NEFS Market Wrap Up Week 13

Week Ending 6th March 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

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China India

Russia and Eastern Europe Latin America

Africa Middle East

Equities

14

Financials Pharmaceuticals

Retail

Commodities

Energy Agriculturals

Precious Metals

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Currencies 20


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MACRO REVIEW

United Kingdom

Markit’s Purchasing Manager’s Index (PMI)

tracks business conditions in various sectors of

the economy, with a reading above 50

indicating expansion, and a reading below 50

indicating contraction. The index for the UK’s

services sector fell to 52.7 in February, down

from 55.6 in January. As shown on the graph

below, this is the worst reading since March

2013. The slowdown in services is attributable

to falls in the volume of new business. The

increased risk of Brexit, alongside financial

market volatility and weak domestic and global

growth, mean clients are delaying placing new

orders.

The construction and manufacturing PMI

results are also at their lowest levels in over a

year, at 50.8 and 54.2 respectively. These two

sectors account for 16% of the UK economy –

but the services sector accounts for over 75%.

Therefore this data has raised fears that GDP

growth could fall to 0.3% or less in the first

quarter of 2016. It also makes it more unlikely

that the Bank of England will raise interest rates

soon. Alan Clarke, head of European fixed

income strategy at Scotiabank, has said this

could even lead the Bank of England to

consider a cut in interest rates.

The weak PMI data serves as a signal that the

prospect of Britain leaving the EU is damaging

the economy. A referendum is due to be held

on 23rd June. None of the foreign exchange

strategists who participated in a poll by Reuters

this week thought that a Brexit would benefit the

UK, with over half forecasting that it would lead

to a sterling crisis. Recently, the pound fell to a

seven year low, due to expectations that

sterling will fall even lower if a Brexit occurs.

The world’s largest asset manager, Blackrock,

has said that Brexit would: damage the UK

economy, particularly the financial, fashion and

property markets; trigger lower growth and

investment; lead to higher unemployment and

inflation; and pose risks to sterling and UK

equities. Blackrock have also stated that the

UK’s £18.5bn surplus in financial, insurance

and pension services was likely to contract - if

10% of workers became redundant following a

Brexit, the government could lose up to £3bn in

annual employment taxes.

Shamima Manzoor

Markit Services Sector PMI

NEFS Market Wrap-Up

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United States

The US economy is set to “power ahead” and

push inflation back to target despite hazards

overseas, John Williams, the president of the

Federal Reserve Bank of San Francisco said in

an assessment of the current US economic

climate. Despite the recent winds of gloomy

warnings, Mr Williams talked down the

recession fears and flagged up risks associated

with leaving interest rates too low for too long.

To some extent, this bullish assessment of the

economy is not completely implausible. The

resilience that the US economy has shown in

the face of developments such as the 20%

surge in dollar is quite remarkable and one that

is projected to divide the Fed’s policymakers at

the Central Bank’s meeting, planned in late

March.

In other news, US construction spending

surged in the first quarter of 2016 to the highest

level since 2007 when it bottomed at $0.78

trillion, as shown on the graph below.

Construction spending increased 1.5% to $1.14

trillion, as both private and public outlays rose,

the Commerce Department said on Tuesday.

First-quarter gross domestic product growth

estimates are currently as high as a 2.7%, but

the strong construction spending report could

prompt economists to raise their forecasts.

The year 2016 seems to be an optimistic one

not only for US businesses but also the young

graduates seeking professional jobs, thanks to

an aging US workforce and low unemployment.

Amidst all the political conjecture, you do not

have to dig far below the surface of recent jobs

reports to discover why billionaire Donald

Trump this week solidified his place as the

Republican frontrunner. Mr. Trump secured

“Super Tuesday” victories in a wide variety of

states from north-eastern and wealthy

Massachusetts to southern and poorer

Alabama. Mr Trump’s economic policy hangs

largely on cutting taxes and protectionist

promises to raise tariffs on China and Mexico to

bring offshore jobs back to the US. Such

economic anger has been a big theme in this

election campaign so far and one that Donald

Trump seems to successfully capitalising on.

Vimanyu Sachdeva


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Eurozone

Eurozone lenders and the International

Monetary Fund (IMF) disagree over how much

more Greece needs to do to reform its

economy, a dispute that may delay new pay-

outs and the start of debt relief talks, officials

said this week.

Greece has been kept afloat since 2010 by IMF

and Eurozone bailouts. The lenders have

disagreed in the past, but they have managed

to resolve their issues before they received

much publicity. But after Athens had to ask for

a third bailout last year, some in the IMF wanted

to stay out of yet another programme unless

they were sure it would get Greece back on its

feet.

"The main problem now is disagreement

between the institutions, because that will harm

the credibility of any solution," one senior official

said. "They must get their act together and

agree on a scenario and on policy measures."

IMF and Eurozone officials hope to reach a

compromise on Greece in talks this week,

before a meeting of Eurozone finance ministers

on Monday.

Until the Eurozone and the IMF agrees, they

cannot decide if Greece has met the first

requirements for the pay-out of new loans. Nor

can the Eurozone start discussions with Athens

on debt relief that would help make Greece's

huge debt sustainable. Greece has no major

debt redemptions due until July, giving the

lenders and Athens time to find a compromise.

But the drawn-out talks undermine investor

confidence.

The dispute focuses on what Greece has to do

to reach a 3.5% primary surplus in 2018 and

keep it there so that it no longer has to borrow

from the Eurozone to remain solvent.

The IMF believes Greece's primary surplus in

2018 will be around 2% with the current

reforms. Growth will be about a percentage

point lower than forecast by the Eurozone.

Greece should therefore be more ambitious

with reforms, especially with the most politically

difficult, pension reform.

The pension reform could be less ambitious

and the 2018 primary surplus lower if the

Eurozone offered Greece greater debt relief.

That would irk some in the Eurozone who have

to maintain similar surpluses to keep debt

sustainable or who, like the Baltics or Slovakia,

find it difficult to justify Greeks getting bigger

pensions than their own citizens.

Erwin Low

NEFS Market Wrap-Up

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Japan

This week, yields on Japanese government

bonds turned negative for the first time,

meaning that people are now paying the

Japanese government for the privilege of

lending them money. This is symbolic more

than anything, as yields have been rapidly

approaching zero over the past few weeks (see

graph below), however, this emphasizes the

extent to which borrowing costs in Japan, and

around the world, have dropped, highlighting

the failure of recent unconventional policy

measures implemented by the BoJ, who hoped

that by cutting interest rates into negative

territory they would be able to stimulate

investors into putting their money into riskier

assets. Nowhere is the problem faced by

authorities in Japan more noticeable than in the

case of the Japan Post Bank, which was

privatised by the Japanese government six

months ago in the hope that ordinary investors

– the so-called Mrs Wantanabes of Japan –

would be tempted into investing in equities.

Falling yields on Japanese government bonds

have squeezed the profits of the Japan Post

Bank and its share price is now 20% below the

IPO level. This will have hurt the confidence of

many ordinary investors in Japan and this,

therefore, demonstrates the policy

contradictions which are present in Japan at the

moment.

In other news, figures for capital spending and

retail sales were released this week. It was

reported that capital spending for japan in the

final quarter of 2015 grew by 8.5% from a year

earlier, which is lower than the forecasted 8.8%

gain and down from an 11.2% gain in the

September quarter. This fall may have been

caused by decreasing business confidence,

which itself is attributable to a contracting

economy, volatility in financial markets and

gains in the yen, which have eroded the

competitiveness of Japanese goods overseas.

With retail sales, at -0.1%, also lower than their

forecasted value, which was 0.2%, many

economists think that GDP growth may be

revised, from an initial projection of a 1.4%

drop, to a contraction of 1.5% when updated

figures for GDP are released next week. As has

been the case for many years, figures for

unemployment remained low this week and

actually fell to 3.2% from 3.3% in January. This,

however, becomes less impressive when you

realise that average cash earnings increased

by a measly 0.4% last month.

Daniel Nash

Greece has been kept afloat

since 2010 by IMF and

Eurozone bailouts. The


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Australia & New

Zealand

Economists expected the end of the mining

boom to bring turmoil to Australia’s economy for

months to come, however the latest figures on

Australia’s growth show otherwise. As shown

by the graph below, Australia enjoyed 3%

growth in 2015 as output rose by 0.6% in the

December quarter. ABS said that “the major

contribution to economic growth” came from

household final consumption expenditure, with

0.4 percentage points to GDP growth, and

public gross fixed capital formation with 0.2

percentage points. This was caused by lower

petrol prices, rising house prices and falling

saving rates, which encouraged consumer

spending. This offset a slump in private

business investment (-3.3%), driven by a fall in

new engineering construction (-12.3%).

Craig James, CommSec economist, stated that

Australia is now one of the fastest growing

economies in the developed world. After the

collapse of the mining industry caused

devastation throughout the economy, this news

boosted consumer and business confidence,

aiding growth. The news helped prop up the

Australian dollar to US72.29c.

Elsewhere, New Zealand’s terms of trade

declined in the fourth quarter due to weaker

meat and dairy prices. Import volumes rose

0.7% and the value fell by 1.9%. Export prices

fell more than import prices, as seasonally

adjusted export volumes and values fell by

2.4% and 6.1% respectively. The decline was

led by milk powder and butter. A weaker dairy

market hit KiwiRail and Port of Tauranga who

suffered from the drop in export volumes. Meat

values fell by 2.4%, led by a 6.6% drop in beef,

despite a 16% surge three months earlier.

However, Christina Leung, NZIER senior

economist, implied that although prices for dairy

exports have sunk, strong population growth,

construction and tourists are helping to offset

such downturns. She stated that they will be the

“key driving forces behind solid growth for the

next few years” and expects annual GDP

growth to recover to around 3% over 2016.

But Leung did warn that “tough international

conditions” could make this trifecta effect less

strong. She mentioned that current volatility in

the global financial markets indicates how

quickly things can change and that the US

Federal Reserve’s interest rate plans are still

being digested throughout the global economy.

New Zealand’s Reserve Bank is said to be

becoming “increasingly mindful” of their loose

monetary policy on asset prices and financial

stability.

Meera Jadeja

NEFS Market Wrap-Up

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Canada

It was revealed this week that the Canadian

economy in the fourth quarter of 2015 grew by

0.2% as we can see on the graph below. The

growth rate decreased from 0.6% in the

previous quarter. The Canadian GDP growth

rate for the whole of 2015 was revised to 1.2%.

This was despite the fact that Canada was in a

technical recession for the first half of 2015,

after recording two consecutive quarters of

negative growth.

The decline in the Canadian GDP growth rate

is partly due to Canada exporting less, in 2015

it exported a value of $408.7 billion (US dollars)

of goods. This figure is down by 13.7% from

2014. This could be partly due to the big

decreases in the price of oil in the previous

year. Oil accounted for 19% of Canadian

exports in 2015. In 2015, of the top ten

importers of Canadian goods, all ten imported

high quantities of oil from Canada. The US,

Canada’s biggest export recipient (76.8% of

Canadian exports go to the US) imported $74

billion of oil in 2015 alone. Canadian exports

decreased by 0.6% in the fourth quarter of

2015. Consequently, a decrease in global oil

prices have greatly impacted upon the

revenues of the Canadian government.

Moreover, another cause in the decrease in

GDP growth in 2015 compared to 2014 was a

decline in investment in Canada. This can be

shown by the decrease in business gross fixed

capital formation, which measures net

investment into the Canadian economy. As

investment is a component of output a decline

in the level of investment decreased GDP

growth.

In other news it was announced that the

Canadian merchandise trade deficit rose in the

first month of 2016 from $0.63 billion to $0.66

billion. The increase in the value of the deficit

can be accounted for by an increase in exports

of 1.0% and a corresponding increase in

imports of 1.1%. The main reason for the

increase in exports was a rise in consumer

good exports of 13.7%. If we compare this to

January 2015, exports have grown by 7.3% and

imports have increased by 4.4%.

Kelly Wiles


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EMERGING MARKETS

China

Rather surprisingly, China started off this week

by cutting its reserve requirement ratio, which

stipulates how much cash banks must keep in

reserve. The half a percentage point cut to 17%

for large commercial lenders was the first of the

year, freeing up CNY685 billion in funds. The

People’s Bank of China stated that the cut is

designed to “ensure adequate liquidity, and to

ensure a steady expansion of credit, in order to

provide a suitable financial environment for

supply-side structural reforms”. The shock is

significant given the huge amount of liquidity

that has been pumped into the system recently.

While this may boost the economy in the short

term, the view on Chinese policymakers’

confidence in the economy is concerning. The

policy move exacerbates downward pressure

on the Yuan, which is likely to be absorbed by

further declines in Chinese foreign exchange

reserves. However, further capital outflows

could nullify this new monetary stimulus.

Moody’s cut its outlook on the Chinese

economy to negative from stable amid growing

uncertainty and diminishing government power.

The credit rating agency left its long-term credit

rating at Aa3, the fourth-highest investment

grade.

This week on the economic calendar, official

and Caixin purchasing managers’ indices (PMI)

for manufacturing and non-manufacturing

sectors have been released. China’s official

factory gauge declined for a record seventh

straight month to a figure of 49.0, missing

estimates of 49.4, as shown in the graph below.

Official non-manufacturing PMI came in at 52.7,

also lower than the previous month’s figure of

53.5, bringing it to its weakest level in seven

years. Measures of new orders, selling prices,

employment, backlogs and inventories

presented a figure below the 50-point mark,

suggesting a weakening economy. The Caixin

PMIs for both the manufacturing and non-

manufacturing sectors came in lower than

forecasted and lower than last month’s figures.

Premier Li Keqiang is expected to reveal a

growth target of between 6.5% and 7% at the

upcoming National People’s Congress, slightly

lower compared to last year’s target of around

7%. With debt levels at an unprecedented

247% of gross domestic product and current

rapid capital outflows, how the Chinese

government plans on achieving such a goal will

be of significance to the global economy.

Sai Ming Liew

NEFS Market Wrap-Up

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India

With one eye on upcoming elections, the

government this week announced a politically

smart, $288mn budget aimed primarily at

India’s farmers, who make up the majority of the

country’s 1.2bn people. Finance Minister Arun

Jaitley outlined the government's

"transformative agenda" for the economy and

whilst investors seeking liberal economic

reforms were left disappointed, India’s rural

economy was promised $13 billion of

development.

The ‘pro-poor’ budget ambitiously aims to

double farmers’ incomes within the next five

years and includes a pledge to set up 89 new

projects for irrigation whilst also pushing for the

completion of old ones. This follows two

consecutive years of drought which has left the

farming sector, and the two fifths of Indian

families who rely on it, reeling. The government

will also raise spending on a rural employment

scheme, a crop insurance programme and

focus on increasing rural access to the internet.

Investment in agriculture is urgently needed

since India’s farmers are still massively

monsoon-dependent and it seems that the

poorest in society are yet to benefit from India’s

rapid economic expansion. The budget also

offered relief for small tax payers as the ceiling

of tax rebate for people earning an income of up

to Rs 5 Lakhs per year was raised to Rs 5000

from the current Rs 2000. Over a million tax

payers are expected to benefit from this

measure. Elsewhere, $32bn is to be allocated

for infrastructure development in 2016-17, an

increase of 22.5% from last year, building

10,000km of national highways and upgrading

another 50,000km.

Despite these spending pledges, India will stick

to its fiscal deficit target of 3.5% for the coming

year after achieving 3.9% in the current year.

There was much speculation surrounding this

decision and many would have liked to see

Jaitley stretch the deficit target in order to

recapitalise public sector banks, which will

receive a capital injection of just $3.6bn. This is

a small fraction of the $26bn that a state

banking sector weighed down with bad loans is

estimated to need in order to stabilise it.

The absence of bold economic reforms left

investors and analysts dissatisfied, with the

stock market closing 0.7% down on the day of

the announcement. The GST Bill was

mentioned only in passing and the lack of

private investment is still an issue which needs

to be addressed.

Homairah Ginwalla


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Russia and Eastern

Europe

Tensions throughout Europe have taken a turn

for the worse this week, with Eastern Europe

being on the receiving end of high amounts of

criticism from Brussels. Merkel has denounced

Eastern Europe for its poor approach to aiding

the Migrant Crisis that is currently plaguing the

southern European states of Greece and Italy,

as well as Hungary. Some of the Western-most

countries of Eastern Europe, such as Croatia,

Serbia and Slovenia, have adopted a very

independent approach to the crisis, which has

included introducing tighter entry conditions,

closed borders, and a possible cap on asylum

applications. This has angered politicians in

Brussels, stating that this uncooperative

response to the crisis is merely prolonging the

economic detriment ailing the Greek and Italian

economies, which are still recovering after the

2008 Economic Crisis. Additionally, the

response is placing greater pressure on

Germany and other nations to open their

borders. Solving the Migrant crisis currently

afflicting the political, social and economic

scenes of Europe is undoubtedly of the highest

importance, and yet a solution can only be

found by ensuing a collaborative, swift and

tolerant response from a united Europe.

Eastern Europe has also been condemned by

British politicians in its response to the possible

2016 ‘Brexit’. Following discussions between

Brussels and the UK, numerous Eastern

European states, namely Poland, Romania and

Bulgaria, have spoken out about the numerous

negative consequences a UK exit will have on

their economies. Britain is the fourth highest

contributor to the EU, and, through the robust

nature of its economy, has fuelled the economic

growth of new EU members with investment

and trade. British politicians have judged that

this self-interested response from many

economically successful Eastern European

countries is only focused on the future

prospects of their economies.

Yet with investment figures released for the

fourth quarter of 2015, Eastern Europe

fortunately continues to see very strong

investment levels. Hungary fared the sturdiest,

having imposed record low interest rates of

1.35% in July 2015 (see graph below). Overall

investments increased by 7%, with investment

performance seeing a 0.7% rise. Most

substantially, public investment rose by 70%,

and health and social work investment

increased by 110%. With very strong levels of

investment, it can be anticipated that the first

quarter of 2016 has also proved industrious for

Eastern Europe.

Charlotte Alder

NEFS Market Wrap-Up

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Middle East

The UAE’s non-oil private sector showed a

rebound in growth last month, with output rising

at a marginally faster rate, according to the

Emirates NBD UAE Purchasing Managers’

Index (PMI) released this Wednesday. In the

United Arab Emirates, the Emirates NBD UAE

Purchasing Managers’ Index measures the

performance of companies in non-oil private

sector and is derived from a survey of 400

companies, including manufacturing, services,

construction and retail.

As shown in the graph below, the February

index rose to 53 from a 52.7 in January,

signalling growth in the non-oil private sector

compared to persistent slowdown in four of the

previous five months.

The overall improvement in business conditions

was helped by expansions in output, new

orders and employment. All three variables

rose slightly faster than in January, but the

respective indices remained below long-run

trends.

Analysts have attributed faster jobs growth to

increased workloads and new project start-ups.

The increase in new work was also sufficient to

lead to further growth of business, while the

report stated that staff costs were relatively

contained. Overall input costs increased at a

slightly faster rate in February, but price

pressures remain modest as US dollar strength

and low commodity prices helped in keeping

producer inflation contained.

Moreover, the report showed that purchasing

activity and inventories rose at a similar pace to

January, but the rate of increase in both

remained relatively modest at 53.6 and 52.3

respectively. Backlogs of work also increased

only slightly last month and remain low by

historical standards, suggesting there is spare

capacity in the UAE economy. Because of this

spare capacity, analysts hope that in the

coming months the PMI can again reach the

levels hit in the middle of last year.

“The improvement in the Emirates NBD UAE

PMI last month is encouraging, particularly

against a backdrop of low oil prices, global

growth concerns and a strong dollar. However,

the rate of growth in the non-oil private sector

remains much weaker than a year ago, when

the headline PMI registered 57.1. We expect

the environment over the coming weeks to

remain challenging, with several global factors

weighing on sentiment and activity,” said

Khatija Haque, Head of Mena Research at

Emirates NBD.

Harry Butterworth


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EQUITIES

Financials

As a result of the impending disappointment of

the financial markets, it comes as no surprise

with the announcement of further capital

requirements for the world’s largest banks. On

Friday, the Basel Committee on Banking

Supervision officially banned banks from

initialising their own assessments of risk. Global

regulators restricted these banks on using their

own models for calculating operational risk -

which accounts for up to 28% of the total risk to

some banks - stating that they are now required

to hold a larger quantity of capital in order to

counter the minimal risk illusion that banks try

to portray. Greater transparency will hopefully

see improved equities as a result.

Whilst some banks are having this capital crisis

as a result of poor financial performance, we

see that some who are trying to list their

company shares on the equity markets face

even greater problems. London in particular

has dominated the European market for Initial

Public Offerings (IPO’s) so far this year, with the

UK accounting for a massive 72% of the total

raised through entry into the equity markets.

The early months are usually slower due to

companies awaiting previous year’s financial

results, with only one US company listing their

shares on the market in January.

This huge rush for listing UK shares on the

stock markets comes as the EU referendum

and its attached uncertainty looms ever closer.

As a result a massive $1.8 billion has been

raised so far this year by ten IPO’s on the

London Exchange – a 17% rise from last year.

The concern within the UK is proven through

comparison to European IPOs (excluding

London), where only $700 million has been

raised – a huge drop of 90%. Clearly the

uncertainty surrounding financial markets is

continuing to take its toll and with the UK’s

stance in the financial world being under

persistent questioning, the financial markets

are only going to face struggles from here on,

with investor confidence being a huge

determinant.

But, with so many factors weighing down the

markets, it’s a relief for investors to see that the

Dow Jones US Financials Index is up 4% over

the past week, whilst the FTSE 100 Index –

which is primarily composed of financial

companies – is up almost 2% in the past week,

as shown by the figure below. So with greater

restrictions seeing more transparency we see

growing performance in the financial industry.

Daniel Land

Dow Jones US Financials Index vs FTSE 100 Index

FTSE 100

Dow Jones

NEFS Market Wrap-Up

14

Pharmaceuticals

This week we have seen the FTSE 350 Index -

Pharmaceutical & Biotechnology rally by 3.42%

and the NASDAQ Biotechnology Index rally by

4.36%. This week has been positive for the

Pharmaceutical sector as the two indices have

increased by 3% to 4%.

AstraZeneca has struck a $500m deal to sell

the marketing rights for two heart drugs in the

latest example of the UK pharmaceuticals

group using licensing agreements to boost

revenues. China Medical System Holdings will

pay AstraZeneca $310m for the rights to sell its

Plendil blood pressure medicine in China and

$190m for its Imdur angina treatment in all

regions except the US. The deal to market

Plendil in China highlights growing

collaboration between western and local

manufacturers in the world’s second-largest

pharma market. These agreements can help

multinational groups widen their reach in China

while giving local companies access to strong

branded medicines.

Valeant shares slump 6% after company

reschedules its earnings release. The company

made the announcements as its chief executive

Michael Pearson returned from medical leave

and the Canadian drug maker moved to split its

chief executive and chairman roles. Valeant

came under fire last year for its drug pricing

strategy, as well as for accounting issues and

its relationship with the specialty pharma

network Philidor. Shares of Valeant are down

59% in the last year, while the S&P has been

down 7% from a year ago.

In other news, Sanofi, another pharmaceutical

company, is open to acquisitions in the market

for rare disease treatments in a sign of

confidence that the high prices commanded by

orphan drugs are sustainable. David Meeker,

the head of Sanofi’s Genzyme specialty care

business, said rare disease assets were among

the French group’s potential targets as it hunted

growth. Orphan drugs command the biggest

margins in the sector because of the small

number of patients from which manufacturers

can make returns on investments.

It was a good week for the Pharmaceutical

sector as the overall sentiment for the

Pharmaceutical sector has been positive and

there has also been huge progress in the fields

of cancer research. All in all, this year would be

a transformational year where there would

potentially be many breakthroughs in the field

of medicine and biotechnology.

Samuel Tan

NASDAQ Biotechnology Index (NBI)


15

Retail

This week consumer groups overtook the

financial sector as the largest component of the

FTSE 100 as many of these companies have

become a haven for investors who have

recently been looking for companies with

relatively safe balance sheets and strong

earnings. Consumer goods rose consistently

this week with the FTSE Consumer Goods

Index up 7.33% and general Retailers have

also risen. The FTSE 350 retail index finished

up by 2.5% from the start of the week to midday

on Friday.

Companies such as Unilever, Diageo and

Burberry have risen to become dominant

members of the FTSE 100 as investors shy

away from banks in a world where interest rates

are so low. The five banks in the index have

fallen in value by £37.8bn since the start of the

year to the end of February. Aberdeen Asset

Management was also recently demoted to the

FTSE 250 and Sports Direct, the sportswear

retailer which has experienced problems similar

to that of Poundland (explained below) was also

dropped from the group. A decade ago

consumer goods groups made up only 9.3% of

the index but now they take up 20.85%.

In the same vein as previous weeks, investor

sentiments over the prospects of high street

retailers can be illustrated from major

reductions in a number of equities over the last

few months. As seen below, Poundlands

market value has halved over the last of six

months, leading its chief executive, Jim

McCarthy, who had been at the helm for over

10 years, to quit this week. Along with many

other UK retailers, Poundland has had a tough

time given that spending habits are shifting in

favour of online shopping. On top of competition

from other high street multi-discount rivals such

as B&M, it has suffered costs from the

integration of the 99p stores acquisition made

last year. Furthermore, like other retailers it has

been trying to adapt in order to absorb

increasing labour costs. From April 1stof this

year, the UK's new national living wage initiative

will raise the minimum wage for over-25s to

£7.20 an hour, from £6.70 now. Poundland has

responded by switching to LED lighting in

stores, cutting its electricity bill by a third and

continuing expansion in foreign markets such

as Spain, where it has seen relatively

successful trial results.

Given that the consumer goods sector has

shown stable and strong performance in

comparison to other sectors, notably the

financial sector, stocks from this sector are

likely to perform well in the near future.

Traditional high street retail stocks on the other

hand remain subdued and I believe this trend is

unlikely to change because spending habits are

fundamentally changing.

Sam Hillman

NEFS Market Wrap-Up

16

COMMODITIES

Energy

Oil prices climbed nearly 3% on Monday after

the Chinese government took measures to

intervene in its slowing economy. The Chinese

government made the decision to cut its

required reserve ratio – the amount banks must

hold in cash – in a move to boost investment.

This has a major impact on the oil price as

China is the world’s largest importer of the

commodity. In addition to this, the US and

OPEC’s output fell, while Saudi Arabia vowed

to help stifle the current market volatility,

indicating that the market selloff might finally be

nearing its end.

Both WTI and Brent Crude rose further on

Wednesday to their highest prices in 2 months,

as the planned production cap by the world’s

major oil producers began to appear credible.

Venezuela’s oil minister, Eulgio del Pino, stated

that more than 15 nations were prepared to

attend a meeting to deliberate over a potential

output freeze. Vladimir Putin also expressed his

support saying ‘On the whole, an agreement

was reached that we will keep oil output at

January level.’ However, data was also

released on Wednesday that showed US crude

oil stocks had risen by a further 10 million

barrels to 495 million. This caused any overall

gains to be cancelled out, leaving the price

roughly where it started the day.

The price of crude futures increased on Friday

due to positive US jobs data, adding further to

the week’s gains. Brent is likely to end the week

5% higher. Prices had been rising steadily,

supported by US production cuts. But traders

had been holding back to hear news of the

imminent Non-Farm Payrolls Report. A net

increase of 242,000 jobs was sufficient for a lot

of investors to open long positions and the

benchmark’s price increased markedly late on

Friday.

If current trends are to continue, and we have

actually reached the end of the glut, then prices

should be expected to rise gradually over the

rest of the year as demand re-equilibrates with

supply. However, this is highly dependent on a

formal agreement being reached over the

prospective coordinated production freeze.

William Norcliffe-Brown


17

Agriculturals

Grain futures may be set for a revival in pricing,

according to analysts at ABN Amro, who predict

that prices have now ‘bottomed out’ after a four

year slump. Frank Rijkers, commodities analyst

at ABN, said that “the fact that prices have

been moving sideways for the last few weeks

would seem to indicate that prices have now

bottomed out”, citing the end of three years of

over production finally coming to an end, with

consequential signalling to farmers to lower

their production, further lowering prices.

Evidence for this can be seen in the

International Grain Council forecast of 1.4%

lower production for 2016-17, as farmers no

longer look to maximise output, given the

weak incentives provided by lower prices.

The bank also noted the role of projected crop

yield shortcomings in lowering prices, with

inclement weather conditions in South Africa,

for example, resulting in projected yields of far

less than previous peaks. This will, of course,

lower supply even further, and raise prices as

a result.

It is also interesting to note that ABN forecasts

a rebound in oil prices, which, despite not

being an agricultural commodity in itself, has

a number of knock-on effects for a plethora of

agricultural commodities, including grains. For

example, if ABN’S forecasted rise in oil prices

were to occur, demand for bioethanol, an

alternative in many cases to oil, would

increase, raising prices of bioethanol, which is

produced largely from corn. In turn, the

demand for corn would increase, and prices

would increase further. It is, however, worth

noting that not all investment banks and/or

analysts share the same predictions regarding

oil. Goldman Sachs analysts, for example,

predict that oil prices will continue to fall in

2016 as a lack of storage creates motivated

sellers, and OPEC supply seems set to

remain high. If this is true, ABN Amro’s

predictions on grain pricing may not

necessarily be accurate.

To conclude, therefore, ABN Amro’s

predictions make for interesting reading at a

time when grain futures have begun to exhibit

their first tentative signs of improvement in a

period of years, though only time will tell if they

are accurate or valid.

Jack Blake

NEFS Market Wrap-Up

18

Precious Metals

The outcome of the G20 summit, which took

place on 26th and 27th February reinforced the

importance of stabilising China’s yuan.

Although further depreciation would assist

commodity exporters, the People’s Bank of

China (PBOC) agreed that an improved

balance is essential in order to shift towards a

market oriented economy. Gold appreciation,

however, may slow. Furthermore, a more stable

currency would increase the exchange rate

flexibility.

According to Bloomberg, G20 sees no basis for

a prolonged China’s currency depreciation.

However, the slowing growth of the country’s

economy has been forecasted previously and,

according to the Central Bank, the yuan will

weaken.

Among other currencies, the US dollar

continues to strengthen but the Japanese yen

might expect relative depreciation due to

negative exchange rate policy (G20).

Appreciation of USD and strong equities raise

concerns in the precious metals market.

Differently, growing demand for physical gold

as well as oil prices remaining low offset the

negative impact of the currency. Overall, the

metal appreciated steadily over the last week.

In the period 26th February to 4th March Gold

appreciated by 3.44%, shifting from 1220.40

USD/t. oz. to 1262.40 USD/t. oz. (Figure 1).

In other metals market, the prices didn’t

increase as steadily. Silver reached its monthly

lowest on the 26th (14.714 USD/t. oz.) and,

after a slight dip on the 1st March (14.756 USD/t.

oz.), the price recovered to 15.275 USD/t. oz.

on the 4th (+3.81%). Similarly, with a slight

downturn on 2nd, the price of Platinum

increased by 3.90% from 914.25 USD/t. oz. to

949.90 USD/t. oz. On the 4th, Palladium

reached its highest in the last two months, rising

by 14.4% from 11th January to 4th March (Figure

2). As the demand for physical metal

overcomes US dollar appreciation, most metals

experienced appreciation, with Gold remaining

less volatile.

According to Georgette Boele, strategist at ABN

Amro, it is surprising to observe Gold still

appreciating because of the opposing factors in

the global economy. However, whilst the price

is still peaking up, investors see a potential –

meaning the right time to invest. Deutsche Bank

also forecasts that low interest rates and a

slowing economic growth could have a positive

effect on Gold value as historical evidence

shows an opposing effect at times of

accelerating growth (CNBC.com). For the time

being, Gold experiences a positive shift in its

value, directing other precious metals towards

appreciation. Fed. Reserve meeting on 15-16th

March should reduce uncertainty in the metals

market as, after the decision, at least the

interest rates will be seen stable for a longer

term.

Goda Paulauskaite

Figure 1 - Gold Figure 2 - Palladium


19

CURRENCIES

Currencies

This week we learnt that the Bloomberg Dollar

Spot Index, which tracks the currency against

ten major peers, dropped 1.8% in February as

the global economic slowdown is expected to

drag down the US. Deutsche Bank AG,

however, which is the world’s second-biggest

currency trader, is expecting a fast recovery of

the US Dollar after February’s slump. Deutsche

Bank is relying on the “Misery Index”, which

measures the rate of inflation and

unemployment. Hence, the unemployment rate

faced an eight-year low this Friday. Alan

Ruskin, who is the global co-head of foreign-

exchange research at Deutsche Bank, said that

“the tighter the labour market is, the more likely

that we’re in a cycle where the Fed is going to

be supportive of the dollar”. He forecasts the

greenback will strengthen to 95 cents against

the Euro by the end of 2016. This Friday, the

Dollar already rose 0.1% against the Euro to

$1.0952 after reaching a monthly high in the

beginning of the week.

At the same time, the major European

currencies, sterling and the Euro, are

struggling. In fact, the Euro is the worst-

performing major currency after the Pound after

the past month as the EU faces a potential

“Brexit” and other political turmoil due to the

present nationalisation process, which is

already eroding the Schengen area. German

Chancellor, Angela Merkel said on March 2nd

that the strength of the Euro “relies on the free

movement of goods and services as well as

people”. Bloomberg experts are predicting the

median value of the Euro at the end of 2016

with $1.08. While the weak Euro may have

positive effects on the export sector of the Euro-

countries, recently published data revealed that

the UK on the other hand faces economic

downturn. The threat of an exit from the EU and

poor economic performance has led to a

downfall of the GBP, which now stands at

$1.4161.

Contrarily, the Canadian Dollar appreciated this

week, now up to $0.7450, benefiting from

better-than-expected economic performance in

February. Australia’s GDP, as well, increased

more than expected, leading to an appreciation

of the Australian Dollar, which now stands at

$0.7384, a six-month high, as can be seen in

the graph below. However, Australia is not the

only resource-exporting country with a gaining

currency. Brazil’s Real headed to for an 8.8%

surge versus the US Dollar, while South Africa

was set for a 3.8% climb.

Alexander Baxmann

NEFS Market Wrap-Up

20

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

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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 13