texan working population is
held up largely by the oil and gas industries. On
top of the job losses, 42 North American
companies have filed for bankruptcy protection,
stressing the acknowledgement of volatility in
the industry. An analyst for Oppenheimer & Co
even went so far as to say that more than half
of independent drilling companies in the US
could go bankrupt before prices bounce back.
Often forgotten too, are the companies that
issue credit cards to regular gas consumers,
which, incidentally, take a 3% transaction fee.
Because of this, the $120 billion less spent at
the pump has translated into a $3 billion fall in
these companies’ revenue. Furthermore, along
with bankruptcy and revenue losses, the risk of
oil companies defaulting on drilling loans has
sky-rocketed, particularly problematic for banks
such as Bank of America Merryl Lynch and
Wells Fargo who have $27 and $17 billion in oil
and energy loans respectively.
Ultimately, however, we have to remember the
words of James Hamilton, economics professor
at the University of California, who reminded us
that the worst affected locations in the US will
be the same as those in the 1980s oil glut: those
who export the most. Consequently, then, the
overall effect on the US, a net importer, will be
positive. These words also, however, translate,
onto a global scale and so we can say that the
effect for a net exporter like Russia and OPEC
will be negative, very negative.
Tom Dooner
Week Ending 31st January 2016
19
Retail
Retail equities have not come off unscathed by
recent bearish investor sentiments. The FTSE
350 retail index has fallen by 6.54% since the
7th of December, the date at which NEFS
released its last market wrap up. Coming up to
Christmas, retailers witnessed a relative fall in
sales from previous years which is alarming for
a sector that traditionally expects to achieve
14% (according to the Office for National
Statistics) of its sales during the month of
December.
A relative trading slump occurred before
Christmas this year with the share price of blue-
chip retailers including Next plunging as a
result. Next’s sales were down by 0.5% in the
60 days before Christmas, well below city
forecasts, causing its share price to tumble by
5% after its festive results were announced on
January the 5th. Warm weather has been cited
as an explanation for poor fourth quarter results
and Next even produced the rather convincing
graph below to explain.
The years busiest day for internet shopping
occurred on Black Friday in November as
retailers offered a multitude of discounts to
battle for sales. Consumers are obviously
becoming increasingly savvy when it comes to
seeking out these deals as more people are
going online to take advantage of Black Friday
and the Boxing Day sales instead of regular
shopping in the 2 weeks before Christmas. For
example, John Lewis reported a 10.7% rise in
online sales on the first day of its discounts:
Christmas day. Although Next shunned the
Black Friday sales and still performed well on
the day, its lack of stock and relatively
weakening online presence is being reflected in
its share price which has fallen by 13.6% since
the 2nd of December.
Overall, Christmas has been relatively
downbeat for retailers, especially those who
failed to invest heavily in online trade. Online
giants including Amazon and Ebay have
certainly soaked much trade away from high-
street brands as they focus on sales instead of
profits. However, this has had severe
consequences as even they took huge share
price hits, both falling by 12% following poor
earnings reports.
Sam Hillman
NEFS Market Wrap-Up
20
Technology
In general, the technology heavy, NASDAQ
index has fallen 8% in the last month, mainly
due to the strengthening dollar, interest rate
hikes and the Chinese stock market crash. In
the past week the news has been dominated by
firms releasing their Q4 results, with many of
the market giants making headlines. For
example, Apple [NASDAQ: AAPL] has had to
recall 12 years’ worth of plugs which have
caused safety concerns due to overheating.
Amazon [NASDAQ: AMZN] was one of the
week’s top losers due to an unpredicted small
increase in sales. The online shopping firm
reporting a 21.8% rise in fourth quarter sales,
pointing mainly to the holiday shopping season
and increased used of its cloud computing
system. However, this increase was 5.7 times
less than the sales figures predicted by city
analysts. This shortfall sent Amazon’s share
price tumbling 13%, as shown on the graph
below, as investors felt the market had
overvalued the company. This event continued
Amazon’s trend of missing analyst forecast.
Five out of the last eight predictions have been
missed, which has baffled many shareholder as
the company has invested in increasing its
workforce by 50%, as well as buying new
machinery. The firm also announced earlier in
the week that it will be pumping more cash into
“Amazon Web Services”. This is likely to reduce
its cash flow further, while the return on this
investment is unknown, therefore, I would warn
against investing in Amazon.
As I briefly mentioned earlier, the Christmas
period has brought about a large increase in
sales of cloud computing services. Consumers
of these services are not just households but
also large corporations, such as high street
banks, who can save vast amount of
investment on infrastructure by “renting” the
memory storage service. Microsoft [NASDAQ:
MSFT] has particularly benefited from this
increase in sales, with revenue for its cloud
services division rising 5% to $6.3bn in the last
quarter. However, company profits for the final
three months of 2015 fell 15% to $5bn. Many
point to the fall in PC sales, which could be due
to the strengthening US dollar making
purchases for foreign customers more
expensive. Unlike Amazon, however, these Q4
results where much better than expectations,
thus the share price rose 5.5% during Fridays
trading.
Sam Ewing
(A graph of the Amazon share price in the last week. Source: Yahoo! Finance)
Week Ending 31st January 2016
21
Pharmaceuticals
With the advent of the New Year, we have seen
the FTSE 350 Index - Pharmaceutical &
Biotechnology fall by 4.46% in the last month
and the NASDAQ Biotechnology Index fall by
16% also in the last month. This is due to the
‘Irrational’ sell-offs in the Pharmaceuticals
sector in the recent weeks. 2015 had been a
good year for Pharmaceuticals & Biotechnology
stocks as they outperformed the S&P 500 yet
again by a healthy margin.
GlaxoSmithKline and Qualcomm are in
currently in negotiation to set up a joint venture
potentially worth up to $1bn to develop medical
technology. This is one of the latest examples
of mergers between the healthcare and
technology industry, and we may very well see
more of this type of convergence happening.
After months of unhappiness and resentment
against the high drug prices, the
Pharmaceuticals & Biotechnology sector met
up in San Francisco at the annual JPMorgan
Healthcare Conference to hopefully start off the
New Year on a positive note.
The sentiment is that the recent Pharmaceutical
sell off would pose a threat to the IPO market.
Shire PLC has started off the year by
announcing its long awaited $32bn takeover of
US-based Baxalta, but investors have shown
signs of loss of confidence in mega deals as the
proposed deal pushed down the shares in both
companies subsequently. Another large-cap
biotech company, Celgene has also trimmed its
profit forecast and is predicting that the
revenues this year would be below analyst
expectations.
Industry executives are on the defence as they
argue that investors are not seeing the bigger
picture as biopharma companies are
discovering more drugs than they have in
years, such as cancer immunotherapies, a
breakthrough towards countering tumours
which have been untreatable till date.
In other news, the NHS has recently approved
a £5,700-a-month skin cancer drug called
Opdivo as it is marketed by its Manufacturer
Bristol-Myers Squibb. Opdivo is the second of
an important new class of cancer drugs to be
recommended by the National Institute of
Health and Care Excellence in the past four
months. This has triggered a 3.12% rise in the
price of Bristol-Myers Squibb Co, and is likely to
continue this trend and to outperform the
market.
It is rare to see one single industry group remain
the market leader in performance for more than
year or two but the Pharmaceutical &
Biotechnology stocks have done just that since
2011 until last year in 2015 when it started to
show signs of reversion. 2016 will be a much
more challenging year for this sector, and we
would have to closely observe the different
headwinds of the economy to make a better
assessment of the year’s forecast.
Samuel Tan
NASDAQ Biotechnology Index (NBI) Credits: Yahoo Finance
NEFS Market Wrap-Up
22
COMMODITIES
Energy
Over the past weeks, there have been major
changes in energy markets. Weakening
economic indicators in China caused a fairly
major stock market sell off, which caused the
demand for energy to diminish markedly.
Notably, Brent crude hit its lowest price in 12
years, trading briefly at $27 a barrel last week.
Since then, the prices of Brent crude and West
Texas Intermediate have made sharp rises.
This was in part due to minor rises in global
stocks. However, the bounce back can mainly
be attributed to the announcement that the
Russian energy minister will hold talks with
OPEC with regard to a potential oil supply cut.
The initial reaction was for Brent crude oil
futures to shoot up by around 7%. Currently it is
thought that a 5% cut in production is what is on
the table, although it is still highly improbable
that any action will actually be taken from these
talks. Talks could be unfruitful given that Saudi
Arabia, the largest producer in OPEC,
maintains the view that Russia would be unable
to cut production. The significance of these
talks has been further downplayed by Rosneft
(Russia’s largest state-controlled oil producer).
A spokesperson from the group claimed that
nothing had changed that would increase the
likelihood of oil production cut.
In the light of these recent developments
surrounding the oil market the World Bank has
slashed its estimates of the average oil price
during 2016. The previous forecast, from just 3
months ago, is down from $52 per barrel to $37
– an almost 25% drop from the average 2015
price. It cited the main factor in the decision was
the unexpectedly aggressive slowdown in the
Chinese economy, which has been shown to
have substantial effects on commodity prices in
general. The bank also stated that the recent oil
drop in the early part of 2016 has had little to do
with fundamentals, and was therefore part of an
irrational market sell off. Furthermore they
predict a steady price rise throughout 2016.
William Norcliffe-Brown
Brent Crude 4 Hour Candlestick (Source:
Oanda)
Week Ending 31st January 2016
23
Precious Metals
Gold entered 2016 with a significant
appreciation over the last 12 weeks from
around 1066.60 USD/oz to around 1114.30
USD/oz. A number of factors which played the
key role in determining the price in the first week
of January, 2016, as illustrated in the first figure
below. One of the key drivers identified was
lower oil prices combined with strengthened US
dollar. The metal is regaining a stronger
position since a sharp fall in October, 2015,
when the Fed Statement had a negative effect
on investments.
According to Thomson Reuters GFMS, as long
as the prices stabilise or, preferably, recover
further, Gold should expect a greater investor
interest in Asian markets. Furthermore, GFMS
forecasts a steady gradual increase in the
metal’s price in the second half of 2016 by up to
5%. This prediction is mainly being brought on
by the shrinking supply from the mining industry
and, again, reinforced by the increasing
demand from Asia.
On the other hand, there are concerns of
equities markets falling, weakening Gold’s
position in the market. There also are worries
that a similar trend to the one in 2008 could
arise. A significant fall in the metal’s position
resulted in the early 2008 as a combined
outcome of a sharp decline in energy prices, a
shift in higher real interest rates and partly due
to the credit crisis.
This year Silver seemed to be slowly regaining
its position in the market up to 26th January,
2016, while still lagging behind Gold. Whilst
industrial demand is slowing, increasing
interest from investors could force the price up
and change the current depreciation. The
amount of Silver sold increased by 61%
between 2009 and 2015. As prices remain
steadily decreasing (as shown in the second
figure), a lower level production is to be
expected due to the declining profitability of the
metal. In turn, a lower supply may shift prices
back up to a new stable equilibrium to meet the
demand. However, this week, the price slowly
dropped between 26th and 28th January from
14.564 to 14.255 USD/t oz.
Platinum supply was lower in 2015. However,
the demand followed a similar trend. According
to Johnson Matthey, although both indicators
are moving in the same direction, it is still
surprising to observe a lack of response with
respect to the price level. 2016 projects an
expansion of the metal’s supply because of the
increasing scale of “recycling”, while demand is
also expected to rise. Overall, P. Duncan, JM
General Manager, expects a net deficit to result
in the coming months.
Goda Paulauskaite
Silver prices (2012-2016)
NEFS Market Wrap-Up
24
Agriculturals
During the preceding Christmas holiday period,
Agricultural Commodities exhibited a number of
fluctuations in a number of different markets,
driven in no small part by concerns over
Chinese demand and weakness in emerging
markets.
Wheat, for example, as measured by the
Chicago board of trade index, fell over 2% over
Russian plans to eliminate a proposed tax on
wheat exports. The tax was originally intended
to mitigate rising food prices within Russia
through incentivising domestic producers in
turn to supply a domestic market, increasing
supply and lowering price within Russia. Had
the tax have been implemented, global supply
would be lowered, increasing prices and
allowing wheat to continue its quintuple session
rise. In contrast, however, the tax has now been
deemed unlikely to be implemented, with First
Deputy Agriculture Minister Evgenii Gromyko
stating that his ministry were proposing either
lowering, or more drastically, completely
eliminating an export tax on wheat. In the
simple but accurate words of US Commodities
Analyst Jason Roose, “if they reduce the tax,
that simply means more wheat in the world”. In
other words, increased supply, which will in turn
lower global wheat prices, as exhibited by the
aforementioned price correction on the Chicago
exchange.
Elsewhere in the expansive field of agricultural
commodities, we have seen other fluctuations
in price, due to a plethora of factors, including,
but not limited to, technical factors. For
example, expectations of unusually high South
American soybean crops have caused a bullish
market reaction from traders, with market rallies
expected to be limited as a result. "When we dip
into some support areas, we'll see that buying
from time to time, but I don't really look for this
buying interest to be maintained or sustained
unless weather in South America is very dry in
the long term," said Brian Hoops, analyst at
Midwest Market Solutions.
Whilst there were other movements in similar
markets, such as corn futures in particular,
wheat and soybeans exhibited the most notable
changes in the preceding period. Agricultural
commodities remains an interesting sector to
cover, with inevitable macro-economic
fluctuations driven by Chinese economic
concerns undoubtedly affecting prices across a
range of commodities.
Jack Blake
Week Ending 31st January 2016
25
CURRENCIES
Major Currencies
On Wednesday, the 28th January 2016, Janet
Yellen declared that the Fed probably won’t
increase the interest rate in March, which is not
surprising considering the low inflation rate.
Many economists already expected anyway
that the next rise of the interest rates will follow
not earlier than June. With the lifting of the
interest rate to approximately 0.25% in
December, the Fed finally ended the era of
cheap money in the United States. Yellen now
wants to follow a policy of slow but steady return
to 2% on the medium-term and between 3 and
4% on the long-term. However, the expected
inflation rate stays unchanged at a low level,
too. On the other hand the labour market in the
US is improving which was pivotal for the last
uprating for the times being. To be able to
further raise the interest rate higher inflation
would be necessary as a strong Dollar actually
hurts the US-industry.
The inflation rate in the Eurozone on the other
hand raised from 0.2% in December to 0.4% in
January which is its highest level since October
2014. However, as M3 money supply
decreased to 4.7% in December 2015, from 5%
in November and M1 money supply decreased
from 11.1% to 10.7% during the same period,
many experts doubt that the expansive
monetary policy of the ECB is actually working.
Additionally, the perpetually low oil prices
continue to force the inflation rate down, as well.
Furthermore, president of the ECB, Mario
Draghi pledged unexpectedly to review the
ECB stimulus programme in March this year.
After a relatively stable performance of the Euro
on the exchange market last week, Draghi’s
statement led to higher volatility at the end of
this week. After it showed a positive trend at the
beginning of the week – the EUR/USD
appreciated on Thursday to 1.091, but
devalued again to 1,083 during Friday’s trading.
However, zero interest policy in Europe
remains unchanged favourable which is why
the Euro will predictably depreciate again
against the dollar throughout 2016 if the Fed
follows its “return-to-normal” strategy. As there
is a large gap between the target inflation of
nearly under 2% and the actual inflation rate,
the ECB surely will follow policies to approach
this goal. Therefore, the weaker Euro will exert
upward pressure on inflation in 2016.
Accordingly, predictions by the ECB assume
the inflation rate will rise to 0.7% in 2016.
Alexander Baxmann
NEFS Market Wrap-Up
26
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 jmartin@nefs.org.uk. 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,
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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
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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 jmillar@nefs.org.uk Sincerely Yours, Jack Millar, Director of the Nottingham Economics & Finance Society Research Division