NEFS Market Wrap Up Week 11

Week Ending 21st 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

8

India China

Russia and Eastern Europe Latin America

Africa Middle East

Equities

14

Financials Retail

Technology Pharmaceuticals

Oil & Gas

Commodities

Energy Agriculturals

Precious Metals

19

Currencies 22

EUR, USD, GBP


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MACRO REVIEW

United Kingdom

Office for National Statistics (ONS) figures

published on Wednesday showed that there

has been an increase in the number of people

in work to 31.42 million, which is the highest

figure the UK has seen since records began in

1971. The UK currently has one of the lowest

unemployment rates in the European Union at

5.1%, following only Germany and the Czech

Republic.

Despite this, pay growth remains subdued.

Average weekly earnings in the last quarter of

2015 was just 1.9%, down from 2% in the

previous quarter. A few temporary factors seem

to be suppressing wage growth, such as an

increase in lower paid jobs, low CPI, a decline

in the average number of hours worked per

week, and a higher proportion of people new in

their jobs relative to the recession. However

there is also a larger underlying structural factor

- weak productivity. The current unemployment

rate of 5.1% is close to the UK’s ‘natural rate’ of

unemployment, which is the rate at which

inflationary pressures should increase as

employers find it more difficult to find workers,

therefore wages rise. Due to low productivity

however, this is not happening.

Weak wage growth also has implications for the

base rate. Sam Hill, an economist at RBC

Capital Markets, said that “even if average

earnings growth does pick-up towards 3% this

year…it seems unlikely to be enough to

provoke the Bank of England to tighten policy

before early 2017”.

Currently, low CPI (0.3% in January) is

protecting workers from the consequences of

low pay. George Osborne, the Chancellor of the

Exchequer, hopes that the introduction of a

‘National Living Wage’ in April will help pay and

inflation to rise. The 50p increase to £7.20 per

hour will be the largest annual increase in a

minimum wage rate across any G7 country

since 2009. The rate will then rise to over £9 per

hour in 2020. However this highlights the trade-

off between pay and employment growth, as

employers may look to increase productivity of

existing workers rather than hire more workers.

Subtle signs of this are already starting to show

as the unemployment rate remained at 5.1% in

December, as shown on the graph below,

although economists had forecasted a fall to

5%.

Shamima Manzoor

NEFS Market Wrap-Up

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United States

US consumers are panicking in a mad rush to

refinance their borrowings as uncertainty

surrounding interest rates has amplified in

recent times. In a recent report, the Mortgage

Bankers Association stated that the refinance

volume is now at the highest level in over a

year. The total mortgage applications are 8.2%

higher on a seasonally adjusted basis this week

compared to the previous week. Borrowers with

large loans tend to be more sensitive to a drop

in interest rates given a higher potential gain

from refinancing. Hence, it comes as no

surprise that big banks have engaged in a bit of

an arms race to secure the business of wealthy

clients. In some cases, jumbo loans and an

explicitly lower rate is being offered to new

clients who pledge a certain amount of assets

to be managed by the bank – one of the most

popular avenues to get clients through the door.

In other news, the economy witnessed a fall in

consumer sentiment amid signs of slower

economic growth and winds of turmoil from

abroad. As shown on the graph below, the

Index of Consumer sentiment hit 90.7 in

February's preliminary reading, slumping down

from 92 in January. This figure has drawn

interest especially due to the retail sales gaining

momentum earlier this year, which is an

indicator that usually moves parallel to

consumer confidence. Despite the steady drop,

consumers expect low inflation to transform

meagre wage growth into real income gains.

Such economic times are incredible examples

to us economists of how the basis of consumer

actions have evolved over the years.

As the presidential race gets underway,

Republican candidate, Mr. Donald Trump

seems to have mastered the art of positive

messaging and conveying optimism to the US

voters. With the wounds of the Iowa election

results still afresh, Mr. Trump reported a

landslide victory in New Hampshire last week.

The voters in New Hampshire delivered a

resounding rebuke to the US political

establishment on Tuesday, with strong wins for

left-wing Democrat Mr. Bernie Sanders and the

radical Republican that is Mr Donald Trump.

The presidential race has taken an interesting

turn with the first week of March being labelled

a “decider week” as voting takes its full swing.

Vimanyu Sachdeva


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Eurozone

Europe’s new banking watchdog has ordered

the biggest Eurozone banks to boost their

capital levels by 0.5 percentage points on

average after a year-long assessment of their

risks.

The Single Supervisory Mechanism (SSM) that

was established in late 2014 as part of Europe’s

efforts to combat its debt crisis, warned in a

report published on Friday that overall risks for

the roughly 130 large Eurozone banks it

supervises have “not decreased compared to

2014.”

The report highlighted that many banks were

still recovering from the 2012 financial crisis

and “they continue to face risks and

headwinds.” The biggest risk consists of

adapting their business models to a new

environment of low interest rates. It is the first

time that the Eurozone’s single banking

watchdog has reviewed the riskiness of the

bloc’s biggest banks based on a common

standard. The task previously fell to national

regulators, who took different approaches to

capital levels and business risks.

Europe’s battered banking sector needs to

have confidence driven back into it but this has

also come under renewed pressure in recent

weeks amid broader concerns around the

health of the global economy. The MSCI

Europe Financials Index has fallen more than

15% so far this year.

Core Tier One ratios are a key measure of a

bank’s balance sheet strength, comparing

equity capital to risky assets and the Eurozone

banks need to boost their core Tier One capital

ratios to 9.9% on average this year from 9.6%

last year, and set aside an additional 0.2% of

capital as a buffer against the risk posed by

systemically-important institutions.

The report shows that five banks didn’t have

enough capital to meet the current

requirements, including one that fell

significantly short. The review provides “a

holistic view of banks’ risk profiles,” and uses

forward-looking elements such as stress tests,

said Korbinian Ibel, Director General at the

European Central Bank responsible for micro-

prudential supervision. Mr. Ibel said that the

SSM had hired more than a thousand staff

since its establishment in late 2014 and was

now “the biggest supervisor in the world.”

The SSM is housed within the ECB in Frankfurt,

and the banks it supervises account for around

85% of all Eurozone banking assets.

Erwin Low

NEFS Market Wrap-Up

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Japan

The prospects facing Japan’s economy have

scarcely improved since last week’s article; just

before the week began it was reported that

Japan’s economy shrank at an annualised rate

of 1.4% in the fourth quarter of 2015. This figure

came as no surprise, released as it was after a

dismal few weeks for Japan, in which stagnant

wages, a strengthening yen and global market

uncertainty decimated any hopes the BoJ had

of achieving their inflation target of 2% in the

near future. As usual, Japanese officials were

quick to come to the defence of the economy,

with Yoshihide Suga, Japan’s chief cabinet

secretary, blaming an abnormally warm winter

for weakness in consumption. He claimed that

the economic fundamentals in Japan are good

and said that the government was expecting a

steady recovery in business conditions.

On Wednesday, it was announced that Japan’s

trade surplus for January was ¥119bn, the

highest it has been in four years. This is

somewhat good news for officials as external

demand is supposed to be one of the driving

forces of the Abenomics stimulus, however, the

figure does not directly reflect the fact that

exports, although rising by 0.6% compared to

December, fell by 12.9% year-on-year. Part of

the reason why there is a trade surplus despite

this is that falling oil prices have lowered the

value of one of Japan’s main imports (see graph

below). Going forward, this trade surplus is in

danger of disappearing, as the recently

strengthened yen has its effect on the

competitiveness of exports and as demand

from China weakens even further.

We also learnt this week that machine orders in

Japan, which are a popular proxy for capital

spending, fell by 3.6% year-on-year in

December. This, along with the fact that the

index of all industries’ activity, which reflects the

total value of goods and services purchased by

businesses, fell by 0.9% month-on-month in

January, will further cement worries that Japan

is stuck in secular stagnation and raise the

likelihood that officials will take action over the

coming weeks. What form this action would

take is not clear; it’s unlikely that the

government will intervene in currency markets,

as this would be politically toxic and Mr Abe has

ruled out a supplementary budget. Therefore,

we’re left with the possibility that the

government will postpone the planned rise in

consumption tax or that the BoJ will cut interest

rates further into negative territory.

Daniel Nash


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Australia & New

Zealand

The Economic and Political Outlook 2016 report

from the Committee for Economic Development

of Australia (CEDA) was released this week but

was not optimistic. Business confidence was

predicted to be a “significant issue” despite the

fact that the economy is much stronger than

surveys suggest. This is partly due to the

political election which can sway business

sentiment. The fall in the mining industry from

its 2012 boom and the worst of its effects are

said to be over, as 60% of job losses have

already been incurred but there are still fears of

further turmoil.

The Treasury and Reserve Bank admitted that

Australia’s trend rate of growth is in fact closer

to 2.75% than 3.25%, so the incomes of

taxpayers and the tax base will grow slower

than the economy has previously experienced.

The economic chapter described that a

weakness in income can spell disaster for the

economy. This is because “households want to

defer spending”, businesses will reduce

investment and governments are experiencing

growing budget deficits, implying they are

inclined to use stronger contractionary fiscal

policy and so the economy won’t experience

high levels of growth.

China’s slowdown in economic growth was also

mentioned, as it means the global economy

faces significant risks. But the report stated that

Asia’s rising middle-class provides

“unprecedented opportunities for Australia’s

non-resource sectors”, a key opportunity that

political and business leaders should focus on.

In other news, New Zealand’s Prime Minister,

John Key, announced that the government is

continuing with tax cuts, despite a slowdown in

recent economic growth. It was speculated that

the size of the economy is expected to be

NZ$17 billion lower over five years than

expected by the Budget in May 2015, partly

caused by weak dairy prices.

Continuing with such plans would result in

“slightly less tax revenue, slightly lower

operating balances and slightly higher debt”

than the Budget predicted. These forecasts

would not hold the government back from

continuing with their restrictive approach by

having a tight hold on government spending,

whilst trying to pay national debt, focusing on

public services results and return excess

revenue to taxpayers.

In addition, Mr Key reassured the population

that despite lower forecasts, the economy

continued to expand, as the Treasury

forecasted an average of 2.7% over the next

five years. Figures also showed that incomes

are growing faster than inflation, and growth in

employment continues.

Meera Jadeja

NEFS Market Wrap-Up

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Canada

The Candian inflation rate has reached its

highest level since November 2014. Consumer

prices in Canada increased at a rate of 2.0% in

January 2016. As evident from the graph of the

Canadian inflation rate over the last four years,

the inflation rate rose by 0.4%, from 1.6% in

December 2015 to 2.0% the following month.

The rise in the inflation rate was above the

market expectations of 1.7% increase in

consumer prices.

In seven of the eight major components used

for calculating the Canadian inflation rate prices

increased over the one year period from

January 2015 to January 2016. The largest

increases was in food and transportation prices

- food prices rose by 4.0% whilst transportation

prices increased by 2.2%. If we look at food

prices in more detail we can see that a large

proportion of the increase in food prices is due

to a rise in the price of fruit and vegetables. In a

basket used for calculating the price of fruit and

vegetable which contains peppers, cauliflower,

celery and broccoli, prices rose by more than

22%. One of the factors causing the large

increase in the prices of food is the weak value

of the Loonie (the Canadian dollar). This

generates higher food prices because a large

proportion of Canadian food is imported.

Clothing and footwear prices declined by a

small 0.3% over the one year period. All the

provinces in Canada recorded higher inflation

rates in January 2016 than in January 2015.

In other news this week, it was announced that

the Organisation for Economic Co-operation

and Development (OECD) has cut the growth

forecast for the Canadian economy in 2016

alongside the global growth forecast. The

OECD have stated that their new projection for

the Canadian growth rate is 1.4% (the same

prediction as the Bank of Canada). This is

revised down from the previous prediction of a

growth rate of 2.0% in 2016. For 2017 the

OECD are now predicting a growth rate of 2.2%

decreased slightly from 2.3%. The OECD

stated that investment and trade has been

weak in the US and Canada contributing the

revised figures, alongside low inflation and the

large fall in the price of oil in Canada. The

recent weak trade figures and the fall in the

price of oil have been particularly important as

the OECD described the Canadian economy of

being too reliant on export commodities. The

world economy grew by 5.0% in 2015, the

lowest rate since 2010.

Kelly Wiles


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EMERGING MARKETS

China

Chinese markets re-opened this week after the

week-long Lunar New Year holiday. The risks

of deflation in China in 2016 were emphasised

recently and this week’s consumer price index

(CPI) and producer price index (PPI) data

highlights this. There is also trade balance data

this week which should somewhat demonstrate

how well China’s accommodative policies have

performed so far.

Data released by the National Bureau of

Statistics showed that CPI year-on-year came

in at 1.8%, just missing a forecast of 1.9%. This

was a notch higher than last month’s figure of

1.6%. The main driver of the gain in inflation can

be attributed to food prices, rising 4.1%

compared to 2.7% in the previous month.

However, food prices are subject to supply

shocks and seasonal blips, such as the recent

Lunar New Year. PPI year-on-year came in

better than expected at -5.3%, slightly higher

than last month’s figure of -5.9%, as shown in

the figure below. The forecast for the month of

January was -5.5%. Producer prices are often

regarded as a proxy for medium-term inflation

and as such, can have an effect on inflation

expectations. Prices of mining products

declined the most by 19.8%, raw materials by

9.1% and means of production by 6.9%.

Overcapacity still remains a large problem.

From an international trade perspective, the

world’s biggest trading nation’s trade balance

rose to CNY 406 billion from the previous

month’s reading of CNY 382 billion. This

month’s figure was higher than a forecasted

CNY 389 billion. It was the largest trade surplus

on record. Despite this seemingly positive data,

the underlying figures should be examined

carefully. Exports in US dollar terms from a year

earlier declined by 11.2%, well below last

month’s fall of 1.4% and a forecasted -1.9%.

This suggests that the central bank’s efforts to

boost competitiveness in the export market has

not taken effect. Moreover, imports fell by

18.8% from a year earlier, representing the 15th

straight month of declines. This could signal a

weak domestic economy, one in which the

Chinese were keen to pursue.

As mentioned before, it is important not to look

too much into figures around Chinese New

Year due to potential distortions. Nevertheless,

the Chinese economy still remains at weak

levels compared to the last two decades or so.

The Chinese government may want to inject

fiscal stimulus as soon as possible to drive

consumption and investment.

Sai Ming Liew

NEFS Market Wrap-Up

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India

In the past couple of weeks, I have primarily

highlighted and discussed the internal and

external difficulties that India faces in terms of

maintaining its impressive yet somewhat

questionable growth figures. Despite the fact

that India must address its own macroeconomic

imbalances as well as dealing with a fragile

global economic situation, reports published

last week by the Organization for Economic

Cooperation and Development (OECD) and

Moody’s, a global ratings agency, were much

more optimistic, stating that India would not be

negatively affected by the global slowdown as

the country’s economic outlook would be

determined instead by strong domestic

demand.

Both reports also predicted that the South Asian

nation will continue to see robust growth over

the next two years, with the OECD upgrading

its 2016 forecast for the Indian economy to

7.4%. Moody’s prediction for the next fiscal year

was even more cheerful at 7.5%, as it stated

that India is less exposed to external

headwinds, such as China’s slowdown and

global capital flows. It also expects India to

continue to gain from lower commodity

prices, despite speculation that the benefits

enjoyed as a result of lower prices could dry up

within the next year. Amid low growth in global

trade in goods, another source of resilience is

provided through India’s large services export

sector, with IT services accounting for around

18% of total exports. Moody’s also maintained

an optimistic tone in regards to the forthcoming

24% increase to public sector salaries, which

has been criticised by some who believe it will

only contribute to inflation within the economy.

Instead, the agency believes that the

government will cut spending in other parts of

the budget in order to maintain the deficit

broadly in line with the 3.5% of GDP target,

thereby mitigating some of the inflationary

effects.

The optimism shown through these reports is in

direct correlation with the positive sentiment

currently present within the county, after “Make

In India Week”, which closed on Thursday,

garnered $222bn worth of investment pledges

from firms all over the world. The event was a

part of the government's push to create jobs by

increasing the share of manufacturing to GDP

to 25% over the next decade, from the 16-17%

now.

Although there is still plenty of room for

improvement, India must also be applauded for

the continuing stability that it displays in spite of

an unaccommodating global economic climate.

Homairah Ginwalla


11

Russia and Eastern

Europe

In a UN Development Programme report

published this week, it has been noted that

despite Eastern Europe having made terrific

advances in economic growth over the past 10

years, the size of its middle class is greatly

under threat. Unfortunately, whilst many people

are rising out of poverty, they are then being

prevented from moving to higher income levels.

As a result, wealth inequality is worsening and

having a detrimental impact on potential

economic growth. Several factors have been

postulated as possible causes for the reduced

income and employment opportunities, such as

falling commodity prices, slowing economies

and shrinking remittances. Whilst many hope

that oil prices will eventually stop falling and

consequently bring economic opportunities

back to Eastern Europe, this is uncertain.

Another solution would be increasing

investments into training already employed

workers with new skills to enable them to attain

higher income jobs, as well as creating new

employment prospects. However this would be

extremely costly and many argue it would be

wrong to invest money into helping workers

achieve a higher income, when there are still

issues of poverty and unemployment. More

effective schemes could also be provided to aid

citizens with saving money and property

ownership. Finally, global measures could be

initiated to increase the amount of remittances

being sent back to Eastern Europe.

Subsequently, with the economies of Eastern

Europe growing rapidly, it has hence become

vital that the middle classes are allowed to

expand accordingly and wealth inequality is

kept to a minimum.

With regards to falling oil prices, Russia has

temporality halted the deterioration of its

economy following a deal on Tuesday with

various OPEC leaders, most notably Saudi

Arabia. Along with Qatar and Venezuela,

whose economies are also struggling with the

low oil prices, the nations have agreed to freeze

oil production at current levels. By holding

supply constant, it is hoped that increasing

global demand will cause oil prices will rise.

This has led to a spark of confidence in the

Russian economy, which briefly saw a large

increase in the value of its share prices (see

Figure 1), specifically in the oil industry. Across

Eastern Europe, it is greatly hoped that by

increasing commodity prices and accelerating

growth, the problem of a shrinking middle class

may cease to exist.

Charlotte Alder

Figure 1: Russia MICEX Stock Market Index (14. Feb – 19. Feb)

NEFS Market Wrap-Up

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Latin America

On Wednesday Mexico’s central bank

unexpectedly increased the key lending rate by

half a point to 3.75 in an attempt to nip in the

bud the prospect of rising inflation. The bank,

which followed the US Federal Reserve in lifting

rates in December when it lifted rates by a

quarter of a point, and had been expected to

stay in step with the US, stressed its decision

was not the start of a rate raising cycle.

On Wednesday the peso, which has tested

historic lows against the dollar, persistently

surged almost 5% on the rate rise news, up to

18.2 against the dollar. It had shed almost 10%

so far this year against the dollar. Mexican

authorities until now have said the plunging

peso would not spark an inflationary spiral, but

the Bank of Mexico (Banxico) said in its

statement that international market volatility

had increased since December, and the outlook

for the Mexican economy had “continued to

deteriorate”. Analysts believe the impact of that

on the peso had increased inflation prospects

so that they were no longer in line with the

permanent objective of 3%. A further factor and

one that Mexico has very little influence in is

that emerging market traders have hammered

it because it is used as a proxy, due to it being

the most liquid emerging markets currency.

The unexpected rate rise comes as Mexico is

preparing to make new cuts in public spending

for next year’s budget and to throw a financial

lifeline to Pemex, the state oil company, where

stagnating oil production and a plunge in

international prices has pushed the company

into a financial crisis. So in the same vein as the

rest of Latin America, 2016 may prove to be a

painful year for Mexico, which brings me on to

a previous article in which I commented on the

possibility that Venezuela may have the

possibility of a default.

Furthermore, Venezuela’s debt woes are

compounded by the fact that the economy is

forecast to shrink by almost 5% this year after

8% in 2015. Furthermore, annual inflation is

predicted to be around 180%. However the crux

of the default issue is the exorbitant servicing

costs which are around 20$bn a year which

equates to 90% of all Venezuela’s oil exports.

Max Brewer


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Africa

At the African Transformation Forum (ATF) in

Kigali, this Monday, economists, policymakers,

investors, and civil society are trying to plan

ways of breaking the dependence of many

African countries on raw natural resources. The

case is now more urgent than ever for resource-

based African economies to diversify.

The downside of dependence on raw natural

resource exports is being felt around the

continent: for example, Nigeria, which has been

dependent on oil exports for 70% of

government revenue, faces a huge budget gap

in the face of dropping oil prices; Zambia had

lost some 80% of the value of its currency

against the dollar as China’s demand for the red

metal cooled down, resulting in prices half of

what they were a few years ago; Angola has cut

its budget by 40% from two years ago, resulting

in reduced public services.

One of the main topics to be discussed by

Africa’s top economists, policymakers and

business leaders at the first African

Transformation Forum (ATF) in Kigali is how to

use agriculture as a base for the continent’s

economic transformation. A surplus-generating

agricultural sector can provide cheap food,

ensuring adequate nutrition for the population,

including its workforce, and also increase the

amount of disposable income left to individuals

and families after the food bills have been paid.

This generates demand for other goods and

services, creating direct and indirect jobs.

The Bank of Mozambique has once again

increased its key interest rates in its struggle to

bring down inflation. A statement issued by the

Bank's Monetary Policy Committee on Monday,

after its monthly meeting, announced an

increase of 100 base points in the Standing

Lending Facility (the interest rate paid by the

commercial banks to the central bank for

money borrowed on the Interbank Money

Market). This rate thus rises from 9.75% to

10.75%. This is the highest interest the Bank of

Mozambique has charged since September

2012.

The Monetary Policy Committee said it has

increased the interest rates because of “the

probable impacts of the adverse international

conjuncture, as well as the expected effects of

drought in the South and centre of the country

and floods in the North”. In addition, the

Mozambican Gross Domestic Product was

growing at less than the initial forecast, while

“projections for domestic inflation show the

prevalence of pressure in the short and medium

terms”.

Sreya Ram

NEFS Market Wrap-Up

14

Middle East

A perfect storm is about to smash into one of

the most sensitive areas of Egyptian policy –

the bread subsidy programme. The government

sells bread to its people at 0.05 Egyptian

pounds a loaf, a programme that is expected to

cost an enormous US$4.8 billion dollars this

year. While local farmers have planted enough

wheat this year to ensure an estimated harvest

of 8.1 million tonnes by the end of June, the rest

must be imported from abroad.

But as stated last week Egypt is currently

experiencing a foreign currency reserve crisis,

meaning it has been having problems financing

these imports. For example, the government

has delayed letters of credit for wheat suppliers,

causing shipments to be delayed. This made

traders somewhat reluctant to sell wheat to

Egypt.

With a low supply, an increase to the price of

bread may be the only option left. However a

sharp hike in the price of a loaf in 1977,

designed to take pressure off the government’s

budget, backfired dramatically when riots broke

out across the country overnight, causing the

government to quickly reverse the price

increase. For the future, I believe the

government must persevere to maintain the

subsidy programme and restart wheat imports

if a situation similar to 1977 wants to be

avoided.

In other news, the drop in oil prices to below $30

a barrel has fuelled fears among the younger

Saudi generation of what a future of cheap oil

will mean in the Arab world’s largest economy.

Low oil prices have knocked a chunk out of the

government budget and now pose a threat to

the unwritten social contract that has long

underpinned life in the kingdom.

For decades, the royal family has used the

kingdom’s immense oil wealth to lavish benefits

on its people, including free education and

medical care, generous energy subsidies and

well-paid (and often undemanding) government

jobs.

The shift is already echoing through the

economy, with government projects delayed,

spending limits imposed on ministries and high-

level discussions about measures long

considered impossible, like imposing taxes and

selling shares of Saudi Aramco, the state-run oil

giant.

For Saudis below 35 — shown by the graph to

take up over 70% of the nation’s population —

the oil shock has meant a lowering of

expectations as they face the likelihood that

they may have to work harder than their

parents, enjoy less job security and receive

fewer perks.

Harry Butterworth


15

EQUITIES

Financials

After what has been a frantic two months, with

financial markets crumbling, we begin to see

things settling down. The performance of the

financial sector is seemingly improving from the

offset of this turmoil, and this brings hopes of

rising stock prices for investors. It therefore

makes sense to review how some of the largest

financial bodies have coped so far this year,

with some having obviously struggled under the

pressure.

Focussing on two major central banks: Bank of

China, Bank of Japan, as well as the second

largest financial influencer in North America:

the Bank of America, whose shares all

plummeted to an annual low last week, we are

beginning to see a rebound in this drop. This is

shown by the figure below, which depicts the

past month’s variations in stock prices of these

three. With the very cause of the poor

performance in financial markets arising from

alterations in central bank’s policy, it’s no

surprise to have seen both the BoC and BoJ

suffer themselves (whilst BoA was hugely

impacted by the adjustments), and hence all

incurred a loss of confidence from investors.

This turnaround saw Bank of America rise 7%

since its downfall, whilst Bank of Japan

recouped a massive 17%, and Bank of China

climbed a minor 3% from last week. These

gains are a strong indication of a recovery

within this market, and with them being from

major influencers in the financial markets we

see an upsurge in investors’ confidence in this

sector.

This is shown by a pattern that is forming all

across the financial market, with the majority of

companies showing some form of recoup from

the sector-wide plummet in stock prices on the

11th of February. Morgan Stanley’s stock price

had fallen 8% on the day from $23 to $21.23,

and has since made a 13% gain to close this

week at $24. Further to this, J.P. Morgan

experienced a drop of 5.5% on the same day

from $56.0 to $52.92, but has recovered 9.4%

since. The recovery is not just unique to US

financial firms either, where improvements are

being seen across Europe, with Deutsche Bank

recovering 15% from last week’s €13.12 low to

closing this week at a higher €15.20.

This surge in stock prices seemingly concludes

better financial equities than what was the case

last week, and with firms’ performance gaining

traction; we see high expectations from

investors and companies alike for this trend to

continue in hopes of establishing higher valued

stocks.

Daniel Land

Figure: Bank of America, Bank of Japan, Bank of China

BoA

BoJ

BoC

NEFS Market Wrap-Up

16

Technology

This week’s technology news has been

dominated by the privacy dispute between

Apple, the FBI and The US Department of

Justice. The FBI would like to investigate the

contents of an iPhone belonging to the San

Bernardino Shooter. However, this requires

Apple to unlock the iPhone, which the

technology giant is unwilling to do due to

privacy issues. The US DoJ has got involved in

the debate, supporting the FBI and accusing

Apple of putting “brand marketing concerns

ahead” of legal obligations.

Elsewhere, telecoms firm T-Mobile has

increased its market share in the US market by

attracting 917,000 new customers in Q4 of

2015. The company points to the new services

they have launched to improve user

experience, such as allowing customers to

watch streaming websites, including Netflix and

Hulu, without eating into their data allowance.

Furthermore, the new Jump on Demand service

allows customers to change their handsets up

to three times a year. Earnings per share of the

company exceeded market analyst

expectations by 126% in the quarter, while net

profits were at $297 million. However, although

the share price did momentarily increase on

Wednesday, as shown below, due to the

company’s high debt to earnings ratio of 2.5, the

share price has remained relatively constant.

Game maker, Ubisoft saw its share price

increase 21% this week to 23p after it

announced a plan to increase revenues 60% by

2019. This plan was announced in an attempt

to fight off a rumoured acquisition from rival

company, Vivendi. Vivendi, controlled by

notoriously aggressive businessman, Mr

Bolloré, had already launched a takeover bid of

Gamesloft – a company similar to Ubisoft. As a

result, Ubisoft will shift its attention to producing

multiplayer games to create “more predictable”

revenues. The company announced it expected

to free up €300m of cash flows once changes

had been implemented. Although there was a

strong response from the market, the founders

of the company, the Guilleot family, only have a

9% share in the company, leaving them more

vulnerable to a takeover, therefore, I would be

cautious in investing in Ubisoft shares.

Sam Ewing


17

Retail

Retail equities have slightly improved given

positive early year results and improving

sentiments over prospects for the sector. They

have benefited from positive January results,

boosted by clearance sales, as reported by the

British Retail Consortium. The Dow Jones

Consumer Goods index rose by 2.9% before

Friday’s trading and the FTSE 350 General

Retailers index also had an upbeat week, rising

by 4%.

As shown below, Walmart's share price took a

5% hit last Thursday, despite gaining

approximately 10% in the last four months. Its

price had previously declined since the start of

2015 by around 32% up to November given that

it had warned of a reduced sales growth

outlook. Thursday’s results marked the

company's worst sales performance in 35 years

due to a plethora of factors including mounting

online competition from the likes of Amazon

and the impact of a strong dollar affecting the

profitability from overseas trade. In response,

Walmart announced that it is closing 269 stores

globally as they failed to become profitable. In

the UK specifically, the company, which owns

Asda, also reported its sixth consecutive

quarter of decline, with sales dropping 4.7% for

the full year. One factor which is worrying

investors on Walmart’s outlook is same store

sales, which missed the already low estimate of

1% by 0.4%. As food prices are related to the

price of oil, Walmart has argued that food

deflation has had a large impact on its

performance, yet investors remain sceptical

and wonder whether this is an example of wider

shifts in consumer behaviour or specific issues

related to Walmart’s management.

In response to its extended poor performance,

Asda has announced cuts to hundreds of jobs

at its head office in Leeds. Having identified that

consumers are shopping in a more fragmented

way, without so much bulk buying, Asda had

hoped to adjust to this structural change by

lowering regular prices in order to maintain its

position as part of the 'big four' supermarkets.

As single large-shopping trips are less

common, German discounters Aldi and Lidl

have been able to nab 10% of the market.

A rise in footfall and sales for the start of the

year has been broadly based on post-

Christmas price cuts but has also been helped

along by cheaper energy costs, which have

helped to boost confidence and spending. It will

be interesting to see if this trend is set to remain

over the coming months.

Sam Hillman

Walmart’s share price since the 19th November

NEFS Market Wrap-Up

18

Pharmaceuticals

This week we have seen the FTSE 350 Index -

Pharmaceutical & Biotechnology increase by

3.41% and the NASDAQ Biotechnology Index

increase by 4.33%. The Pharmaceutical &

Biotechnology sector has been stable and this

week’s increase is in line with the S&P 500,

which also rose 4.7%.

Shire, a London-listed drug maker has put a

stop to the $50bn acquisition spree it had

accumulated over the past three years as the

company looks to focus on integrating assets

and launching new products. Shire had

acquired Baxalta for $32bn and two other US

biotech companies, NPS and Dyax for more

than $5bn over the past year. Revenues in 2015

were up 7% from 2014 at $6.4bn and Shire

predicts a double-digit percentage increase in

sales and growth in earnings per share from 7%

to 10%. All in all, Shire’s shares have fallen by

over 30% in the past 6 months but this is due to

a wider sell-off in biotech shares across the

sector.

GlakoSmithKline (GSK) has been fined £37m

for illegally preventing the launch of a cheap

rival drug making it the largest penalty levied so

far by the new UK’s competition policies. The

Competition and Markets Authority (CMA) said

that GSK was guilty of having this so called

‘pay-for-delay’ deals where the generic

manufacturers seek to break the market

exclusivity of a branded medicine by

threatening to challenge its patent in court.

GSK’s share price has fallen 2.7% from

£1423.40 to £1384.50 in the last week. GSK is

unlikely to be affect by this penalty and will still

remain as one of the top British Pharmaceutical

companies in the world.

Pfizer Inc. has agreed to pay $784.6 million to

settle claims over Medicaid rebates, resulting in

the drug company’s downward revision of its

fourth quarter results. As a result of this

settlement, Pfizer revised its fourth quarter

results to a loss of $172 million, or 3 cents a

share. In other news, the world may be just a

few weeks away from a viable Zika virus test,

but the vaccine is still many months away from

large-scale trials as reported by the World

Health Organization. Some of the companies

working on the vaccine are French-based

pharmaceutical company Sanofi and Iowa-

based NewLink Genetics.

It was a good week for the Pharmaceutical &

Biotechnology sector as share prices increased

by an average of 3% to 4%. IPOs in the sector

are predicted to slow down this year but on the

flip side, there is a greater possibility of larger-

scale Mergers and Acquisitions this year.

Samuel Tan

NASDAQ Biotechnology Index (NBI) Credits: Yahoo Finance


19

Oil and Gas

Since the last update, there has been word from

OPEC: the world’s petro states have come

close to organising a production freeze at

January output levels. Number one oil producer

Saudi Arabia and number two Russia, initiated

the accord, contingent on the other big oil

producers backing the freeze. Qatar and

Venezuela have since come on board, but

Tehran’s withdrawal on Wednesday has proved

an element of hesitancy in amongst

dealmakers.

Credit rating agency Standard & Poor’s,

however, are sceptical about the deal and are

not predicting any effect on its oil price

assumptions. Indeed, the financial services

group went on to downgrade Saudi Arabia by 2

points from A+ to A- on Wednesday. This is a

real issue, considering that this leaves the

country only 4 rungs away from non-investment

grade territory. To put this in perspective, this is

often referred to as “junk”. In addition, Bahrain’s

credit level was downgraded as a direct

consequence of its now 20 month-long decline

in oil prices. Brazil, Kazakhstan and Oman also

had their levels lowered.

Ultimately, the actions taken by S&P illustrate

quite clearly the massive risk that the oil price

slump is having on the global market. Investors

are worried; oil has typically been a relatively

safe investment – this is, however, no longer

the case. Concern has been raised over the

economic effects; it is quite possible that the

Saudi riyal will have to be unpegged form the

US dollar.

The Gulf Kingdom is not the only region to be

ailed by this so-called ‘Dutch Disease’

(overreliance on one export). Norway, too, is

feeling the pinch as the PM Erna Solberg

acknowledges that “None of us can be sure

where the oil price will go.” She went on to say

that “The Norwegian economy has to diversify.”

Unfortunately, for economies such as the

aforementioned and those in the Gulf Kingdom,

diversifying is a long-term endeavour; it is

unlikely that now that the negative effects have

already been felt, that they could be reversed.

Surpluses have dwindled and are now

transformed into gaping budget deficits which

will have ripple effects not only in the domestic

economy but globally.

Below is a graph showing the decline in the

price of Brent crude of which the effects are

being felt globally.

Tom Dooner

NEFS Market Wrap-Up

20

COMMODITIES

Energy

Oil dropped markedly on Friday, but is still likely

to make its first weekly price rise in a month.

Earlier in the week, four of the main oil

producing countries - Russia, Saudi Arabia,

Venezuela and Qatar - agreed to freeze their oil

production by maintaining their output at

January levels. The oil market, on balance, took

this as negative news. Despite the fact that

keeping supply constant will allow demand to

catch up to rebalance the oil market, Russia

and Opec’s production was already at multi-

year highs, so supply is being frozen an at

extremely high level. Additionally, the market

believed that Iran was planning to increase

production to its pre-sanction levels, and

therefore the sentiment was that global supply

was unlikely to tail off any time soon.

However, surprisingly late on Wednesday,

Iranian Oil Minister, Bijan Zanganeh, expressed

his support for a deal to hold supply constant,

provoking a rally in oil price. The deal agreed by

Russia and Saudi Arabia would only have held

if other large exporters, mainly Iran, joined.

Hitting $32.40 on Wednesday, the news caused

Brent Crude to rise to over $34 overnight and

continue up to around $35.40 during Thursday.

The volatility continued on Friday, as prices

dipped overnight in response to news that US

crude stocks had hit record highs. Inventories

of US crude rose by 2.1 million barrels last week

to reach a height of 504 million barrels.

However, there was also some good news on

Friday from Iraq, Opec’s second-largest oil

producer. The country’s Oil Minister gave

verbal support for measures undertaken by

Russia and Saudi Arabia to restore ‘normal’

prices, he also stated he ‘welcomed’ the

participation of Russia as a non-Opec country.

Oil prices have risen throughout the day on

hope of a wider deal to curb production, with

Brent crude expected to close around the

$34.00 mark above the open this week of

$33.15.

William Norcliffe-Brown

Brent Crude Price Chart (Source: MoneyAM)


21

Agriculturals

Much of the major news in the expansive sector

of agricultural commodities revolves around

Egypt, in much the same vein as last week,

largely to be expected given the country’s

influence on global wheat and grain markets.

Whilst the author last week speculated as to the

reaction of traders to Egypt’s recent

contamination furore, it appears that merchants

are exercising a degree of flexibility and

extending a hand to Egypt, lowering the risk

premiums demanded to make trades with

Gasc, the country’s grain authority.

As a result, Gasc made its biggest order since

October, purchasing a total of 240,000 tons of

wheat, with an additional 30,000 tons of US

hard red spring wheat, a variety high in protein,

representing the first purchase since 2010. The

reduction in risk premium comes after a written

document was released by Egypt, outlining its

specifications. Despite this, the number of

tenders was remarkably low, at 5, compared to

the usual 20 or so. As a result, the value of

wheat futures on the Chicago Mercantile

Exchange rose 1.0% this week.

Elsewhere in the agricultural commodities

sector, broker VSA Capital predicted that cocoa

futures are set to rally past the $3000 a ton

level, breaking the earlier 2016 sell off which

caused the New York exchange to fall around

10%. Much of the forecasted rally is supposedly

due to the intrinsic nature of the cocoa market,

with concerns over the West African crop being

compounded by sub-optimal weather forecasts

which are set to keep the Ghanaian crop at

approximately last year’s disappointing levels,

and significantly less than VSA Capital’s

previously forecasted output.

As a result, the net long position from Hedge

Funds and other speculators increased

significantly within cocoa futures, adding

supportive evidence to VSA Capital’s forecasts

and elucidating the sizeable market impact of

the predicted fall in output and thus supply. Due

to similarly inclement weather conditions, other

crops, such as soybeans, may also exhibit

fluctuations in output, and by extension supply,

affecting markets in a similar manner to cocoa

futures. As such, agricultural commodities

remain an interesting and dynamic group of

markets to follow in coming weeks.

Jack Blake

NEFS Market Wrap-Up

22

Precious Metals

The outcome of the Federal Reserve meeting

on the 17th February implies a turning point in

adjusting the interest rates as soon as March.

Certainly, this change would have a significant

effect on turning the appreciation of precious

metals towards the opposite direction. The key

factors raising concerns include sinking oil

prices, slowly declining inflation rates (relatively

low already) and volatility in equity markets.

According to the Fed's Bullard, raising the

interest rates now is most likely to hurt the US

economy.

This forecast cannot be called unexpected as

earlier. On 10th February, J. Yellen, the

chairwoman of Fed, suggested that the rise in

the interest rates should be delayed. The

economist added that the main factor initiating

financial market volatility is increasing

uncertainty on China’s exchange rate policy. M.

Perez-Santalla, the VP of business

development at Bullionvault, reflected that in

the upturning event, strengthening China’s

economic position, gold would certainly

depreciate.

While we continue waiting for a further increase

in interest rates this year, the Bank of America

Merrill Lynch is already changing its prediction.

The Bank suggests that increases of the real

interest rate should be reduced to 2 times rather

than 3-4 times as forecasted earlier.

Similarly, the EU is observing a worsening

distribution of economic performance. On 15th

February M. Draghi, the President of ECB,

commented on depreciating banking stocks

and weakening emerging market economies.

The main worry for banks is decreasing

commodities prices, mostly affecting the banks

financing suppliers, due to the increasing risk.

Discussions raised had a negative shock on

metals prices. The value of gold topped on the

11th at 1246.70 USD/t. oz. and, after a slight tip

on 16th (Figure 1), slightly strengthened by the

19th to 1232.48 USD/t. oz. A short period of

depreciation could be explained by a slowing

demand in physical gold purchases on early

trade. In the meantime, the demand for physical

silver on ready trade remained relatively stable.

In other metals markets the situation is also

similar. Silver also peaked on the 11th and

remained depreciating up to 19th Feb., from

15.794 USD/t. oz. to 15.405 USD/t. oz.

Meanwhile, Platinum fell from 960.20 USD/t.

oz. to 943.28 USD/t. oz.

Regression analysis by Dennis Boyko,

GoldMinerPulse Stock Researcher, projects a

1/3 chance for Gold ending the year with an

overall appreciation. Otherwise, 2016 is likely to

end without a clear trend. As evident in the

Figure 2, Gold entered 2016 at just above 1060

USD/t. oz. and sees a slight upward trend in the

1st quarter.

Goda Paulauskaite

Figure 2 Gold

Figure 1 Figure 2


23

EUR/USD 16.-19. February

CURRENCIES

Major Currencies This week the USD was fuelled by higher-than-

expected US CPI, which triggered a higher

demand of USD. The core inflation at a yearly

basis rose to 2.2%, above expectations of

2.1%, while on a monthly basis, it advanced

0.3%. The core inflation is a surprise in the face

of declining oil prices. Inflation plays a major

role for the monetary policy of the Fed.

Recently, the market expectation of further

increases of the interest rate by the Fed slightly

rose again. However, the majority is still

expecting that there won’t be a further increase

this year. Additionally, the surprisingly strong

performance of the US-industry backed the

USD. Hence, after the USD was worth 0.898

Euro on Wednesday, it was expected to

increase its worth to 0.9005 Euro today.

This week the EUR/USD declined resulting in a

2-week low. As the graphic below shows the

EUR/USD went down to 1.10859 on Friday. On

Tuesday EUR/USD lied at 1.1166, on

Wednesday at 1.130 USD. As for the ECB a

decision for its next meeting on March 10th has

not been made yet. However the ECB may

decide to act if the recovery of an inflation near

under 2% is endangered. “The main thing for us

discussing our decisions is the prospect for

inflation going forward. We don’t expect to

reach our goal in a short time, but to go in that

direction”, said ECB Vice President Vitor

Constancio to Reuters. The ECB is trying to

boost inflation with the help of QE. However,

low energy prices, stagnating growth and weak

lending still keep the inflation rate far away from

the ECBs target.

The Euro to Pound exchange rate is currently

between 0.7776 and 07817. The GBP/EUR

exchange rate softened and is currently trading

around 1.2846 mainly because of rumours,

comments and speculation on the second day

of EU reform talks, where David Cameron is

currently battling for Britain’s national interests

as he said in a recent statement. However, the

Prime Ministers hopes of securing a reform to

Britain’s EU membership have been already

diminishing after several Eastern European

countries rejected proposals to restrict child and

in-work benefit payments to EU migrants.

Italian Prime Minister Matteo Renzi stated

“some timid steps forward on migration, some

steps back on a UK deal… I’m always

confident, but a bit less optimistic than when I

arrived.”

Alexander Baxmann

NEFS Market Wrap-Up

24

The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups.

For any queries, please contact Josh Martin at [email protected]. Sincerely Yours, Josh Martin, Director of the Nottingham Economics & Finance Society Research Division

This Publication has been prepared solely for informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, product,

service or investment. The opinions expressed in this Publication do not constitute investment advice and independent advice should be sought where appropriate.

Whilst reasonable effort has been made to ensure the accuracy of the information contained in this Publication, this cannot be guaranteed and neither NEFS nor any

other related entity shall have any liability to any person or entity which relies on the information contained in this Publication, including incidental or consequential

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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 11