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Week Ending 14th 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
9
China India
Russia and Eastern Europe Latin America
Africa Middle East
Equities
15
Financials Retail
Technology Pharmaceuticals
Oil & Gas
Commodities
Energy Precious Metals
Agriculturals
20
Currencies 23
EUR, USD, GBP
Week Ending 14th February 2016
3
MACRO REVIEW
United Kingdom
Latest figures show that in December 2015,
industrial output in the UK fell by 1.1%, which is
the largest monthly fall the index has seen in
over three years. A combination of factors have
led to this, including the fall in oil prices, warmer
weather that reduced the demand for heating,
and weak manufacturing output.
This adds to ongoing concern about the UK’s
reliance on services, and helps to explain why
the trade gap has reached a new record - a
£125 billion deficit in goods and a £90.3 billion
surplus in services, as seen on the graph below.
David Kern, Chief Economist at the British
Chambers of Commerce, said that to improve
trade, the government needs to place more
emphasis on helping small businesses to
export, and to assist companies to enter new
markets.
The trade deficit is also acting as a drag on
economic growth. The Confederation of British
Industry (CBI) lowered their GDP forecasts to
2.3% in 2016 and 2.1% in 2017, down from
2.6% and 2.4% respectively. This follows last
week’s downward revisions to the growth
forecasts in the Bank of England’s Inflation
Report. Despite this, the Director General of the
CBI said that “the UK is likely to remain among
the fastest-growing advanced economies”, as
the UK’s direct exposure to some of the major
global headwinds are limited. For instance,
stock market investment in the UK tends to be
done via pension funds or insurance
companies, so there is not much of a direct
effect on households from share price volatility.
Furthermore, China is not one of the UK’s
primary export destinations, so the slowdown in
growth over there may not have much of an
impact on the UK’s exports.
Weak UK growth could delay a rise in interest
rates, or even lead to a decrease. Although
markets expect a rate rise in 2017 or 2018, the
Economist Intelligence Unit predict a rise only
after at least 2020. They believe this will be
prolonged due to unresolved structural
weaknesses in the UK economy such as low
productivity and slow wage growth, alongside
weak global growth and unstable global
markets. Stock market volatility means
investors are looking for alternative places to
keep their cash, with government bonds and
precious metals high in demand. The UK’s 10-
year government debt is at a record high, with
the yield falling to just 1.29% on Thursday.
Shamima Manzoor
NEFS Market Wrap-Up
4
United States
The once unimaginable scenario to most
economists, may soon be seen, with the US
following the footsteps of Japan and
Switzerland to produce negative interest rates.
The US Federal Reserve will need to play an
astonishingly canny hand in the coming weeks
amidst the bolstering speculation around an
interest cut. Janet Yellen, chair of Federal
Reserve, has stressed that such a move is
hypothetical but “remains on the table”. The
largest US banks were recently demanded to
produce models examining how their balance
sheets would perform under the event of
negative stress tests, an “adverse market
scenario” where the three month treasury bills
falls to minus 0.5% for a long period. Such
actions carried out by authorities certainly help
to harness the speculation into a reality.
The negative interest rate may be implemented
by charging banks to hold reserves at the
Central Bank, which would encourage banks to
earn a positive return by instead creating loans
for consumers and businesses. Overall, this
may spur spending within the economy, as
borrowing becomes more affordable. However,
there are several reasons to be sceptical here.
The fed reacting in a way knee-jerk motion
following the recent hike in interest rates could
destabilise expectations. This holds true
specifically for the private sector which is
already facing uncertain conditions given
volatility from oil exporting countries abroad. A
hit to the hard earned credibility is the last thing
the Fed would want right now.
Despite the ambiguity, the week was generally
a positive for the American consumers. As
shown on the graph below, US import prices fell
by 1.1% in January for a seventh straight month
since reaching the annual peak in mid-2015.
The US Labour Department has attributed the
considerable decline to the decreasing cost of
petroleum products alongside a strong dollar
which undercut prices for a range of goods. The
US commerce department on Thursday
reported a 0.6% increase in US retail sales
excluding automobiles, gasoline, building
materials and food services after an unrevised
0.3% decline in December. Such
macroeconomic conditions point to periods of
weak inflation in the near term. The rebound in
retail sales brings optimism but households
remain cautious given the uncertain economic
outlook.
Vimanyu Sachdeva
Week Ending 14th February 2016
5
Eurozone
The Eurozone economy notched up modest
growth in the final three months of last year,
showing that the bloc has little muscle to shrug
off the globe's mounting economic problems.
Recovery remains disappointingly weak after
Greece fell back into recession and Italy slowed
to near stagnation.
After a week where stock markets around the
world plunged, the 19 countries using the Euro
failed to lift the gloom with data showing that
growth of its gross domestic product was just
0.3% in each of the final two quarters of 2015.
On an annual basis, the Eurozone expanded by
1.5%, down from 1.6% three months earlier,
suggesting growth remains weak despite the
European Central Bank’s stimulus measures
and the positive impact of cheap oil.
Greece was the worst performing member of
the Eurozone, with GDP falling by 0.6% in the
last three months of last year. That followed a
steep contraction of 1.4% between July and
September, when capital controls were
imposed and its banks were shut. Germany, the
Eurozone’s largest economy, grew by 0.3% in
the last quarter. Domestic demand was solid,
but foreign trade had a negative impact on
growth with exports falling faster than imports.
Italy was the big disappointment, with
expansion slowing to just 0.1% against
predictions of 0.3% growth. Italian growth has
slowed steadily through 2015, since managing
growth of 0.4% in the first three months.
This will add to pressure on the European
Central Bank to ramp up its 1.5-trillion-euro
money printing scheme to buy chiefly
government bonds when governors meet in
March. Having spent much of their firepower,
however, options are limited.
The data painted a bleaker picture for European
industry, from car-making to mining. Industrial
output fell 1% month-on-month in December - a
1.3% year-on-year fall. This was worse than
expected by economists who had predicted a
0.3% monthly rise and a 0.8% annual increase
in production.
Relative calm returned to world markets on
Friday after a hurricane-force week that wiped
billions off share prices and saw investors dash
for shelter in top-rated government bonds and
gold.
European stock markets rallied on Friday
morning, after days of heavy losses. The Stoxx
600 index has shed 15% of its value this year,
with bank shares hitting their lowest levels since
the 2008 financial crisis.
Erwin Low
NEFS Market Wrap-Up
6
Japan
One of the ways in which the BoJ hoped that
cutting interest rates into negative territory
would improve Japan’s inflationary prospects
was by weakening the value of the yen and,
therefore, making exports cheaper and
increasing firms’ overseas profits. Due to global
market turbulence, however, many investors,
who see the yen as a ‘safe haven’ currency,
have been moving their money out of relatively
more risky economies and into Japan. As a
result, the yen has appreciated and the BoJ’s
credibility has been called into question.
Another reason which may be responsible for
the paltry performance of the BoJ’s negative
interest rates policy is that interest rates around
the world are also extremely low or negative. In
this respect, the effectiveness of the policy may
be further compromised if the Federal Reserve
pauses its December rate rise.
Last Sunday the figures for average cash
earnings in December were released; they
showed that average cash earnings in Japan,
which were forecasted to rise by 0.7%, rose by
0.1% in December, reflecting, as we can see in
the graph (shown below), a long term trend.
Figures for the producer price index, which
were expected to show it falling by 2.8%, were
released on Tuesday and showed that it had
actually fallen by 3.1% in December. The
producer price index is a leading indicator of
consumer inflation and, therefore, it is unlikely
that consumers will feel significantly worse off
in the short to medium term, however, this will
be distressing news for the BoJ as it only
worsens fears about contraction in the
Japanese economy.
We will, mostly probably, have to wait until the
BoJ hold their next monetary policy meeting,
which is scheduled to take place in March, to
see how they react to recent events, however,
short of intervening in the setting of the
exchange rate, as some have suggested they
may do, it is hard to see what options they have
left; cutting interest rates further would be
unlikely to have a meaningful effect and would
increase the pressure on bank’s profit margins,
while quantitative easing seems to have been
pushed to its limit. Although authorities in Japan
may be able to take specific measures to relieve
the desultory economic prospects facing its
economy, when their situation is viewed in the
context of the global economy it seems that it is
merely a symptom of a wider problem.
Daniel Nash
Week Ending 14th February 2016
7
Australia & New
Zealand
There was a remarkable improvement in
Australia’s Westpac Consumer Sentiment, also
known as Australia’s Consumer Confidence
Index, this week. From -3.5% last month to a
4.2% result this month, the optimists came out
on top. The indicator is based on the responses
from 1200 adults across Australia and the
survey is carried out the week before the results
are released. There are five sub-indices which
compose the index, family finances versus a
year ago, family finances in the next 12 months,
economic conditions in the next 12 months,
economic conditions in the next 5 years and
whether it a good or a bad time to buy major
household items.
The -3.2% figure from last month owed to the
respondents’ “concerns with the sharp falls in
share markets and the oil price from the
beginning of the year”, as stated by Bill Evans,
Chief Economist at Westpac. Oil prices had
been down 20% and Australia’s share price
index had fallen by 8% since the beginning of
2016 to the last day the survey was taken. The
recovery this month is a result of the
respondents’ relief not to have witnessed a
continuation of such steep declines.
In New Zealand, the Business NZ Performance
of Manufacturing Index came to a 15-month
high. The index was revised upwards from 57.0
in December 2015 to 57.9 in January, as shown
by the graph below. Production was up at 60.3,
employment in the sector increased to 54.9 and
deliveries grew to 58.4. New orders grew at
around the same pace whilst finished stocks
growth slowed down, an overall improvement
across three of the five sub-sectors of the index.
New Zealand’s manufacturing sector has been
expanding since October 2012 and is still going
strong. In December 2015, manufacturing sales
increased by 3.2% and the Manufacturing Index
grew by 1.5 points in December 2015. However
Craig Ebert, Senior economist at the Bank of
New Zealand stated that manufacturing was not
running at the same speed in every sector,
evidently printing, publishing and recorded
media are lagging behind those seen as more
“robust industries”, such as food and
beverages.
Meera Jadeja
NEFS Market Wrap-Up
8
Canada
This week the Bank of Montreal announced its
assessment on several economic aspects of
the Canadian economy. The senior economist
at the Bank of Montreal, Sal Guatieri, revealed
his prediction that the provinces of
Newfoundland, Alberta and Labrador will
remain in a recession at least until December
2016. He has a slightly more optimistic outlook
for 2017, where he believes these provinces will
record low but positive GDP growth rates,
mainly due to oil revenues being larger for next
year. He also predicted that the provinces of
British Columbia and Ontario will record
moderate GDP growth rates in 2016.
In the announcement, the Bank of Montreal
stated that they also believe that the Bank of
Canada will cut its interest rate within the next
few months, the Canadian interest rate is
currently at 0.5%. The senior economist at the
Bank of Montreal stated “The Canadian
economy remains weak due to sharp
reductions in investment and income in the oil-
producing regions and further declines in the
mining sector”. Canada’s unemployment rate is
currently at 7.2% and it has been predicted that
it will not decrease below 7.0% in 2016 due to
the energy sector cutting jobs. It has been
forecasted that 100,000 jobs were lost
throughout 2015 in the energy sector, this was
mainly due to the low price of crude oil and
policy uncertainties.
In other news this week, the Canadian Prime
Minister Justin Trudeau announced that his
government may fail to meet his Liberal party’s
pledge to eradicate the Canadian budget deficit
by 2019-2020. He stated that “If we look at the
growth projections for the next three or four
years, it will be difficult (to return to balance)”.
Moreover, the Liberals have failed to meet the
promise of a $10 billion shortfall cap for its 2016
budget (during the Canadian election the
Liberal party promised to keep the budget
deficit below $10 billion). He insisted that they
would still meet the target of reducing the debt
to GDP ratio in every year that his party are in
power.
In a separate statement, the National Bank of
Canada reported that the current government
could generate a budget deficit of over $90
billion over the four years it has been voted into
power for. This prediction has been made due
to the poor performance of the Canadian
economy over the last year and the Liberal
government’s promise to spend billions in
expansionary fiscal policy. During the election
campaign the Liberals promised to spend $38
billion over the next four years. A large
proportion ($17.4 billion) has been allocated to
infrastructure to help growth rates and create
jobs.
Kelly Wiles
Week Ending 14th February 2016
9
EMERGING MARKETS
China
The first day of the Chinese New Year fell on
Monday earlier this week, with bank holidays
declared for the entire week. It is customary for
family members to return home for the New
Year, especially for a reunion dinner on the eve
of the first day of Chinese New Year. The 40-
day New Year travel rush began late last month
and is often described as the greatest annual
human migration on earth. It is expected that
Chinese travellers will make more than 2.91
billion journeys this year. Many are moving from
the manufacturing heartlands to their rural
roots. The effects of the halt in trade and
production reach far beyond Chinese shores
and can affect weeks of business globally.
Many workers also use this time to look for new
jobs, further disrupting production as new
workers have to be trained.
The only economic data out this week came
from the People’s Bank of China (PBOC). The
PBOC reported that foreign exchange reserves
shrank less than expected by US$99.5 billion to
US$3.23 trillion in the first month of the new
year, as shown in the graph below. This was
slightly lower than the previous month’s decline
of US$107.9 billion, the highest ever recorded.
Reserves in China reached an all-time high of
US$3.99 trillion in June 2014. Policymakers
have been depleting foreign exchange
reserves, by selling US dollar holdings, to stem
currency depreciation pressure. The Chinese
currency hit a 5-year low in January amid
slowing economic growth, tumbling stocks and
rising outflows. The lack of a counter-balancing
force of capital inflows against outflows, due to
barriers to entry into the Chinese markets, have
hastened the decline in foreign exchange
reserves.
Data released from China, or from other nations
that are heavily dependent on the Chinese
economy, over the first two months of the year
should be taken lightly due to the large
disruptions that occur during this period. The
closure of financial markets has also presented
Chinese officials with an opportune moment to
release expectedly bad economic data to limit
panic in the markets. It remains to be seen
whether the PBOC can maintain the rapid rate
of foreign exchange reserve declines should
the currency continue to fall. Political reform
may be a more effective antidote.
Sai Ming Liew
NEFS Market Wrap-Up
10
India
This week saw India consolidate its position as
the world’s fastest growing economy, recording
a growth rate of 7.3% for the final quarter of
2015, as shown below. Coupled with the
impressive full year average rate of 7.5%, the
figures are good news for Prime Minister
Narendra Modi who has aggressively pursued
an agenda focussed largely on development.
Other figures however are not so flattering, with
manufacturing and industrial production both
contracting and, inflation unexpectedly
accelerating to a 17 month high of 5.69%.
The growth rate finally allows us to now confirm
that India is comfortably outpacing China, which
most recently recorded its lowest growth rate in
25 years. However, whilst the data paints a rosy
picture for India during a difficult time for most
emerging markets, there is also scepticism
surrounding the validity of the numbers. Many
analysts have argued that imbalances within
the economy contradict the healthy growth rate
being publicised by ministers. Dire export
figures in particular, as discussed in previous
weeks, do not support what the figures are
saying. Growth is also being primarily driven by
consumer demand and debt-fuelled public
spending, which is worrying given the steadily
rising inflation rate, which is now dangerously
close to the RBI’s 6% target. Despite attempts
at a revival by the government, private capital
investment promises to remain dormant and
output in both manufacturing and infrastructure
declined 2.4% and 1.3% respectively.
There is also uncertainty surrounding the recent
changes made to the method through which
data is measured. This alteration resulted in
sharp increases in the recorded rates for Q1
and Q2 from 7% to 7.6% and 7.4% to 7.7%
respectively and although the revisions may be
a valid outcome of the new approach, the extent
of revisions combined with a lack of
understanding of the new method does make
the task of interpreting the data more difficult
than usual.
We must also remember that growth is not all
encompassing, and closer analysis of the data
shows that the consumer spending, which
drove growth in the last quarter, was made up
extensively of urban consumer spending, more
than compensating for rural spending, which
was very subdued. Given that the majority of
India lives in the rural areas, their exclusion
from the growth process erodes its success.
If the figures are taken at face value, then India
looks to be in a strong position, but deeper
analysis merely reiterates what is already
apparent: reforms need to be implemented
rather than just advertised, and further private
investment must be encouraged. Publishing a
flashy growth rate is not enough to convince the
world that India is the bright spot that it wants to
be.
Homairah Ginwalla
Week Ending 14th February 2016
11
Russia and Eastern
Europe
Whilst many countries in Western and Central
Europe are facing increasing unemployment
rates and calling for an end to the Schengen
Plan, Eastern European states are making a
plea for ‘any able-bodied’ workers to enter their
depleted labour force. Over the past few years,
millions of young workers have left Eastern
Europe in search of higher wages, causing a
surge in job vacancies and a substantial brain
drain. Poland, for example, is struggling greatly
to meet employment demands, with unfulfilled
job vacancies increasing over 20% last year. As
seen in the graph below, job vacancies have
continued to grow, year-on-year, since 2011.
Whilst some argue that border controls will
reduce Eastern Europe’s shortage of labour
and increase the quality of labour available,
many fear the detrimental impact it will have on
Western European economic growth. Another
solution would be to import labour from
countries outside the EU, such as the Ukraine,
however this will merely spread the problem.
Wages in Eastern Europe could also be forced
to rise, however as has been seen in Poland
(where wages have doubled to $8,222 since EU
membership), this has driven up production
costs, leading to reduced investment and poor
trade. Consequently, any solution to Eastern
Europe’s labour shortage will doubtlessly call
into question some of the most basic principles
of the EU’s founding.
As Russia’s economy continues to worsen as
the year progresses, the Kremlin this week has
hence devised various new strategies to
support its ailing industries. Whilst all ministers
are still expected to cut their spending by 0.9%
of GDP, the government will now issue various
types of government grants and contracts to
companies (especially in the industrial sector),
instead of bank loans. Subsequently, the
Government can decide who receives the
money and the enterprise will receive the
money directly. Additionally, the Kremlin wishes
to put into action a stimulus plan for Russia,
which will include spending 828 billion Rubbles
on the car, railway, construction and agriculture
industries. Whilst this plan is highly feasible
considering Russia’s extremely low debt, which
currently stands at 12% of GDP, international
sanctions prevent Russia from borrowing this
money. Nonetheless it can be hoped that if the
Kremlin wishes to see a flourishing economy
that can be borrow money, by having the
sanctions removed, then Russia may be
incentivised to abide by European conditions.
Charlotte Alder
NEFS Market Wrap-Up
12
Latin America
As discussed in a previous article, China has
been heavily involved in Latin America, with the
majority of all Chinese finance going into
infrastructure and manufacturing. In said article
China was funding a $15bn scheme to build two
nuclear power plants. Chinese development
bank finance couldn’t come at a better time for
Latin America, as the region is experiencing a
significant downturn and other sources of
finance are drying up.
China’s two development banks, the China
Development Bank and the Export-Import Bank
of China, have provided upwards of $29bn to
Latin American governments in 2015,
according to new estimates published by
Boston University.
Western-backed development banks and the
private sector are on the retreat from Latin
America, so China’s development banks are
coming to the rescue, at least for now. This is
highlighted by the fact that both the World Bank
and Inter-American Development Bank cut
lending in 2015 by 5% and 14% respectively. It
is estimated that Latin America needs $170bn
to $260bn per year in infrastructure finance so
these cuts could not be coming at a worse time.
In contrast, most economists would agree that
such downturns more than justify an uptick in
development bank finance.
It is astonishing, as a three-fold increase of
Chinese lending from 2014 has been
witnessed. What’s more, China’s 2015 finance
to Latin America was more than the World
Bank, Inter-American Development Bank, and
the Development Bank of Latin America
combined. The majority of the loans went to
Venezuela, Ecuador and Brazil - the countries
facing the harshest downturns in the region.
Barbados, Costa Rica, and Bolivia also join the
list. However, this borrowing comes at a price,
and the onus is on Latin American governments
to translate this new finance into economic
growth that is socially inclusive and
environmentally sustainable. If they don’t, they
will be left with ever more debt to the Chinese,
to their own people, and future generations.
In other news, Argentina’s bid to end the
country’s financial blockade was slammed by
its hedge fund nemeses. On Thursday,
Argentina requested the removal of an
injunction that prevents it from paying its
creditors without also paying the “holdouts” who
refused debt restructurings following its 2001
default. As expected, at least four of the biggest
holdouts were not happy, and chairman of
Aurelius Capital Management went as far as
saying, "This is a baffling continuation of the
failed strategy of the past”, so this jousting
match will be an interesting one to follow in the
coming months.
Max Brewer
Week Ending 14th February 2016
13
Middle East
Pressure for a currency devaluation is mounting
in Egypt as foreign currency shortages are
hitting local businesses relying on imported
inputs. Egyptian foreign currency reserves have
dropped from $36bn on the eve of the
anniversary of the 2011 revolution that
overthrew former president Hosni Mubarak, to
$16.48bn at the end of January this year. As
seen in the graph below, it has also sharply
declined in last year, falling to $16.36bn from
$20.55bn in the space of 6 months.
The reason behind Egypt’s diminishing foreign
currency reserves lies in five years of political
turmoil, which has seen foreign investment and
tourism plummet, curtailing the inflow of dollars.
Moreover, declining receipts from the Suez
Canal - as a result of slow global trade - have
further worsened the currency shortage.
Egyptian businesses complain that the dollar
shortages have been compounded by central
bank measures to shore up the value of the
Egyptian pound, as it attempts to conserve
currency reserve levels while it destroys the
black market in foreign currency. These parallel
markets undermine the Central Bank’s fixed
exchange rates by selling in a free market,
allowing for changes in the exchange rate
outside of the their control.
One such sector to have been deeply affected
is the pharmaceuticals industry. Osama
Rostom, deputy head of the chamber of
pharmaceuticals industries, said the need to
source dollars on the parallel market to pay for
imported inputs has increased the cost of some
medicines beyond the sale prices fixed by the
government.
Hamdy Abdel Aziz, head of the engineering
industries chambers, said a devaluation of the
pound would be beneficial as it “provides relief
[to local businesses] and at least increases our
exports”.
Furthermore, since mid-2013 the Egyptian
pound has strengthened against the euro, the
currency of one of Egypt’s main export markets.
A devaluation of the currency will ensure a drop
against the euro, thus making Egyptian exports
attractive again.
However, many analysts have argued that
Egypt would in fact gain little from a currency
devaluation since there will still be no demand
for its products. Therefore, any devaluation
would do little more than widen the current
account deficit.
Harry Butterworth
NEFS Market Wrap-Up
14
EQUITIES
Financials
This Thursday saw global financial markets
enduring another period of turmoil with
announcements that more central banks are to
impose negative borrowing rates on banks,
resulting in greater costs. Only two weeks on
from the BoJ reducing its interest rate to
negative, we see others following suit, with
Sweden’s Riksbank cutting its main overnight
borrowing rate to minus 0.5% (from its previous
rate of minus 0.1%) in an attempt to stimulate
what has been a poorly performing economy
amongst the debt-embedded European Union.
But it seems apparent that the BoJ’s demise
into the negative territory will not stop there,
with investors anticipating a further drop in rates
from both them and the ECB, in hopes of higher
inflation.
This uncertainty within the investment world is
continually intensifying as more unfavourable
news is announced, and this creates concern
surrounding equities. As a result, investors sold
off shares sharply, with the FTSE All-World
stock index down 20% from last year’s peak.
Additionally, the Stoxx 600 European banks
index fell 6.5% to its lowest level since 2010 (at
the midst of the Eurozone Debt Crisis), with the
S&P 500 also encountering a sharp decline due
to broad losses for US companies.
But with the financial world seemingly
collapsing, risking another recession, we see
light in the form of some EU banks with both
Deutsche Bank and UniCredit posting sharp
gains, sparking a rebound in shares. This rally
in EU banking shares arose as Deutsche Bank
announced that they will consider buying back
several billion euros of its own debt, whilst
assurance from senior bankers and politicians
provided forward-guidance on the European
banking sector, stating that it is far healthier
than the media implies.
Indeed, as shown by the figure below, this boost
in investors’ confidence saw shares in
Deutsche Bank jump 14%, whilst UniCredit
rose 10%. Even Credit Suisse had temporarily
bounced back 4%, but it seemed that the fall in
their revenue over the previous quarter
imposed a greater severity than initially thought,
with shares closing the week at a lower 13
Swiss Francs.
With more rates becoming negative in a hope
to stimulate greater inflation and to boost global
economic performance, a recession seems
increasingly probable, and it’s a fear amongst
investors of such an occurrence that is driving
down the equity markets across the world, and
so for now, the financial world sits in a fragile
state.
Daniel Land
Figure: Deutsche Bank (Orange), Credit Suisse (Blue), UniCredit (Red)
CS
DB
UniCredit
Week Ending 14th February 2016
15
Retail
Unsurprisingly, Retail shares have dipped
slightly in the past week, given that investors
are fearful of a widespread recession.
Nevertheless, they have not fallen by as much
as they did over Christmas, as the FTSE 350
Index was down by only 0.7% by the end of the
week. The index had been uplifted towards the
end of the week by some rather promising retail
data indicating that spending growth
surprisingly hit a four-month high in January.
The report by the British Retail Consortium
indicated a spending increase of 3.3% in
January compared to a year ago, suggesting
that consumers are taking more of an
advantage of post-Christmas sales.
FTSE 100 retailers such as DIY chain
Kingfisher and clothing giant Next were up 3%
and 2.5% respectively, following the promising
data. This comes as a surprise to many,
especially considering that the price of a Next
share was previously down since Christmas by
almost 11%. That dip reflected its lagging online
investments which US hedge fund Lone Pine
Capital had this week cited as a reason to bet
£60 million against the retailer. Steve Mandel,
the billionaire who controls the fund, explained
that his 2016 investment strategy is based
around the growing influence of the internet
continuing to significantly dismantle the
conventional retail sector that companies like
Next rely on.
Sainsbury's has also recently been in the news.
It plans on acquiring the retail group that owns
Argos, although the graph below shows that
investors remain sceptical, so much so that the
share had fallen from Tuesdays peak following
the positive data. It also suggested that it will no
longer offer promotions in store due to changing
consumer behaviour. This approach assumes
that consumers are now more interested in
attaining goods at lower regular prices rather
than buying promotional items in larger
quantities. In fact this is nothing new, as Asda
did the same in 2012, regarding the alternative
approach as better suited to the British habits of
strict budgeting.
Overall, this week could've been a lot worse for
retailers considering huge losses experienced
throughout the markets as a whole. Stronger
than expected retail data somewhat improved
retail equities but wider economic sentiments
still prevailed in the end by dragging them down
back down.
Sam Hillman
NEFS Market Wrap-Up
16
Technology
The NASDAQ 100 fell almost 3% midweek due
to the announcement from the head of the
Federal Reserve, Janet Yellen, that the US
economic outlook is not as strong as they had
hoped. Technology news was also dominated
by the UK government’s enquiry into Google,
regarding tax evasion. After a six-year audit of
the company’s accounts, the government
negotiated a £130 million deal with the
technology firm. However, following public
uproar, the UK government has begun further
interviews with executives of the company.
Elsewhere, Nokia’s shares began to slide
further after it announced that it expected future
profits will be lower than previously thought this
year. The Finnish company has pointed to the
Chinese slowdown as a reason for these
predictions. The Chinese middle-class has
been growing for decades, due to large
increases in wealth, thus there has been
greater demand for telecoms. However, as
there are signs that the economy may not be as
healthy as predicted, such as the stock market
crash, Nokia expect the roll-out of a 4G network
to slow. This news caused the company’s share
price to fall 6% on Thursday to 5.11p. This
reflects the company’s struggles in recent
years, after it has been all but pushed out of the
mobile telephone network and is in the process
of becoming a telecoms equipment maker.
The electronic car maker, Tesla, on Thursday
brought a halt to its share price slump after
announcing it expected sales to improve in the
coming year. As the chart shows below, since
the beginning of the year, shares have fallen
37%, mainly due to sales expectations not
being hit. However, the company has said it will
be launching its first mass market car this year,
the Model 3, which they expect will increase car
sales this year to 80,000-90,000, up from
50,658 in 2015. Having said this, in my opinion,
with oil prices remaining low and the globally
economy in uncertainty, I doubt many
consumers will look to purchase the luxury of an
electric car. Therefore, I would be cautious
when investing in Tesla.
Sam Ewing
(Chart showing the decline on Tesla’s share price since December 2015. Source: Yahoo! Finance)
Week Ending 14th February 2016
17
Pharmaceuticals
This week we have seen the FTSE 350 Index -
Pharmaceutical & Biotechnology fall further by
3.56% and the NASDAQ Biotechnology Index
fall by 3.13%. There is a bearish trend reflected
over the outlook of equities of the past two
weeks and is coincident with the S&P 500 Index
and the NASDAQ.
In other news, President Obama has requested
for $1.8bn in funds from Congress to help tackle
the prevalent Zika virus in the US and around
the world. The World Health Organization has
declared the virus as a global emergency after
a huge increase in reported cases of birth
defects suspected to be linked to the disease.
Although the Zika virus has not erupted all over
the world, there are potential repercussions
similar to the Ebola virus if not properly handled
and the already weak global economy may be
further affected.
Early trials of an AstraZeneca cancer drug have
indicated the potential to widen the range of
patients who can benefit from new
breakthroughs in oncology. AstraZeneca is one
of the leading companies in the field of cancer
immunotherapy treatments that aids the body’s
immune system in combating against tumours.
Although AstraZeneca’s immunotherapy is still
a work in progress, they have been heralded as
the biggest advance against cancer for
decades. AstraZeneca’s share prices have
fallen 11.51% from 4499.00GBP to
3981.50GBP in the last 2 weeks but this is in
line with the NASDAQ Biotech Index and is also
due to the reduction in future earnings estimate.
This week we have seen two new biotech
companies go public, increasing the total count
to four for the year. The new companies that
went public are Proteostasis Therapeutics Inc.,
a company working on treatments for patients
with protein-processing diseases and AveXis
Inc., a gene-therapy company. Also, the two
IPOs I mentioned last week, Beigene Ltd. and
Edittas Medicine have both fallen by 2.90% and
3.49% respectively. Shares on Beigene have
fallen 29% on the week and Editas have fallen
10% this week.
In other news, Mylan, the Netherlands-based
pharmaceuticals group has agreed to acquire
Sweden’s Meda for $9.9bn. Mylan is one of the
world’s largest makers of copycat generic drugs
and its shares fell 9.4% to $45.78 after the
company reported earnings that fell short of
analyst’s expectations. This takeover of Meda
would be the latest in a series of deals that have
led to a consolidation of the copycat drug
industry. On the other hand, GlaxoSmithKline
has been fined £37m for illegally stifling the
launch of a cheap rival drug, making this the
highest penalty paid so far by the UK’s new
competition policy.
As a whole, the Pharmaceutical & Biotech
sector is still poised to maintain its reputation
against other sectors and one should not worry
about the drop in share prices of the
Pharmaceutical sector as this is line with the
general market consensus as reflected in the
2.5% drop in the S&P 500 this week.
Samuel Tan
NASDAQ Biotechnology Index (NBI) Credits: Yahoo Finance
NEFS Market Wrap-Up
18
Oil and Gas
Shareholders have been questioning the
dividend policy of oil majors this week, amid
speculation that large international oil
companies are steering towards a cut in
dividend prices in light of the crude plunge over
the last 3 months.
Even well known giants such as Chevron and
Royal Dutch Shell are failing to cover payments
from cash flows and, consequently, are facing
huge liquidity barriers – something that cutting
dividend payments would resolve. Of course
the matter is prone to dispute; investors have
warned against the cuts, in fear of an exodus.
This is only natural; especially considering that
oil giants are typically well known for offering
out dividend payments considerably higher
than other large-scale companies. Shares, for
example, in Shell and BP offer more than an 8%
yield, placing it amongst the 10 top payers in
the FTSE100. In addition, the five largest
Western oil companies, Exxon Mobil, Chevron,
Shell, BP and Total, paid out approximately
$46bn. in dividends last year. Matthew Beesley,
global head of equity at Henderson and investor
in BP, Total and BG (soon to be a part of RDS)
has hinted that the “cuts would not be
welcomed by investors.” Most majors have
been increasing output only slowly, if at all,
subsequently garnering premature attention
from shareholders; by extension, Eric Oudest of
BCG says that cutting dividends “could be the
last decision they (oil majors) would make in
that job.”
Volatility in the market for oil has been rife for a
substantial period of time, however, it peaked
on February 12th as US crude was on track for
the biggest 1-day percentage gain since
2008/09. Traders scrambled to close bearish
bets as the WTI (shown below) hit the 13-year
low of $26.05/barrel in the previous session and
then proceeded to jump more than 12% to
$29.56/barrel in volatile trading. Across the
pond, NSB also moved sharply higher, gaining
more than 10% to $33.19/barrel. Energy
Aspects analysts have gone so far as to say
that volatility has been the market hallmark of
2016, thus far.
In light of this, we can be positive about the
simple fact that oil prices are not just decreasing
now. While volatility can be just as debilitating
as uncomplicated downward trends, it at least
suggests some sort of hope for the current state
of the market. All ears are now pricked in the
direction of OPEC with their expected
announcement of a production limit.
Tom Dooner
Week Ending 14th February 2016
19
COMMODITIES
Energy
Oil made headlines again this week, with the
Brent benchmark sliding over 10% from
Monday to Thursday. However, oil bounced
back on Friday due to comments made by
United Arab Emirates energy minister that
insinuated potential OPEC (Organisation of
Petroleum Exporting Countries) production
cuts. Earlier in the week oil steadily declined
after news came out detailing the slowdown in
oil demand. Economic slowdowns in Europe,
US and China have caused forecasters to
revise their estimates of oil demand growth for
2016. In 2015, oil demand growth reached a 5-
year high of 1.6 million barrels per day (mb/d),
in 2016 this figure is now expected to fall to
1.2mb/d. These projected figures were not
good for the oil price, as traders were expecting
further increases in the demand growth for oil
during the year to accelerate the closing of the
oil output gap.
WTI (West Texas Intermediate), and Brent to a
lesser extent, had a poor day on Thursday. WTI
dropped nearly 5.1% to $26.05, a new 12-year-
low, as storage facilities begin to reach
maximum capacity causing traders to sell off
excess oil. Brent declined 2%. Stocks at ‘the
pipeline crossroads of the world’, an oil hub, are
at 90%, causing the WTI March discount
spread – the discount of its front month contract
to second month - to rise to $2.50, the highest
spread in 5 years. The disparity between the
falls in prices can in part be attributed to the
higher flexibility of Brent crude whose March
discount spread stands at 70 cents.
Oil jumped back by 6% on Friday following
comments from the UAE energy minister. He
stated that low prices were already forcing
some output reductions, which should help
stabilise the market. However, more importantly
he said that he is willing to negotiate with other
OPEC members with regard to a coordinated
output cut. Although, Hans van Cleef, senior
economist at ABN AMRO, claimed that the
news was merely speculative in the sense that
nothing fundamental has changed among
OPEC members and it merely indicated a
period of higher volatility is on the horizon, as
price movement is no longer one-way.
William Norcliffe-Brown
Brent Crude Price Chart (Source: MoneyAM)
NEFS Market Wrap-Up
20
Precious Metals
Similar to last week, the trend in the prices of
Gold remains unchanged. Although the metal
has been appreciating for the last 3 months, a
positive shock of +16.2% added to the metal’s
value since the beginning of the year. The
increase seems to see no slowing down as the
appreciation increase by around 7% from
1173,40 USD/t oz. to 1238.87 USD/t oz. from
5th to 12th February. Silver continues to be
regaining a stronger position as well, due to
close linkage to Gold market, climbing up by
+6.0% to 15.67 USD/t oz. over the same period.
With the inflation rate remaining low, the
Federal Reserve is not changing its tactic, and
is going to hold on to relatively low interest rates
for the rest of February, which is likely to
contribute to the increasing precious metals
prices.
According to Janet Yellen, the Chairwoman of
the Fed, recent findings support the idea that
the interest rate on financial markets should be
raised in March. The decision is not definite yet,
provided that March only promises yet another
scheduled meeting in order to confirm future
plans. The economist delivered the report in the
meeting to Senate Banking Committee on the
5th February, raising concerns for the potential
investors. On the other hand, the change in
interest rates should be significant enough to
affect Gold’s value in global markets. As
mentioned last week, the uncertainty in the
financial markets is not retreating yet, urging
investors to invest in gold. Even though today’s
economy is far from certain and steadily strong,
Janet Yellen concluded that increasing the
interest rates should have a positive effect on
the sustainable economic growth.
Provided the projected US dollar appreciation
(as shown below) remains its steady recent
trend in the near future, the affordability of
physical commodities would relatively
decrease. In turn, this effect would be reflected
in lower demand, shortly followed by shrinking
prices of gold and silver.
Similarly to Gold, other precious metals show a
regaining strength in the global market.
Platinum has gained +5.53% from 5th to 12th
February, rising from 908.00 USD/t oz. to
958.20 USD/t oz. This is the first lasting positive
shock since 31st December, 2015, when it
peaked at 889.90 USD/t oz. Trading Economics
forecasts suggests that the price is likely to
depreciate to 829.00 USD/t oz. by the end of
March.
Goda Paulauskaite
Week Ending 14th February 2016
21
Agriculturals
Amidst the expansive world of commodities, in
which both macro and micro economic data
cause constant fluctuations, this week
agricultural commodities exhibited no changes
of significant note. The Chicago Board of Trade
index for corn, wheat, and soybean all moved
less than 2% amidst relatively light trade
volumes, as a direct result of a lack of pertinent
data affecting the markets.
Interesting developments came, however, from
Egypt, the world’s largest importer of wheat.
Egypt imports wheat so as to provide its poorest
citizens with bread, and Egyptian developments
often have significant impact on the world
wheat market. Egypt this week purchased a 60
thousand tonne delivery of Romanian Wheat,
the current cheapest on the market, having
cancelled orders from France due to the
presence of a fungus, ergot. Egypt has
previously caused fluctuations in the global
wheat market as a result of uncertainty and
internal contradiction over whether or not it
would accept wheat with said fungus present.
One of the aforementioned cancellations has
prompted legal action from Bunge, a leading
commodities trading house, demonstrating the
inextricable links between market making
financial firms and world governments, in
addition to their influence on global commodity
prices.
Egypt’s purchase is the first since January 21st
and analysts have speculated as to the motives
behind it, aside from the obvious demand for
bread. Given the aforementioned fiasco
regarding the Bunge purchase, traders, such as
commodities trading houses, have hesitated to
offer contracts to Egypt, much less at typical
prices. Egypt, for example, received only five
tender offers for the previously mentioned
purchase, atypical given the typical 10-20 offers
received. Egypt also overpaid by around 5.5%
relative to Tunisia’s 75000 tonne purchase
earlier this month, at $190.88 per metric ton as
opposed to the $179.21 paid by Tunisia.
As such, some analysts believe that Egypt may
have made its recent purchase simply to
reassure world markets and add a degree of
stability. Only time will tell whether Egypt
suffers long term price and availability
ramifications over the ergot issues, and the
author looks forward to reporting on it.
Jack Blake
NEFS Market Wrap-Up
22
CURRENCIES
Major Currencies
The EUR/USD spot exchange rate’s
performance this week has been relatively
stable compared to last week. After it
appreciated slowly over the weekend to 1.1193
on Monday, the pair rose at a faster pace from
Monday to Tuesday, with the day’s high-point at
1.1293 before settling down at 1.1269 this
Friday. However, the USD has generally
dropped down against all but one of the 16
major currencies in February. Traders place the
possibility of an interest-rate increase by the
Fed at 30% while analysts are already
examining the chance of the US adopting
negative interest rates like the Euro area or
Japan if the economy declines. Chair Yellen
testified on Wednesday, the 10th of February, to
the Congress, ensuring that “monetary policy is
by no means on a preset course.” However,
Yellen also stated that “the FOMC anticipated
continuing this policy until normalization of the
level of the federal funds rate is well under way”.
By squeezing some breath out of the
enthusiasm for negative interest rates, the chair
is actually trying to support the USD.
The Euro fell to $1.1259 this Friday after
reaching an almost four-month high of $1.1338
on Tuesday. At the same time, the Euro lost 7%
to sterling, now trending in the region of 0.7754
after the economic growth rate of the Eurozone
remained stable in the fourth quarter of 2015.
Eurostat published data today estimating that
output climbed 0.3% sequentially, the same
growth rate as in the previous quarter. As for
the yearly basis, the annual growth rates
slowed marginally form 1.6% to 1.5% matching
with economists’ expectations. Additionally,
stock markets are doing badly at the moment,
with bank shares taking one heavy hit after the
other in the Eurozone. China has had to use its
currency reserves to be able to keep the Yuan
in line and the Bank of Japan has implemented
negative interest rates. Hence, investors are
pushing the value of the common currency up
by turning to Euro-denominated assets.
The Pound Sterling has been has had a volatile
week, as shown by the graph below. The GBP
performed quite well on Friday, despite
Wednesday’s huge drop after bad news from
the manufacturing sector, which failed to meet
forecasts by 0.5%, has been published. The
GBP/EUR exchange rate is currently trading
between 0.7755 and 0.7874.
Alexander Baxmann
Week Ending 14th February 2016
23
gested 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
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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 [email protected] Sincerely Yours, Jack Millar, Director of the Nottingham Economics & Finance Society Research Division