NEFS Market Wrap Up Week 12

Week Ending 28th 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

China India

Russia and Eastern Europe Latin America

Africa Middle East

Equities

14

Financials Pharmaceuticals

Oil & Gas Retail

Commodities Precious Metals

Agriculturals

18

Currencies 20


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MACRO REVIEW

United Kingdom

The International Monetary Fund (IMF) has

called on national governments, including the

UK, to relax austerity measures and to increase

spending, particularly on infrastructure. It

warned of downside risks to UK growth from

ongoing weak productivity; the balance of

payments deficit; the upcoming referendum on

EU membership; and high levels of household

debt. Recently, the Organisation for Economic

Co-operation and Development (OECD) has

also called for the UK to reduce austerity and

spend more. The organisations believe that this

will help to calm financial markets and to

increase confidence in the economy.

This follows latest figures that business

investment fell by 2.1% in the last quarter of

2015, the sharpest fall the UK has seen since

2014, implying a loss in business confidence.

Firms seem to be delaying their spending due

to concerns around global growth, the EU

referendum, and rising costs primarily from the

introduction of the National Living Wage in

April.

The slump in business investment was offset by

consumer spending, which rose by 0.7%

between October and December, and grew by

3.1% in 2015 overall. This increase has been

helped by low inflation alongside steady, albeit

weak, wage growth. Retail sales in particular

showed strong growth, growing by 2.3%

(excluding petrol) between December and

January, which has been the biggest rise since

2013. Chris Williamson, chief economist at

Markit, said this paints "a picture of an

unbalanced economy that is once again reliant

on consumer spending to drive growth as

business shows increased signs of risk

aversion". Samuel Tombs of Pantheon

Macroeconomics adds that “the recovery’s

reliance on consumers is worrying, because

growth in households’ real incomes looks set to

slow this year as the fiscal squeeze intensifies,

employment growth fades and inflation

revives”.

On Thursday the Office for National Statistics

(ONS) revealed that GDP grew by 0.5% in the

last quarter of 2015, making it the UK’s 12th

consecutive quarter of positive growth, as

shown on the chart below. The UK grew by

2.2% on an annual basis in 2015, down from

2.9% in 2014. Despite disappointing growth

rates, the UK economy remains one of the

fastest growing of the developed nations. In the

same quarter, Eurozone GDP increased by

0.3%, and US GDP increased by 0.2%.

Shamima Manzoor

NEFS Market Wrap-Up

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United States

The Federal Reserve’s preferred measure of

US inflation has hit the highest level in more

than three years as personal income rose. This

development has been anticipated to increase

further as a strong jobs market will contribute to

higher prices in the economy. The personal

consumption expenditures price index,

excluding food and energy components,

jumped 1.7% on a year-on-year basis in

January, up from the 1.4% pace in December

2015. The glimpse of such positive economic

news could give Federal Reserve officials the

confidence it needs to continue raising interest

rates this year after the first rate rise in nearly a

decade, which took place in December.

In other economic news, the number of

Americans filing for unemployment benefits

rose last week, but remained below levels

consistent with a tightening labour

market. Initial claims for state unemployment

benefits increased 10,000 to a seasonally

adjusted 272,000 for the week ending February

20th, the US Labour Department said on

Thursday. The US labour market remains

strong despite worries about both the domestic

and global economies, which have manifested

themselves in a world-wide stock market sell-

off that has tightened financial market

conditions. Though bets for a March interest

rate hike from the Federal Reserve have been

wiped out, further monetary policy tightening

later in the year remains a possibility because

of the resilience of the job market.

US President Barack Obama is set to leave

office for the final time later this year. Anger

over a halting US economic recovery has

emerged as a key political theme of the 2016

election, fuelling the surge of populist

candidates such as Donald Trump and Bernie

Sanders. But it is one that President Obama

has strongly resisted. In his annual economic

report to Congress on Monday the president

portrayed an economy that was in relatively

“rude health after weathering one of the most

brutal financial crises in its history”. Mr Obama

went on to reassure that the US is now in the

middle of the longest streak of private-sector

job creation in its history and declared that the

economy is now “less reliant on foreign oil than

at any point in the previous four decades”. It will

be interesting to see how to consumer

confidence of the US population fares amidst

such dynamic times.

Vimanyu Sachdeva


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Eurozone

The second consecutive month of declining

confidence in the Eurozone suggests the

turmoil in financial markets may take a toll on

economic growth in the currency area. With

consumer confidence also in decline, domestic

demand within the Eurozone appears set to

weaken just as the appetite for its exports falls

in large developing economies such as China.

Data from across the 19-member currency bloc

on Friday will put pressure on the ECB to take

strong additional policy actions at its meeting in

March on top of the unprecedented stimulus it

is already giving.

Reports of falling prices in Germany, France

and Spain along with an array of weak

sentiment surveys for the bloc as a whole will

also provide ammunition to those arguing that

governments must now loosen their budgets to

stimulate growth.

The consumer confidence index, meanwhile,

dropped to -8.8 from -6.3 in January, down from

-5.7 in December - a poor harbinger for future

spending, last year's bright spot.

Sarah Hewin, chief economist at Standard

Chartered, said that some of the decline may

have come from a belief that improvements in

growth and employment may be waning. But

she also cited falling stock markets and broader

concerns about how the European Union

manages the hundreds of thousands of

migrants and refugees entering its borders.

The biggest blow from Friday's Eurozone data

may have been to the ECB, which is already

buying assets to the tune of 60 billion euros

($66 billion) a month and effectively charging

banks to deposit money. Both are attempts to

push money out into the economy to boost

inflation, which it wants at just below 2%. But

inflation, dragged down in part by falling oil and

commodity prices, is not playing ball.

Without a weakening of growth, ECB policy

makers already face an uphill struggle to raise

the annual rate of inflation to their target of just

under 2% from 0.3% in January. Economists

estimate that the inflation rate fell in February,

and may even show that consumer prices were

lower than a year earlier.

Spain's statistics agency said its measure for

the month fell to -0.8% from -0.3% in January,

while France's statistics agency said its

measure dropped to -0.1% from 0.3%.

Erwin Low

NEFS Market Wrap-Up

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Japan

New census figures, which were released this

week, show that the population of Japan shrank

by nearly one million in the past five years. This

drop, which is the first since 1920, has been

long expected by demographers, who cite a

falling birth rate and low immigration as its

cause, and will add weight to negative

sentiment concerning the long term prospects

of Japan’s economy, which is going to face

numerous challenges in the coming decades,

not limited to those presented by an aging

population.

The short-term prospects facing Japan’s

economy aren’t much better than the long-term

ones; inflation figures released this week

suggest that the BoJ’s decision, made at the

end of January, to cut interest rates was

justified. There are various measures used to

gauge inflation in Japan (see graph below); one

of these is the Tokyo core CPI, which measures

inflation solely in Tokyo, and another one is the

National Core CPI, which measures inflation for

the whole of Japan. The former, which was

forecasted to stay the same, shrank by 0.1%

year-on-year in January, and the latter, which

was forecasted to shrink by 0.2%, stayed the

same year-on-year in January. These figures

reflect weakness in the global economy, which

has pushed up the price of the yen and,

subsequently, caused demand for Japan’s

exports and the price of its imports to fall.

As aforementioned, the decision to cut interest

rates was taken at the end of January.

Therefore, we will have to wait another month

to see if this policy has an effect. However,

given the fact that, regardless of the cut in

interest rates, the yen has strengthened

considerably this month and that the services

index, which reflects changes in the price of

services purchased by corporations and is a

leading indicator of consumer inflation, grew by

only 0.2% in January, it seems unlikely that

significant inflation will return to Japan in the

near future. Some encouragement does,

however, come from the figure for the BoJ Core

CPI, which measures inflation excluding

energy, which grew by 1.1% year-on-year in

January, and shows that energy, which is one

of Japan’s largest imports, may be responsible

for weak inflation. With this in mind, it is unclear

exactly how the BoJ will act when it comes to

their next meeting in March, however there is a

strong possibility that they will cut interest rates

further.

Daniel Nash


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Australia & New

Zealand

Australia’s housing market made the headlines

this week after UK based economist, Jonathan

Tepper, claimed that Australia is going to

experience “one of the biggest housing bubbles

in history”. Using six graphs, he showed that the

housing bubble is out of control and likened it to

his forecasts on Spain’s experience. After

predicting a 50% drop in house prices, Tepper

blamed the “irresponsible loaning of large sums

of money” by the Australian banking system to

be behind it. His evidence shows that over 40%

of all new mortgages have been interest-only,

and that easy financing is aiding a “disaster

waiting to happen”. House prices keep rising

but other factors of the economy like GDP,

wages and rental income are relatively

stagnant.

But Tepper isn’t alone. In 2014, Lindsay David,

a macroeconomic researcher, predicted there

would be a “bloodbath” in the future housing

market. Similarly to Tepper, he expected that

there could be a catastrophe as the housing

bubble and mining boom go down together.

Economist, Steve Keen also predicted house

prices would drop by 40% within a few years. In

fact, research by CoreLogic and Moody’s found

that slower growth in household income put

brakes on the property market in Sydney. They

claim this is because household income isn’t

growing as fast as before and new apartments

coming onto the market, in the inner city areas,

are “taking some of the heat out of the market”.

However, these analysts believe only a large

shock in the economy would cause the bubble

to burst, and not excessive borrowing. Australia

has one of the highest household debts in the

world, and time will tell what the consequences

will be.

In other news, forecasters in New Zealand were

shocked when their 250 million trade deficit

prediction turned into an 8 million trade surplus.

The graph below shows the dramatic change

from its 53 million deficit in December 2015.

The total value of exports grew by 5.9% to

$3.9billion, led by milk powder, butter and

cheese, pushing China ahead of Australia as

New Zealand’s top export destination. The

value and quantity of cherry exports were also

at a record high, rising by 30%. Imports also

rose, by 7.2%, mainly in intermediate goods

and consumption goods. However the rise in

intermediate goods was offset by the 7.9% fall

in crude oil imports and capital goods imports,

which fell by 4.4%.

Meera Jadeja

NEFS Market Wrap-Up

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Canada

The IMF announced its growth forecast for the

Canadian economy this week: it was greater, at

1.7% for 2016, than many expected.

Meanwhile, the Canadian government and the

OECD are predicting that GDP growth will be

1.4% for 2016, and some economists’ forecasts

are as low as 1.0% for GDP growth in Canada.

In a report released by the IMF this week,

Canada’s economy is predicted to grow at a

faster rate than Japan and some major

European economies such as Italy and France.

In their report the IMF noted that “bold

multilateral actions” were needed to bolster the

economic performance of the global economy.

They called for the G20 countries to implement

expansionary fiscal policy to increase

investment and growth. The report also stated

that many G20 countries have an over reliance

on monetary policy and advised that they

should shift this focus.

This week a G20 summit of finance ministers

and central bankers is convening in Shanghai

for a two day meeting. On the agenda for this

G20 meeting is oil, terrorism and tackling tax

evasion. The Canadian finance minister Bill

Morneau’s focus is believed to be on to get

other nations to fulfil their promises of the

November 2014 G20 summit in Brisbane. At

this meeting the G20 countries agreed to create

a 2% increase in global GDP growth and

promised to invest US$2 trillion to boost the

growth prospects of the world and to generate

more jobs. Global GDP growth was 3.7% in

2014 when the pledge was made, in 2015 it was

3.1% and it is predicted to be 3.4% this year.

Therefore, since the G20 agreement to boost

world GDP growth rates was forged they have

declined.

According to the IMF Canada has the 15th

largest share of world GDP, and the Canadian

economy represents 3% of the world economy.

This means that if the G20 agree to fulfil earlier

promises at the G20 meeting this week then the

Canadian GDP figures could receive a

significant boost, as the Canadian economy is

an important globally trading country. The

Conference Board of Canada economist Craig

Alexander stated that “the weakness we’re

experiencing in the Canadian economy is

Canada importing the weakness from

abroad…. we’re a major trading nation. … One

of the biggest stimulus programs Canada could

have would be if international policy makers

actually managed to lift the growth rates in their

regions”.

In other importance news for the Canadian

economy this week, the Saudi Arabian oil

minister Ali al-Naimi announced this week that

there will be no decreases in the production of

oil and the price of oil will remain low. He

advised that high cost producers in North

America should leave the market if they couldn’t

compete.

Kelly Wiles


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EMERGING MARKETS

China

Much of the recent news surrounding China has

concerned the flow of money, such as the

recent capital outflows and central bank

injections, and this theme is of particular focus

this week. Stock prices in China plunged on

Thursday amid rising money-market rates in a

bid to reverse possibly excessive previous

injections. Both the Shanghai and Shenzhen

Composite Indices fell by approximately 7%,

with many stocks falling by 10% - the maximum

daily decline that Chinese authorities allow for

an individual stock. The overnight repurchase

rate, the rate at which commercial banks lend

to each other in China, rose to 2.11%, an

increase of 11 basis points.

The value of new loans provided by Chinese

banks surged to CNY2,510 billion in January

compared to just CNY597.8 billion in

December, as shown in the graph below. The

figure beat the median estimate of CNY1.9

trillion, and was the largest on record,

supported by the seasonal lending spike before

the Lunar New Year. The growth can be

partially attributed to the shift to onshore

borrowing with the cheaper Yuan. Whether

these loans translate into economic growth will

be of significance to Chinese authorities. The

destination sectors and uses of these loans are

plausible indicators of how this strategy might

pan out in the real economy.

From a policy perspective, the People’s Bank of

China (PBOC) used interest rate cuts and

required reserve ratio (RRR) reductions as

forms of monetary stimulus last year. However,

this year, the PBOC has switched to cash

injections because of growing fears of further

capital outflow should the PBOC cut interest

rates further. Net injections over the month

beginning in mid-January have equated to a

one percentage point reduction in the RRR.

Though traditional, a cut in the RRR is more

permanent compared to injections which

provide flexibility in a volatile environment.

On a more global scale, the G20 finance

ministers and central bankers meet in Shanghai

for a two-day meeting this week. Zhu

Guangyao, a vice minister of finance, said that

Premier Li Keqiang would unveil a government

budget over the coming weeks that would

include economic stimulus through an increase

in deficit spending, just 2.3% of economic

output last year. He added that “countries with

room to make fiscal expansion should take

action”. These comments echo the IMF’s call

for greater fiscal stimulus, where possible, in

order to avoid an over-reliance on monetary

policy.

Sai Ming Liew

NEFS Market Wrap-Up

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India

The eyes of the world have been firmly placed

on India during the past week, with Delhi

continuing to be crippled with social unrest and

the budget session for the forthcoming fiscal

year beginning on Tuesday. There is much

speculation surrounding the proposal, with the

focus being on the GST bill and the

government’s fiscal deficit, which could be

stretched by Finance Minister Arun Jaitley in

order to stimulate demand through further

public spending. However, this could

compromise the RBI’s campaign to keep

inflation below target, as well as influencing its

decision on the interest rate.

Ahead of the Federal Budget, which will be

announced on the 29th, the Railway Budget for

the world’s fourth largest rail network was

revealed on Thursday, with the Railway

Minister promising to increase capital outlay by

21% to $17.63bn. The government have also

proposed the setup of two locomotive factories

at a cost of around $6bn, as it looks to transform

the Indian railway system into an engine of

economic growth, creating employment and

generating revenue growth of over 10%.

Alongside this, 44 new projects valued at

$13.47bn are to be implemented, although the

importance of completing ongoing projects was

also emphasised.

However, not everyone was pleased with the

government’s plans, as the budget was termed

as ‘lacklustre’, failing to inspire investors and

cheer market sentiment. Railway sector-related

stocks plunged, the BSE Sensex ended the day

113 points down, and Nifty, of the National

Stock Exchange, closed at a twenty-month low,

below the psychologically important level of

7,000 points. This was the third consecutive

session in which the Sensex has fallen (as

shown below), and nervousness ahead of the

Union Budget, along with a realistic yet

somewhat boring rail budget, are much to

blame for disappointing performances all round.

The rupee has also failed to impress in recent

weeks and remains weak as outflows from

bond and equity markets by the foreign

institutional investors continue. On Thursday

the rupee closed just 14 paise off a record low

of 68.85 against the US dollar. Whether it

reaches that figure does in part depend on the

forthcoming announcement, as traders look for

government policy direction.

Homairah Ginwalla


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Russia and Eastern

Europe

The Vice-President of the European Energy

Union has stated concern over sustaining the

future growth of the Eastern European

economy. Many economists view the recent

successes of the Eastern European economies

as too good to be true, and the recent turmoil of

oil prices is certainly highlighting the

weaknesses. Numerous states in Eastern

Europe, although evolving, can still be largely

characterised by dominant past-Soviet habits,

high levels of state-owned enterprises and

aging, inefficient industries. Yet with oil

production becoming more limited, in order to

increase producer’s profits, many Eastern

European countries are seeing large

disruptions in the unsecure supply of their oil

from Russia. In turn, this is causing unstable oil

prices and fluctuating production costs. Whilst it

can be argued that Eastern European countries

facing this issue should find an alternative

energy source, this would be very costly and

would create tension with Russia. Additionally,

many Western European countries already

claim principal access to the more easily

accessible oil sources (including Russia),

hence reducing available options. Another

factor that is causing concern and was raised

by the Energy Union are the high levels of

corruption that still remain. Heavy state controls

and weak corporate government practises are

severely limiting future growth and enterprise

creation. Unfortunately, changing these factors

in economies so familiar with them will prove

highly difficult, especially those most affected,

namely Slovenia, Romania, Bulgaria and

Hungary.

Yet this week has also seen many

achievements throughout Eastern Europe. The

Belarusian President signed an agreement

intended to improve the effectiveness of

Belarus’ social and economic conditions by

advocating quality management of state

enterprises, export diversification, accelerated

development of small and medium business,

and a gradual decrease in interest rates. The

agreement also includes additional support for

low-income citizens and families with children.

Bulgaria is focusing greatly on increasing its

trade revenues by securing trade deals with

China, Israel and Uzbekistan, following the

recent trade successes with Russia. Finally,

with Hungary continuing to suffer from

disinflation (see graph below), the government

has agreed to fewer state controls in the hope

of initiating greater consumption and

employment rates. By generating economic

growth, it is hoped inflation with rise.

Nonetheless, in a period of great uncertainty for

Eastern Europe, which still suffers from high

levels of state control and corruption, this is

fantastic decision that may act to promote free-

market economics throughout Eastern Europe.

Charlotte Alder

NEFS Market Wrap-Up

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Latin America

Macri, after winning a historic victory in a

decade-long battle with a group of US hedge

funds in a New York court, now switches his

attention to Argentina’s congress. On Friday,

Judge Thomas Griesa said that he would lift a

controversial financial blockade preventing

Argentina’s access to the international capital

markets. The ruling was made on the condition

that Argentina repeals laws stopping it from

paying “holdout” creditors that refused debt

restructurings after its 2001 default on $100bn.

The second condition is that Argentina then

pays in full those holdouts that reach an

agreement with Buenos Aires before the end of

February.

The injunction was put in place after the

holdouts won a legal victory in 2012 in which

Judge Griesa ordered Argentina to pay them in

full. The refusal to pay the holdouts by former

president Cristina Fernández precipitated the

eighth default in Argentina’s history in 2014.

Argentina’s approach to the situation has

undergone radical change since Macri’s has

come to power. Whereas Fernández refused to

pay the holdouts, Macri has so far been very

proactive, especially in negotiations and earlier

an offer to pay $6.5bn for claims of $9bn was

made to the holdouts. Many point Macri’s

proactivity towards his mission to attract much-

needed foreign investment, however he must

now convince Argentina’s congress to revoke

the laws currently preventing payouts to

holdouts, as requested.

Many have commented, such as Daniel Marx,

former finance secretary, who said that

‘untangling this decade long conflict is vital as

doing so will allow Argentina to return to the

international stage after a long period of

isolation.’ This will therefore enable the country

to borrow at lower interest rates and finance the

economic transition that is under way after a

decade of populist and interventionist policies.

Analysts state that access to the foreign capital

market will also help to bring down inflation,

which is currently at around 30% and is seen as

one of Macri’s toughest challenges to deal with.

Furthermore, the Brazilian CPI inflation rate

rose to 10.71% year-on-year in January,

accelerating for the fourth straight month and

reaching a fresh 12-year high. Figures came

slightly above market expectations mainly due

to a rise in food prices. The country is has

struggled with stubbornly high inflation since

mid-2014 after the government imposed

several tax increases aiming at balancing

overall budget, while a weak Brazilian real

pushes import prices up. Inflation for February

is projected to keep increasing.

Max Brewer


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Middle East

An announcement that value added tax will be

introduced to the UAE by the end of 2018 at a

rate of 5% comes after a press conference with

the IMF’s head Christine Lagarde on Tuesday.

A final agreement is expected in June this year,

Minister of State for Financial Affairs Humaid

Obaid Al Tayer explained. This comes as the

UAE’s fiscal deficit is estimated to stand at 4%

of GDP last year and is likely to widen to double

digits as a result of worsening oil prices.

The UAE is also weighing the introduction of

corporation tax and is currently looking at the

“social and economic impact” of a levy on

businesses, as well as its impact on the UAE’s

international competitiveness Mr Al Tayer said.

Despite the zero-tax environment acting as a

significant draw for companies looking to the

UAE, Ms Lagarde has stated that this tax

incentive is not the main driver of foreign

companies into the nation, and that it was the

right time for the UAE to raise taxes to reduce

the impact of the collapse in oil revenues on

government finances.

In other news, Egyptians have taken to social

media to poke fun at President Abdul Fattah al-

Sisi after he said he would sell himself to help

the country's economy. "If it were possible for

me to be sold, I would sell myself,'' he said in a

speech on state television.

A joke page on Ebay "selling" Mr Sisi was

created and bids passed $100,000 within

hours, with the page later being removed. Mr

Sisi also asked Egyptians to make donations to

the country by text, asking them to donate 10

LE ($1.28) each – a considerable amount for a

population with a rising poverty rate, hitting over

25% during 2012.

There has been a sharp decline in foreign

investment and tourism revenues amidst years

of social unrest. The country also pays large

amounts to cover fuel subsidies and servicing

its domestic debt, and has suffered from high

inflation and unemployment.

This latest event has showed that President Sisi

and the Egyptian government has yet to instil

faith into its population over its management of

the economy along with last week’s bread

import fiasco; a scenario which is still ongoing.

Harry Butterworth

NEFS Market Wrap-Up

14

Africa

South Africa's Finance minister, Pravin

Gordhan, presented the National Budget in the

parliament on Wednesday. Given the recent

deterioration in the economic outlook, the

government has proposed fiscal policy

adjustments to reduce the budget deficit and

stabilise debt.

The projected deficits in each of the next three

years forecast were lower than estimates set

out in October 2015. According to the Budget

Review, a consolidated primary surplus could

be achieved in 2016-17, when revenue would

exceed non-interest spending. The expenditure

ceiling had been reduced and tax adjustments

are expected to yield gross revenue increases

over the next three years. In addition, national

debt was projected to stabilise at 46.2% of GDP

in 2017-18, and to decline thereafter. To

achieve its fiscal goals, government has

proposed to increase revenue through tax

policy measures that would raise an additional

R18.1bn in 2016-17, and R30bn in the

subsequent two years. Fiscal consolidation is

expected to lead to gross tax revenue increase

by 1.5% points of the GDP, and a main budget

non-interest expenditure fall by 0.5% points of

GDP between 2015-16 and 2018-19.

Stimulating investment is key to keeping South

Africa's economy in a good state and

government has announced the opening of

Invest SA, a one-stop-shop aimed at removing

bottlenecks to make doing business easy for

investors. While there are global pressures,

including a slump in commodity prices that has

affected emerging markets, President Zuma

urged all sectors of the economy to focus on

addressing domestic constraints like energy.

However, as rightly warned by some

economists bland growth expectations,

characterised by lacklustre growth in domestic

demand, tepid global trade activity, labour

unrest and stuttering electricity supply, will likely

put hurdles in government's ability to meet the

tax revenue collection targets.

Leaders of Nigeria and the Kingdom of Saudi

Arabia have expressed commitment to a "stable

oil market" and a "rebound of oil price." At a

bilateral meeting between Nigeria and Saudi

Arabia in Riyadh, both committed themselves to

doing all that is possible to stabilise the market

and rebound the oil price as their two

economies are tied to oil and all cannot be well

with both countries when the world oil market is

unstable. The leaders also focused on trade

between their states and agreed to give fresh

impetus to the joint commission previously

established in order to boost commercial and

other activities to unify their peoples.

Sreya Ram


15

EQUITIES

Financials

Moving on from last week’s review, we see that

scepticism continues surrounding the financial

markets. A recent report showed that European

and Japanese financial equities are significantly

lagging behind their developed rivals,

generating concern about the regions’ financial

capability at this current time. The figure below

shows the performance, since the 1st February,

amongst four major indices: Euro Stoxx 600,

S&P 500, Topix, and the FTSE 100.

Europe’s Stoxx 600 index has fallen 4.9%,

whilst Japan’s Topix declined a massive 9.8%.

These are huge downfalls for the two regions,

especially when compared to the performance

of the S&P Index, which represents North

America’s shares, and the FTSE 100 – based

in London. The S&P dropped only 0.5%, whilst

the FTSE 100 fell 1.3% - considerable amounts

lower than both Europe’s and Japan’s

performance. These indices – led by the

financial sector – have tumbled throughout

2016 as a result of slower global economic

growth, which arose from a huge loss in

confidence for central banks and financial

companies over the past few months.

Whilst the FTSE 100 has seemingly coped well,

a company report this week revealed that the

Royal Bank of Scotland encountered its eighth

consecutive annual loss, with the bank

announcing a £2 billion net loss for 2015. This

impact arose from a £6.4 billion hit from

restructuring costs last year. Whilst the net loss

was an improvement from the previous year’s

£3.5 billion loss, it seemed that investor’s

confidence in RBS vanished instantly, with

huge sell-offs of shares seeing a 12% fall. As a

result of their company report, stock prices

rapidly fell from 245.79p to 215.9p on Friday

26th February.

Moving over to the Asia region, we find that it’s

not only Japan’s financial markets suffering, but

China’s too, with them facing their biggest one-

day drop in the past month on the 25th February.

The Shanghai Composite dropped 6.8% in the

final 15 minutes of trading on Thursday – a

direct result of poor global financial

performance, since China’s financial market is

increasingly correlated with the global financial

markets.

With the two-day meeting of G20 finance

ministers and central bankers happening over

the weekend, hopes remain high for

improvement plans focussing on the financial

sector. But with financial markets still adapting

to changes in last year’s Central Bank’s policies

and with banks implementing huge

restructuring efforts, the financial world remains

fragile.

Daniel Land

NEFS Market Wrap-Up

16

Pharmaceuticals

This week we have seen the FTSE 350 Index -

Pharmaceutical & Biotechnology rally by 2.68%

and the NASDAQ Biotechnology Index fall by

1.24%. There were no real surprises this week,

as the sector remained at a steady level.

Valeant Pharmaceuticals International has said

to have delays in filing its 10-K, pending the

completion of an investigation into the

company’s alleged accounting fraud that has

already identified $58 million in adjustments. It

is said that the error was the result of a

misreported statement regarding the sales to

Philidor, a specialty pharmacy that Valeant

revealed it had control over only after being

exposed. Valeant shares rallied 8.5% over the

week but are still down 69% from its 52 week

high.

Allergen PLC beat its profit expectations amidst

a gloomy sales outlook. The pharmaceutical

company reported a fourth-quarter loss of

$700.5 million, or $1.78 a share, from $732.9

million, or $3.34 a share, in the same period a

year ago. Excluding non-recurring items, such

as acquisition costs, adjusted earnings per

share amounted to $3.41, beating analyst’s

consensus of $3.34. Allergen expects the

revenue for 2016 to be approximately $17

billion compared with the analysts’ consensus

of $17.7 billion. The share has lost 12% so far

this year and is at $295.50, but it is poised to

bounce back.

In other news, Pharmaceutical companies are

looking into using video games for healthcare.

Neurological conditions such as autism, ADHD

and depression may benefit from these type of

‘digital therapies’. Akili Interactive Labs, a

Boston-based company that develops mobile

video games to treat ADHD and other

neurological conditions have created a product

called Project: Evo. The company raised

$30.5m of equity investment last month to fund

a large-scale clinical trial. PTC Therapeutics

Inc., a pharmaceutical company focused on the

development of small molecules, fell more than

35% following news of the company’s refusal to

file a letter from the US Food and Drug

Administration.

It was another stable week for the

Pharmaceutical & Biotechnology sector as

share prices remained in line with the general

market consensus. We will expect to see more

advances in the sector and the emergence of

newer technologies as well as the increased in

mergers between the technology and

healthcare sector.

Samuel Tan

NASDAQ Biotechnology Index (NBI)


17

Oil and Gas

Oil and gas news this week has been

dampened by the announcement by the Saudi

oil minister, Ali al-Nani, that a deal by major

producers to cut output was simply not on the

cards. Such a bathetic announcement was

received poorly, and the price of Brent crude

subsequently fell $1.33 down to $33.35; the

minister cited “mistrust” as the reason behind

his decision.

In addition, Spanish giant Repsol became the

next oil major to announce a dividend cut, which

decreased to €0.30/share from €0.50/share.

While this has been opposed by its

shareholders, the news is hardly surprising

when we note the €1.2 billion net loss in 2015.

Across the pond in the US, Chesapeake (the 2nd

largest gas producer in the US) made clear the

effect that the slump has had on them, with a

swing in profits from the 2014 level of $1.3

billion to a $14.9 billion loss last year.

Consequently, the giant aims to cut capital

spending this year by 69%. These are steps

that perhaps should be taken by one of the UK’s

largest independent gas firms, Premier Oil,

which is allegedly in discussions over its

banking practices; it is suspected that they are

close to confirming a refinancing deal.

As we move into the medium term, macro

indicators are starting to flounder. Investment,

particularly in new offshore oil and gas projects,

has lurched. Industry Body Oil and Gas UK

announced this week that less than £1 billion is

to be spent on new projects as opposed to the

£8 billion that has been spent each of the last

five years. This is a cut back of immense

magnitude and comes despite the cost-cutting

initiatives many companies are taking. To put

this into perspective, take the case of

Petroceltic, Dublin-based oil and gas explorer,

which just received a bid of £6.4 million from a

unit of its biggest shareholder. This amount is

84% of its previous valuation; Sunnyhill (a unit

of WorldView), made a 3p/share offer, a great

deal smaller than the 18.4p/share level that the

company was trading at a day earlier. Evident,

then, is the parlous nature of oil and gas giants

at the moment.

Moving East however, oil rose on Friday for the

first time in 8 weeks following supply disruptions

that affected Northern Iraq and Nigeria; Brent

Crude futures rose by as much as 5% (as

shown in the graph below), as did West Texas

Intermediate which reached a high of $34.69.

This reaction to a supply disruption shows the

potential benefits of a production freeze, should

the Saudi minister come on board.

Tom Dooner

NEFS Market Wrap-Up

18

Retail

British Retail and Consumer goods equities

ended slightly lower this week as Brexit

referendum fears mounted, with knock-on

effects to the pound. The FTSE 350 Retail index

fell by 0.74% over the course of the week, yet

the Dow Jones Consumer Goods Index rose by

1.02%. The sector hasn't been the stage for

much volatility last week, although over the past

month there were some major developments

worth noting in greater detail.

It is obvious that online trade will continue to

soak up demand from traditional high street

retailers. However, the spearhead of this main

disruption, Amazon, again recently suggested

that it's still finding it difficult to remain

profitable, making it worthwhile to analyse. Its

share price tumbled by 13% after it released

weaker than expected profits for the 4th quarter

at the end of January, despite the fact that sales

surged by over 26%. Profits were a third lower

than Wall Street expectations, even though it

performed better than brick-and-mortar retail

department stores such as Macy's and Best

Buy. The main reason for its downbeat profits is

that in order to maintain sales, its sales margins

are pushed so close to zero that its aggregate

profits appear flat when compared to sales, as

shown by the graph below. In addition, its

operating costs have been rising, but Amazon

does have a reputation for focussing on growth

and investment instead of profits, so it doesn't

come as a huge surprise. Yet, Investors are still

optimistic about its diversified portfolio. The

bounce in its share price last April has been

underpinned by growth in its fastest growing

and highest margin cloud computing business,

Amazon Web Services, which uplifted profits.

Amazon was not the only company to have

billions wiped off its share price recently though.

Particularly over the past three months Apple

has been tumbling and the stock closed 6.6%

down after investors reacted over its poor

results. Since hitting a record high last year,

investors have grown increasingly concerned

over its cooling sales growth as its share price

has plummeted by over 20% since the start of

November.

Evidently, huge conglomerates such as

Amazon and Apple put a strong emphasis on

sales momentum, yet underlying profitability

factors do make it difficult to justify their book

value. It will be interesting to see how investors

respond over the coming months to the

possible realisation that these stocks may be

maturing and that moving money to newer

markets with bigger growth potential could be

worthwhile.

Sam Hillman


19

COMMODITIES

Agriculturals

This week marked the end of last week’s rally

in corn and Soybean futures, as increased

supply of each respective commodity resulted

in futures dropping slightly. For Soybeans in

particular, analysts noted that forecasted

Brazilian crops put significant pressure on

future pricing. Whilst the nominal sizes of the

decreases were very small and ultimately

insignificant as elucidated below, the

importance of the decrease is simply the

aforementioned end of the rally. According to

Business Insider: “The most active corn

contract for May delivery lost 2.25 cents, or

0.61%, to close at 3.645 dollars per bushel. May

wheat delivery fell 4.5 cents, or 0.99%, to close

at 4.5125 dollars per bushel. May soybeans

decline 0.75 cents, or 0.09%, to close at 8.7225

dollars per bushel.”

In much the same vein, Wheat declined

significantly on Wednesday, with some analysts

noting that expectations of bigger wheat

inventory from the USDA pushing down prices,

despite last week’s news of Egyptian

purchasing resumptions. Not only this, but other

analysts noted concurrent demand concerns,

with the European Union holding a great deal of

inventory and struggling to find sales.

It is also worth noting that agricultural

commodities futures are inextricably linked to

other major financial indices, such as equities

and other commodities, given the diversified

portfolios held by many investors. For example,

this week saw notable increases in many stock

markets, and a rise in the price of crude oil,

making many speculators switch their asset

allocations accordingly. As such, crude oil and

stock purchases will have resulted in not only

less purchasing of agricultural commodities, but

also potential sell-offs; lowering the price level

of agricultural commodities in a plethora of

ways.

This is interesting and significant as it

demonstrates the dual nature of agricultural

commodities, both as instruments for

investment and speculation, in addition to basic

necessities for human consumption. This

results in an abundance of ways in which prices

can fluctuate, and amidst a global backdrop of

economic uncertainty aligned with major

movements in other asset classes as previously

mentioned, many agricultural commodities

could exhibit significant price changes in the

coming weeks and months.

Jack Blake

NEFS Market Wrap-Up

20

Precious Metals

Following a slight appreciation of silver and gold

in the period of Wednesday to Friday of the

previous week, the prices peaked on the 18th

and 19th respectively, ending up in a slight dip

on the 22nd February. Nevertheless, both

values strengthened since then, up to 24th

February.

The continuous slight increasing value of gold

has been affected by strengthening equities.

US dollar appreciation among weakening other

major currencies (except the Japanese yen)

has had an additional effect on precious metals

prices. For instance, the depreciation of GBP

resulted mainly due to increasing concerns of

Britain leaving the EU. Furthermore, slightly

increasing inflation rates in the US contributed

to the outcome and was observed as combined

result of increasing rents and healthcare costs.

These factors allow for the inflation rate to

return closer to target 2% in a shorter term

(currently at around 1.7%) and for the Federal

Reserve to increase interest rates after a delay

since January.

Developments in China’s foreign exchange rate

policy resulted in slow although continued

depreciation of the currency (decreasing by 5%

since January 2015), and the G20 summit in

Shanghai on 26th-27th February will allow a

discussion on stabilising the volatility of China’s

markets. The meeting on 26th suggests that,

despite the negative impact on its exporters,

China is likely to slow the depreciation of

Renminbi to improve competitiveness of the

global market. However, a changing trend in

yuan stability might result in a depreciation of

gold.

In the metals markets only gold appreciated,

increasing by 2.31% from 1210.10 USD/t. oz.

from 22nd to 26th February. In the period 18th

– 22nd Silver depreciated by 1.55%, regaining

its position slightly on the 24th to 15.33 USD/t.

oz. Platinum followed a similar trend to Silver,

declining over the same period by 1.76% and

appreciating on the 23rd to 944.50 USD/t. oz.

(Figure 2). Appreciation was followed by a

decline, with Silver ending at 15.165 USD/t.

and Platinum at 919.98 USD/t. on the 26th

February.

Goda Paulauskaite

Gold

Platinum


21

CURRENCIES

Currencies

This week Bloomberg experts forecasted a

stagnation of the inflation rate in the Euro-area,

slipping back to zero. Additionally, further price

decreases of oil could lead to further

deterioration. The euro-wide downturn will

follow disappointing numbers from Germany,

France and Spain, where the readings were

worse than expected. To confront this

backdrop, the ECB is expected to ease its

monetary policy again. Actually, the ECB has

already started pumping additional money into

the economy. It dropped its deposit rate to -

0.3% and purchased assets in the worth of 60

billion Euro. Consequently, EUR/USD dropped

to 1.0938 on Friday.

Accordingly, San Francisco’s Fed President

John Williams stated on Thursday that “it just

makes sense” to continue policy tightening

looking at the GDP growth of 1% exceeding the

forecasts. However, the USD can’t be

considered safe yet, as consumers in the

United States are finally infected with insecurity

about the future performance of the US

economy. The Consumer Confidence Index

has shown a drastic decline in February after

the consumers gained confidence in January.

The fading confidence finally is indicating a

more conservative spending behaviour which

could affect the inflation rate in the US. This is

probably the response to the current state of the

global economic situation. Hence Williams

acknowledged that “there are big movements

going around in the global economy and

inflation that we have to adjust to”.

At the G20 Meeting, starting Friday the 26th of

February, Zhou Xiaochuan, governor of the

People’s Bank of China, said that the USD is

still the most important currency in the basket of

currencies against which China’s central bank

pegs the Yuan. By stating this, Xiaochuan

explained why China can assert that the Yuan

is pegged against a currency basket while it

sets the daily reference rate against the USD.

With this message, he is able to manage

markets expectations and keep the currency

stable.

The other major Asian currency, the Japanese

Yen, has been highly volatile against the USD

this week, as shown in the graph below, as the

recently released Tokyo Core CPI, which is the

most important consumer inflation release in

Japan, illustrates a deflationary trend. This has

led to the expectation of further QE resulting in

a depreciation of the Yen on today’s Friday with

a day’s high at 113,97506.

Alexander Baxmann

NEFS Market Wrap-Up

22

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 12