NEFS Market Wrap Up Week 10

Week Ending 14th February 2016

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NEFS Research Division Presents:

The Weekly Market

Wrap-Up

NEFS Market Wrap-Up

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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


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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

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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


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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

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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


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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

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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


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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

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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


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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

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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


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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


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)


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


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


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


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

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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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

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NEFS Market Wrap Up Week 10