NEFS Market Wrap Up Week 7
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Week Ending 6th December 2015
1
NEFS Research Division Presents:
The Weekly Market
Wrap-Up
NEFS Market Wrap-Up
2
Contents Macro Review 2 United Kingdom
United States Eurozone
Japan Australia & New Zealand
Canada
Emerging Markets
9
China India
Russia and Eastern Europe Latin America
Africa South East Asia
Equities
15
Oil & Gas Retail
Technology Pharmaceuticals
Industrials & Basic Materials
Commodities
Energy Precious Metals
Agriculturals
20
Currencies 23
EUR, USD, GBP
Week Ending 6th December 2015
3
MACRO REVIEW
United Kingdom
This week saw the release of the Purchasing
Managers’ Indices (PMI), for manufacturing and
services. The PMI are an indicator of economic
activity, derived from monthly surveys of
businesses, and therefore are a useful measure
of current economic performance in different
sectors. The services index rose to 55.9 in
November from 54.9 in October. In contrast, the
construction index fell to a seven month low
from 58.8 to 55.3 and manufacturing also fell
from 55.2 to 52.7. While these are still above
the 50 mark, which separates expansion from
contraction, it is clear that there is a significant
slowdown in these sectors. Therefore it is likely
that construction and manufacturing output will
be stagnant or contract in the final quarter.
However, services is maintaining a healthy rate
of growth and as a result, the economy is set to
grow for the final quarter despite weak data
from other sectors, due to the dominance of
services in the UK economy.
Following Chancellor Osborne’s spending cuts
last week, the government aims to be on track
for its target to wipe out the public sector deficit
by 2020. However this is mainly the result of the
Office for Budget Responsibility, OBR,
announcing a £27 billion windfall due to
expectations for higher tax receipts and lower
interest payments on government debt.
Nevertheless the government is following a
plan of short term pain for long term gain.
Looking towards the economic outlook for the
UK in 2016 it is likely to be positive, yet one-
sided. Domestic consumption seems likely to
remain the main driver of growth well into 2016
due to high wage growth coupled with low
inflation. Inherent problems in manufacturing
and exports will likely mean the economy will
further shift towards services, despite the
government’s plan to rebalance the economy.
Nevertheless, with manufacturing and exports
currently struggling, domestic consumption
must be reinforced as the sole driver of
economic growth, benefitted by consumer
confidence remaining high, as illustrated below.
However, the surge in consumer spending puts
into question how long inflation, and therefore
interest rates, will remain low. Falling energy
and oil costs are offsetting wage growth to keep
inflation low but 2016 could finally see the Bank
of England raise the current base rate above
0.5%.
Matteo Graziosi
NEFS Market Wrap-Up
4
United States
Three key releases of labour market data from
the US this week have all but cemented the
Fed’s interest rate decision at its next meeting
on the 15th and 16th of December. It could be
argued that the decision was already certain
prior to this and that this week’s data was just a
quality check.
A report from the Bureau of Labour Statistics
showed that the change in non-farm payrolls
beat forecasts by 10,000 to reach 211,000 for
the month of November. Last month’s report of
growth of 271,000 jobs was also revised
upwards to 298,000, another positive sign for
the consumer-driven economy. The
unemployment rate remained at its 5.0% level,
in line with forecasts. Month-on-month growth
in average hourly earnings did not match last
month’s growth of 0.4% but still remained
positive and in line with forecasts of 0.2%. This
represented year-on-year growth of 2.3%. The
Fed is close to achieving its dual mandate of
maximum employment and stable prices as the
unemployment rate continually lowers and
inflation rises to its 2% target.
Over the next month, the Fed will decide on
whether it should raise the Federal funds rate
for the first time since 2006. Currently between
0.00% and 0.25%, the rate will likely be raised
to the range of 0.25% to 0.50%. The real
question that needs answering now is how
quickly the Fed will tighten monetary policy over
the course of 2016. Some economists have
suggested two rate hikes while others have
suggested up to four, depending on predictions
for inflation and unemployment rates. An
overview of the probabilities of the Fed funds
rate over the next six months, based on Fed
funds futures prices, is shown in the graph
below (as of 5pm on Friday). From her mid-
week speech to the Economic Club of
Washington, Janet Yellen’s conservative
outlook on the US economy suggests to me that
the Fed is likely to remain cautious not to raise
rates too quickly in order to avoid an early
recession, which would probably be followed by
a rate cut. I believe that we will see a rate rise
in December and another one in March or April
as this gives the economy some time to react to
the change, but also the Fed some time to
analyse the effects of its decision.
Sai Ming Liew
Week Ending 6th December 2015
5
Eurozone
The unemployment rate of the Eurozone
decreased slightly from 10.8% to 10.7% in
October 2015. This is the lowest jobless rate
recorded in the Euro area since January 2012.
17.240 million people living in the Euro zone
were unemployed in October 2015, with the
number of unemployed Eurozone citizens
declining by 13,000 in October of this year.
The unemployment rates of many Eurozone
countries were released this week. Amongst
the countries with the lowest unemployment
rates was Germany and the Czech Republic.
They recorded rates of 4.5% and 4.7%
respectively. The German unemployment rate
has remained constant for August, September
and October 2015, while Spain possesses one
of the largest unemployment rates in the
Eurozone with 21.6% unemployed.
In other news, as we can see on the below
graph the EU inflation rate has remained
constant with the 0.1% in October and
November 2015, while markets had predicted
an inflation rate of 0.2%. Food, alcohol and
tobacco experienced the largest increases in
prices of all goods in the Euro area, rising by
1.5%. Energy prices are expected to decline by
7.3% in November 2015. Whilst this is
significant for the Eurozone, the fall in energy
prices in November is smaller than the decline
in October; energy prices fell by 8.5% in
October 2015. Energy price deflation is having
a notable impact upon the EU inflation rate, if
we exclude energy prices from the inflation rate
calculations then consumer prices would have
increased by 1.0% in November 2015 - this is
below the ECB’s target of 2.0%.
Moreover, the ECB held a meeting on 3rd
December to discuss interest rates and
stimulus within Euro area countries. They
announced that they are going to decrease the
interest rate on the deposit facility (the deposit
facility allows financial institutions to make
overnight deposits with the ECB) by 10
percentage points to -0.30%, while the ECB
refinancing rate will stay at 0.05%. The ECB
stated that in order to achieve the target of 2%
inflation in the Euro area, their asset purchasing
programme, involving the spending of €60
billion a month will be extended until March
2017.
Kelly Wiles
NEFS Market Wrap-Up
6
Japan
This week’s headline purchasing managers’
index reading shows that the rate of output
growth in Japanese manufacturing has
accelerated to a 20-month high. Given the
speed with which firms react to market
conditions, this is a positive sign that managers
seem to consider Japan’s economy to be
healthy. Contributing to this boost has been the
increase in new business orders, which has
been due to an increase in new customers,
particularly from Asian countries. This shows
Japanese manufacturing has remained resilient
in shaking off the emerging market slowdown
currently sending ripples through the global
economy.
November saw manufacturers hire additional
workers to deal with the additional international
demand, but the rate of job creation in the
sector remains about the same as for October
– the fastest pace in 18 months. However, the
further tightening of Japan’s labour market does
also increase its exposure to some risks. With
low unemployment, high participation rates and
an ageing population Japan has few idle
resources. This means the scope of fiscal
policy, and monetary policy in particular, are
rather limited in boosting an economy which is
at full employment. The current rate of
population decline mean that even optimistic
forecasts predict the trend rate of growth is at
most 1%.
Having run a budget deficit of around 8% since
the financial crisis, as shown on the graph
below, a trend growth at 1% puts the
sustainability of the nation’s public debt into
question. While this has not caused any issues
so far, and will have prevented a prolonged
deflationary era, the current ‘liquidity trap’
conditions mean monetary policy has reached
saturation and will not be able to offset fiscal
retrenchment.
Reflating the economy would be one way to
make fiscal adjustment more feasible, but the
success so far has been mixed. Speaking on
Wednesday, Bank of Japan Deputy Governor
Kikuo Iwata said the slowdown in China and
emerging markets still remains as the greatest
threat to the bank reaching its 2017 inflation
target of 2%. More intervention will certainly
follow in the future but with analysts divided on
whether further quantitative easing will be
announced in the New Year, its timing cannot
be easily predicted. The policy decisions made
at the start of the New Year will therefore signal
the future direction Prime Minister Shinzo Abe
intends to follow, and ultimately, shape the
legacy of his Abenomics programme.
Loy Chen
Week Ending 6th December 2015
7
Australia & New
Zealand
Data on Australia’s trade balance in October
was disappointing, as the trade deficit widened
to AUD -3.30 billion, a shock to economists who
forecasted a AUD 2.61 billion deficit. As shown
by the graph below, this 38% increase (from
AUD -2.40 billion) was attributed to a 3% fall in
exports, as non-rural goods fell by 3% and rural
goods by 4%. In addition imports rose
significantly from AUD 74 million to AUD 29,900
million.
There has been much speculation in Australia’s
economy over the past year. Economists were
adamant that the economy was in trouble.
Following a rise in variable home loan rates,
large trade deficits and consistent speculations
over the cash rate, many contemplated whether
a recession was possible. However, strong
employment provided a light at the end of the
tunnel. In addition, this week we learnt that the
economy grew by 0.9% in the third quarter. So
Australia has managed to battle off some of the
economic blues, but how will it cope over the
holidays?
In other news, as New Zealand enters the
holiday period there are expectations for a pre-
Christmas interest rate cut. Despite the fact that
the economy has started to pick up, the head of
the Reserve Bank, Graeme Wheeler, may
lower the 2.75% rate through a 25 point cut,
making it the fourth cut in 2015.
The last review the bank makes this year will be
held on the 10th of December. The ASB stated
it was “a done deal” that the Reserve Bank
would reduce interest rates as the failure to do
so would result in an appreciation in the dollar,
making NZ goods less competitive in
international trade. Westpac and BNZ, two of
the Big 4 banks in NZ, both predicted a cut in
rates, however there are still sceptics. Chief
economist at ANZ, Cameron Bagrie, believes
that the Bank should wait until January to cut
rates. The reason being because the housing
market is “really starting to pick up”, especially
in cities such as Auckland. An even lower
interest rate will make borrowing cheaper and
increase the number of buyers in the housing
market, tempting a potential housing bubble.
Bagrie stated that waiting until January is the
“most sensible approach” to see how inflation
acts. So we could still expect significant
changes in New Zealand’s economy over the
last few days of 2015.
Meera Jadeja
NEFS Market Wrap-Up
8
Canada
On Wednesday the Bank of Canada (BoC)
made the decision to keep the target for the
overnight rate of interest, otherwise known as
its key policy interest rate, unchanged at 0.5%.
Some Economists anticipate that the rate will
be cut further, perhaps to 0.25%, despite
having already been lowered twice since
January 2015. Further stimulus may be
required as the economy still struggles to adapt
to the fall in oil prices, alongside weak domestic
demand and business investment. Other
Economists, such as Diana Petramala of
Toronto-Dominion bank, anticipate that rates
will remain unchanged until mid-2017 as “the
economic impact of lower oil prices is likely to
prove longer lasting and further reaching than
was originally expected.” Correspondingly,
Stephen Poloz, the Governor of the Bank of
Canada, has stated that inflation may only
reach the 2% target in mid-2017 due to excess
capacity, or slack, in the economy – therefore
strengthening the case to hold interest rates
steady. Inflation currently stands at 1.0%.
Statistics Canada revealed this week that the
economy grew by 2.3% to 1.77 trillion CAD in
Q3, close to the BoC’s forecast of 2.5%. This
marks Canada’s official exit from recession,
following two quarters of negative growth, as
shown in the graph below. This has been due
to an increase in consumer spending, a
buoyant housing market, and moreover a 9.4%
increase in exports. Exports were primarily in
the automobiles and consumer goods market,
helped by growth in the US, a weak currency,
and accommodative monetary policy.
However, there was in fact a non-annualised
drop in growth of 0.5% in September. This
signals that the growth rebound may not be
robust. Avery Shenfield of Canadian Imperial
Bank of Commerce described Q3 GDP as
“coming in like a lion and out like a lamb”. The
BoC have already forecast lower growth of
1.5% for Q4 in their recent monetary policy
report.
As the outlook for Canada’s economy is
uncertain, with no strong influences for either a
rate rise or cut, the BoC’s governing council will
wait for some convincing evidence before
considering a rate change. They meet again on
the 20th of January to make their decision. It is
likely that there will again be no change, making
Canada another of the many advanced
economies who have adopted extended
periods of monetary easing.
Shamima Manzoor
Week Ending 6th December 2015
9
EMERGING MARKETS
China
This week there were two major news stories
regarding China’s economy: there has been the
vote of the IMF to decide if China is to be
included into the SDR basket. Furthermore, the
monthly Purchasing Managers Index (PMI)
which provides early indication of China’s
manufacturing sector has been published. To
put it briefly, there is good and bad news for
China.
Starting with the bad news, the industrial sector
has seemed to stagnate. The monthly PMI (see
graphic) fell from 49.9 in October to 49.6 in
November, meaning that the PMI has been
under the critical 50-mark for four consecutive
months. In 2015, China’s biggest 101 steel
companies, which have been the driving fuel of
China’s enormous economic aggrandisement,
lost a combined RMB 72bn in the first 10
months of 2015. Additionally, the government’s
efforts to stabilize the domestic steel industry
have obviously failed and thereby led to new
debts. China’s largest state-owned steel
company, Sinosteel, defaulted on a bond
repayment due in October. Also, Beijing’s
stimulus actions led to an excess supply of
steel, resulting in deflationary pressures.
However, there are many who expect further
action of the government. Contrarily, services
PMI rose to 53.6 in the last month, which shows
that further fiscal boosts are not absolutely
necessary. China’s government stated several
years ago that it wanted to pursue a change in
its economic growth strategy by focusing more
on domestic consumption, in other words, a
switch from manufacturing to services.
Historically, it has proved that this is impossible
without a relative slowdown in manufacturing. It
will be interesting to see whether China’s
government try to further stimulate its
manufacturing sector or if there really is
structural change over the next weeks and
months.
Meanwhile, the good news is that, on Monday
28th November 2015, the IMF finally decided to
include the RMB into the SDR basket. This
decision comes at a crucial time for China as it
has suffered deep falls in financial markets this
year as it is highly questionable that Beijing is
actually willing to stick to reforms. Furthermore,
this decision proves how much the IMF actually
needs China and that the Fund was actually
drastically forced to bend its own rules.
Accordingly, it is not far-fetched to say that it is
a political decision as the SDR would lack
legitimacy if the world’s largest economy,
measured by purchasing power parity, would
not be included.
Alexander Baxmann
NEFS Market Wrap-Up
10
India
Finance Minister Arun Jaitley breathed a sigh of
relief this week as news regarding India’s
growth rate was released. The world’s fastest
growing economy maintained its position,
growing at a satisfying rate of 7.4%. This is
fractionally higher than what was expected by
forecasters and higher than the 7.0% clocked in
the previous quarter. Reflecting fairly stable
growth and inflation, the RBI chose to end the
year with an unchanged interest rate of 6.75%,
leaving room for further monetary easing in the
coming months.
Driven primarily by a strong revival in
manufacturing, which grew by 9.3% along with
increased domestic demand, India is now
outperforming China by half a percentage point.
Investments also increased, growing 6.8% from
a year earlier, compared with 4.9% in April-
June. This is a reflection of India’s
expansionary fiscal policy through which the
government has boosted investment in
infrastructure, complementing private
investment. Further investment has been
promised by the government but more private-
sector capital expenditure will also be required
in order to sustain investment levels.
However, whilst investment in infrastructure
has proved beneficial for growth, India must
also lay robust foundations for development by
investing in health and education, creating
room for social mobility and pulling people out
of poverty. If not, we may see growth quickly
peter out. Moreover, when looking at other
sectors the figures are less impressive, with
exports still acting as a lag on economic growth,
along with sluggish agricultural performance,
which stood at 2.2% after a rainfall shortage for
the second year in a row. Slow progress in
terms of reform is also an issue, as discussed
in previous weeks.
Another consideration is the environmental
implication of India’s accelerating growth, with
some experts warning that India’s growth
addiction is deadly for the planet. They have
cautioned that pursuing aggressive expansion
of industry and energy production will have
hefty global consequences. The government
instead argues that half of the India of 2030 is
yet to be built and expansion is necessary in
order to lift 300 million people out of poverty.
Clearly a balance between seriously
addressing climate change whilst also
maintaining growth needs to be found.
Whilst there are concerns about a rate hike by
the Federal Reserve within the next few weeks,
many hope that a positive outlook, coupled with
strong economic growth, will negate any
potential volatility, which has been predicted for
emerging markets. It is difficult to say for sure,
but when looking at the global scheme of things,
India is looking very attractive in relative terms.
Homairah Ginwalla
Week Ending 6th December 2015
11
Russia and Eastern
Europe
There was controversy on the roads of Russia
this week, as long-distance truckers blocked a
lengthy section of the Moscow ring road to
protest against a national toll. The alleged
target of demurral was the planned fee to be
imposed on truckers travelling on federal
highways. This comes in the form of a GPS-
based system of which Igor Rosenberg –
oligarch and close confidant of Vladmir Putin –
owns a 50% stake.
It is likely, however, that this anger was more
deeply-rooted and actually primarily aimed at
attacking Putin himself. Of late, concern has
arisen that the Russian upper class are
attempting to create revenue streams that
advance their own position at the expense of
the lower and middle classes. Nikolai Petrov, a
professor at Moscow’s higher school of
economics, analogises the idea, suggesting
that the “[oligarch] clans are trying to keep their
portion [of the pie] or even cut a bigger slice.”
This comes with the discovery that an 800-mile
round trip between Moscow and St Petersburg
now costs an extra $33 at the current exchange
rate and is scheduled to rise to $66 next month.
Lumped with truckers’ already dear
transportation taxes, it is estimated to have
reduced their monthly wages by around $500-
600 – a significant amount when we consider
the current inflation level of 15%. A blow like this
is likely to give rise to a serious drop in the
standard of living of the lower classes. Maxim Y
Sokolov, transportation minister, has dismissed
the issue completely, drawing attention to the
expected generation of $700bn a year as a
result. While he says that “this is how a
transportation system functions worldwide,” the
truckers complain that “we live like hell, [while
the rest of] the country is very rich.”
Perhaps what we are beginning seeing here is
something that is untoward of the Russian
people: a disillusionment of their government.
This all comes in tandem with Putin’s speech to
the federal assembly where he described his
country’s economic situation as “complicated
but not critical.” He made clear that Russia
needs to explore export revenue from products
that aren’t to do with energy. It seems that the
government is coming to terms with the
ailments of its primary product dependency
which, until now, has served them well.
Russia’s future success depends on finding
new, profitable revenue streams and to
maintain public confidence while driving down
inflation. The new target is to knock 11
percentage points off the 15% mark to reach
4% by 2017.
Tom Dooner
NEFS Market Wrap-Up
12
Latin America
Fears are deepening in Brazil, as on Tuesday
third quarter figures showed that the largest
economy in Latin America is on track for its
worst recession since the great depression.
The figures mark three consecutive quarters of
contraction as Brazil saw its economy shrink by
4.5% year-on- year in Q3. Many have blamed
weak commodity prices, fiscal contraction and
a fading consumer credit boom.
The poor Q3 figures reflects that almost every
sector of the economy facing continuous
pressure. This even includes exports, which
had been expected to come to the rescue after
the country’s currency, the real, lost circa 52%
of its value against the dollar this year. Further
disappointing factors that add to Brazil’s woes
are that, although President Rousseff is trying
to implement austerity measures, the budget
deficit is currently at 9.5% of GDP. The austerity
comes at a time when Rousseff is witnessing
appalling approval ratings, with the WSJ
quoting ‘only 10% of the country think the
government is doing a good job’. On the upside,
National debt is at 66% of GDP – a relatively
low level in comparison to other troubled
countries (Greece’s national debt is 177% for
example). However the cost of servicing
Brazil’s debt is at about 20% a year, which is
astronomical. What’s worse, last month figures
showed that Brazil’s inflation rate was at its
highest for 12 years, at 10.28%.
In my opinion the key event to watch over the
Christmas break is the Fed’s interest rate
decision on the 16th December. The predicted
rise may have adverse effects on Latin
America, causing possible capital flight and
pushing dwindling equities even lower. This
may quash any hopes of investment, as
emerging markets, especially in Latin America
are not looking like sound investments, so a
more stable return in the US could signal that
low investment is here to stay. Furthermore
Chile, Mexico and many others face interest
rate decisions but all look set to keep them
constant. Meanwhile, on the 6th December the
Venezuela Parliamentary elections will be held.
The ruling socialist party currently holds a
majority, but polls indicate that if the election
were held today, the opposition coalition would
win in a landslide. The 29-party coalition is
benefiting from widespread discontent with
President Nicolás Maduro, driven by mounting
shortages, high inflation and rampant crime as
highlighted in last week’s article.
Max Brewer
Week Ending 6th December 2015
13
Africa
In the south of Africa, the worst drought since
1992 is increasing food prices dramatically. The
price of corn, a staple food for cattle, has
increased by 55% since the beginning of 2015,
due to crop failures. To avoid paying higher
cattle food prices, farmers will kill nearly 36%
more cattle this year than normal. With low crop
and meat availability, food inflation is expected
to rise more than 10% by mid-2016, double the
rate of normal food inflation. Economies
throughout southern Africa have struggled
greatly this year with reduced investment from
China and the appreciation of the US dollar.
Higher food prices will worsen this situation,
with lower consumption, export levels and
standards of living. Many economists and social
activists are criticising the governments of
Africa’s southern regions, who have been
discussing the prospect of designating more
farming land to solar panels and growing
biofuels. This is extremely popular in Europe
and the US, and would hence help trade,
however it does threaten the availability of food.
Following the Paris Climate Summit from earlier
this week, great global focus has been placed
on African economies. Many worry that if
current levels of pollution continue, economies
that are too reliant on primary good trading will
be most vulnerable to its effects, as seen
greatly in Africa. Moreover, many African
economies lack the systems necessary to deal
with Supply Shocks and the resources to help
the population after disaster. Whilst it is
therefore essential carbon-emissions are
reduced, some argue that African economies
will see limited growth and prolonged poverty
levels if prevented from accessing cheap,
carbon fuels. To face this issue, the World Bank
has created the Africa Climate Business Plan,
which will issue USD 16bn investment over the
next 4 years. It will also include the restoration
of arable land lost due to desertification, and the
creation of systems that warn of extreme
weather.
Business confidence in South Africa has fallen
even further in the final quarter of 2015 to 36,
(see graph), its lowest in 5 years. This is due to
great uncertainty about the impact of the US
dollar appreciation, the prospect of future
recession, the depreciation of the South African
Rand and the timing of US interest rate hikes.
With a falling business confidence rate,
investors and businesses are looking
unfavourably on South Africa for future growth
prospects. Policies are subsequently urgently
needed for recovery, to help boost business
confidence.
Charlotte Alder
NEFS Market Wrap-Up
14
South East Asia
As China’s growth slows and India’s future
remains unpredictable, businesses are looking
to ASEAN countries and their combined
population of 625 million to pick up the slack.
The aim of the ASEAN is to integrate the ten
Southeast Asian economies, ranging from
economically deprived Laos to the region’s
biggest economy, Indonesia, who retain their
top 3 position as the manufacturing destination
in Asia and have a population of more than 250
million. ASEAN’s population expects to grow by
approximately 120 million by 2030, adding to an
abundant pool of labour that businesses are
already taking advantage of, with many firms
moving from China to Southeast Asian
countries such as Vietnam, Asia’s fastest
growing foreign direct investment location.
In addition to this, Singapore is currently
suffering from all-time productivity lows and
aims to put their services sector as the driving
force behind their economic growth starting with
closer ASEAN markets integration. Singapore’s
financial regulator has said that stock markets
in Singapore, Malaysia and Thailand should
develop trade systems allowing companies to
connect with their clients more easily, to
improve cross-border transactions to aid
growth.
In relation to services, Thailand sees little
prospect of economic pickup due to a slowdown
in the country’s vibrant tourism industry. For
many years, Thailand has relied on tourism for
a disproportionate chunk of its economic
growth, highlighting an unbalanced economy
which their neighbour Singapore has been
guilty of similarly. Almost all the recent boom in
tourism has come from the overwhelming
demand from China in recent years. However,
with China seeking to make the transition from
manufacturing to services and their slowdown
in growth, a better integrated trading bloc such
as ASEAN will therefore provide more
opportunities for Thailand to reach out to
Southeast Asia’s fastest growing economy,
Vietnam, which is now experiencing 6.8%
annual GDP growth, as shown in the graph
below. However, there is a lack of
administrative capacity within ASEAN; the staff
in charge of implementing policies had a
worrying budget of only $17m in 2014.
The major concern is that ASEAN only
accounts for 3% of global GDP although it
consists of 9% of the world’s population.
Therefore, the greatest challenge for ASEAN
members is whether they can make progress of
increasing integration between the ten
Southeast Asian nations, or whether the
underachievement continues and the focus
shifts towards the Trans-Pacific Partnership.
Alex Lam
Week Ending 6th December 2015
15
EQUITIES
Retail
Following on from last week’s black Monday
centric report, retailers have posted relatively
disappointing results from not only Black
Friday, but also the following “Cyber Monday”.
Whilst Black Friday and Cyber Monday have
little bearing on a retailer’s yearly financial
results, and even less on long term share price
prospects, analysis of sales figures from
retailers could provide an insight into the
decision-making of consumers and the
performance of retailers over the holiday
period.
The first notable fact about black Monday and
cyber Friday is the continued prevalence of
shifting consumer tastes in favour of online
shopping. Matt Boss, a JP Morgan retail
analyst, stated that “online clearly stole the
show over the weekend”, a statement
supported by most sales figures. For example,
around 25% of sales on Black Friday, a day
focused on physical retail sales, were online,
with a total of 103 million US customers
choosing to shop online, significantly more than
in retail stores. This is congruent with general
trends in the retail sector, for post-2000 online
sales growth has been around 15% YoY, vastly
outstripping both inflation and physical sales.
Online growth did not, however, translate into
particularly impressive results for the retail
sector as a whole on both Black Friday and
Cyber Monday. Analytics firm RetailNext stated
that combined online and in-store sales fell
1.4% relative to last year, adjusted for inflation.
Whilst 1.4% is not necessarily statistically
significant, and is not indicative of any particular
changes in the retail industry, it is in line with
retail equities as a whole in the year to date, in
which sales have been “perfectly average”
according to Dana Telsey, a retail analyst
writing for CNBC.
As such, it is difficult to predict any significant or
notable changes over the holiday period, as the
retail sector has been devoid of any significant
structural changes throughout the year, with the
exception of adjustments post-Walmart slump.
As such, it is the author’s opinion that the
holiday period shall retain the same
unremarkable tint, and 2016 shall potentially
hold more exciting news in this venerable
sector.
Jack Blake
NEFS Market Wrap-Up
16
Oil and Gas
After this week’s meeting in Vienna, OPEC
raised its production ceiling to 31.5 million
barrels of oil a day, which led to crude oil prices
to fall more than 3%, to below $40 a barrel.
Following the news, the UK’s benchmark stock
index closed at its lowest level in more than two
weeks on Friday, capitalised by the slump of all
major heavyweight European oil companies.
Shares of Royal Dutch Shell PLC (RDSA: LSE),
for example, dropped 1.8% to $48.13 while BP
PLC (BP: LSE) also gave up 2.4%. Among oil
producers, Tullow Oil PLC (TLW: LSE) fell
massively with a 5.4% decrease in its stock
price, while Norway’s Statoil ASA (STL: OSL)
dropped 4.6% and France’s Total SA (FP: PAR)
declined 2.3%. Meanwhile, Sweden’s Lundin
Petroleum AB (LUPE: STO) also slumped
2.8%, as it was under the additional pressure of
a ratings downgrade from RBC Capital
Markets, from sector outperform to perform.
Oil equipment and services groups were also
hit substantially, with Norway’s Subsea 7 SA
(SUBC: OSL) decline of 5% and Seadrill Ltd.’s
(SDRL: OSL) 5.6% drop. Petrofac Ltd (PFC:
LSE), another provider of oilfield services, also
lost 2.5%.
All in all, the STOXX Europe 600 Oil & Gas
Index (SXEP: INDEXSTOXX), a benchmark
that offers exposure to large, mid and small
capitalisation energy stocks from European
developed countries, declined by 1.98%,
closing at 275 Euros, as can also be seen by
the graph below.
Passing onto more specifics, RWE (RWEX:
GER) announced a radical action this week to
adapt to Germany’s shift to renewable energy.
As the second largest utility company in the
country, RWE followed EON (EOAX.N: GER) in
unveiling plans on Tuesday to divide
renewables, electricity distribution and retail
sales into a new company altogether, with a
10% stake due to be to sold to investors in an
initial public offering next year. Analysts
estimate that RWE can secure up to 2.5bn
euros in proceeds from an IPO of its
renewables business, and the company plans
to invest half of this in wind and solar energy.
By separating out the assets that have good
prospects for growth, both RWE and EON,
which is decentralising its fossil fuel and energy
trading businesses into a separate company
called Uniper, hope to be in a better position to
raise money from investors.
With this move, RWE is fighting to upturn a
difficult year, with its shares losing more than
half their value since January. Eon’s stock has
also fallen 37% since the beginning of the year.
Andrea Di Francia
Week Ending 6th December 2015
17
Pharmaceuticals
The NASDAQ Biotechnology Index fell by 2.4%
and the FTSE 350 Pharmaceuticals and
Biotechnology Index fell by 2.6% this week. Yet,
on Wednesday, Morgan Stanley had upgraded
a number of stocks in the industry, citing
European equities as 'fairly priced'. Off the back
of this news UK Pharmaceutical equities
including GlaxoSmithKline, Shire and
AstraZeneca rose by an average of 2.1%, but
they had all subsequently resumed a negative
position by the end of the week, as illustrated
by GlaxoSmithKline's graph below.
The industry lost out to investor uncertainty as
most analysts remain cautious about
pharmaceutical equities, despite the fact that
some major analysts including Barclays and
JPMorgan are becoming more confident. Star
fund manager, Neil Woodford, had also
expressed his belief that recent issues are only
'bumps in the road' by investing £120million in
Northwest Biotherapeutics.
As speculated last week, it is apparent that the
recent agreement between Pfizer and Allergan
will negatively impact R&D. Despite highlighting
its commitment to R&D in the UK when it
proposed a bid for AstraZeneca in 2014, Pfizer
has announced that it will close an early-stage
pain therapy research and development facility
in Cambridge, leading to a loss of up to 120
jobs. This is perhaps more evidence to suggest
that big Pharma will slowly curtail research led,
organic growth by instead snapping up smaller
companies and slashing costs such as R&D to
ultimately increase profit. Yet, it is not all bad
news on the development front. Astrazeneca
updated investors on a late-stage drug pipeline
during the middle of last week which helped to
assure Morgan Stanley of its double upgrade of
the stock. Morgan Stanley justified the upgrade
by citing Astra's heavy investment into
developing new drugs to offset its expiring
patents, for which it is likely to soon reap
rewards from.
Given the fact that there are numerous
restructuring headwinds facing the
Pharmaceuticals sector in the short term, I
predict that pharmaceutical equities, especially
in the US, will fall slightly in the next few
months. Investor sentiment and confidence
remains shrouded because of certain deceptive
tactics (most obviously price hikes and deceitful
accounting practises), so I would assume that
short-term growth will not yet emerge.
Sam Hillman
GlaxoSmithKline PLC Share Price
Morgan Stanley upgrades GSK
NEFS Market Wrap-Up
18
Technology
Last Tuesday, Samsung announced that it has
replaced the head of its mobile business for the
first time in six years. The action arose as a
result of falling smartphone sales, and the huge
tech-firm is aiming to reverse this downwards
trend, with the previous head of mobile
research and development, Koh Dong-Jin,
taking the former head’s position.
Whilst being the leading producer of
smartphones by sales, Samsung’s handset
profits fell in the first half of 2014, which came a
result of losing its shares in the low-end of the
market to Chinese competitors, and facing a
resurgence in Apple at the high-end. With
competition high, and increasingly intensifying,
it’s inevitable to see a shift in management at
the South Korean company. Furthermore this is
hugely understandable given that, whilst this
year’s third quarter operating profits rose year-
on-year, reaching $2.06 billion, Samsung’s
global market share in smartphones has fallen
from 33% to 24%.
Looking at next year we can see no significant
driver for sales in Samsung’s smartphone
division, but with a hugely anticipated launch of
phones that feature flexible screens (most
certainly to be released in 2017) Samsung
remains the competitive tech-giant that it is. As
a result we should, given a lack of negative
shocks, expect steady growth in the company’s
market value and capitalisation, with a median
target for the share price forecast of $790.50
within the next 12 months – a massive 43.86%
increase on this week’s closing price of $549.50
as shown in the graph below
Indeed, with this year now coming to a close, it
seems appropriate to predict and forecast the
future trends of more of these technological
firms. Through evaluation of this year’s
performance and analysis of upcoming product
releases, we can review the best predicted
performances over the next 12 months.
Facebook has experienced a yearly rise of
39.88% in their share prices, and this progress
is projected to continue with a forecasted
median price target of $125, which is an
increase in the current value of $105.25 by
18.26%. Meanwhile, Apple possesses a
median estimate representing a 30.21%
increase from the current $115 to the predicted
$200. These two companies, alongside
Samsung, are the top technological companies
regarding future performance, and so each
create opportunity for a great investment and
for what is ultimately an excellent return through
dividends in addition to the future sale of these
greater-valued shares.
Daniel Land
Samsung’s Forecasted Growth
Week Ending 6th December 2015
19
Industrials & Basic
Materials
Ball Corporation has announced that it is
planning to sell around €1.5 billion worth of
bonds as it seeks to raise funds to complete its
takeover of UK can maker Rexam. The three-
tranche notes offering have maturities in 2020,
2023 and have a Fitch rating of 'BB+'.
The merger would create synergies, better
manage capital spending and cut costs. The
European Commission, however, fears that this
deal would push up prices for companies and
consumers. The creation of the world’s biggest
drinks can manufacturer, with $15bn in annual
revenues and 60% of the beverage can market
in North America, 69% in Europe and 74% in
Brazil, would raise regulatory issues and likely
require disposals in some regions.
Ball is prepared to divest four factories in
Germany, three in the UK, one each in Spain,
France, the Netherlands and Austria. Nine of
the plants make cans and two of them can
ends. This offer was submitted to the
Commission last week.
Ball will be able to materially improve its risk
profile, profitability and financial flexibility and
strength, owing to the combined capabilities,
production efficiencies and scale of this
massive company after the merger. Thus, this
merger will improve Ball's competitive position
to better optimise beverage can prices to
customers relative to other alternative
packaging substrates. The merger will also
allow the company to tap onto additional
geographies and new customers, increasing
Ball's exposure to growing beverage segments
along with the ability to take advantage of
specialty package technology and efficiencies.
The financial standing of the company would be
immense, with approximately $15 billion in
revenue and $2.4 billion in adjusted EBITDA.
Analysts also believes Ball should have
opportunities to exceed the net synergy target
of $300 million on an annual basis.
Ball's shareholders has approved the
transaction in July 2015 and the transaction is
expected to close in the first half of 2016 and is
subject to approval from Rexam shareholders,
regulatory approvals and customary closing
conditions.
Rexam’s share price has been slowly creeping
up since news of the merger and closed at
597.07 on Thursday closing.
Erwin Low
NEFS Market Wrap-Up
20
COMMODITIES
Energy
Energy Prices have slipped slightly this week as
OPEC agreed to keep pumping near to current
production levels, despite a global oil glut. Oil
futures dropped on Friday, with the US
benchmark briefly falling back below $40 a
barrel and 1.4% for the week. The other main
oil benchmark - Brent crude futures – fell
similarly over the week at 1.6%, while both
Natural Gas and Heating Oil dropped 1.5% and
0.4% respectively.
Cartel members meeting in Vienna on Friday 4th
December made no mention of a production
target in the final stages of their meeting. OPEC
President Mr. Kachikwu told reporters that
“members saw no need to mention a hard figure
but that there had been agreement to maintain
a ceiling that reflects current actual production.”
This roll-over policy adopted by OPEC had
been widely expected, even though there was
pressure from poorer members of the cartel for
a cut in output to prop up the price of oil. Despite
this expectation, there was a strong market
reaction to the news, with WTI Oil falling 3.5%
for the day, by far its biggest tumble this week.
While the official OPEC ceiling is 30 million
barrels a day, the number is largely symbolic,
as the organization has been overshooting it for
months. In September, OPEC produced 31.57
million barrels a day, according to its own data.
Anticipate this trend to continue over the
coming months as OPEC won’t meet again until
June 2, 2016 to reassess policy.
With the purpose behind OPEC’s policy being
the preservation of their market share, the main
reason behind this continuation of policy stems
from evidence that it’s working. Data recently
showed that the number of active US oil-drilling
rigs fell by 10 to 545 as of Friday. Furthermore,
they’re down by 1,030 compared with last year.
In other news, Gasoline plummeted 8.5% for
the week as a re-stabilisation from last week’s
dramatic price increase due to limited supplies
in North-eastern America ahead of
Thanksgiving. Falling to pre-limited supply
levels, Gasoline has equilibrated back with the
rest of the market and general trend.
Over the coming month there is an expectation
that prices of oil will thus remain relatively low
due to this policy roll-over. However, I believe
that Natural Gas and Heating Oil prices will
increase since consumers will generally stay
indoors for the festive period and winter
weather typically intensifies.
Harry Butterworth
Week Ending 6th December 2015
21
Precious Metals
This week we have seen the same trend
looming over the precious metals sector as
investors around the world await the upcoming
meeting of Janet Yellen’s decision. Gold in
particular has seen some short term
fluctuations this week due to the strength of the
US Dollar but still remain at its lowest levels
since early 2010.
Gold prices hit multi-year lows and yet bounced
back on Thursday 3rd December after the
hawkish comments from the Federal Reserve
chairwoman Janet Yellen and positive US
economic data lifted the US dollar against major
currencies. Spot Gold was last at 1,050.50
USD/oz., down $3.30 from Wednesday’s
closing price but bounced to 1063.33 USD/oz.
(See Fig. 2 between 2nd Dec and 3rd Dec) This
can be attributed to the announcement made
after this Thursday morning, 3rd December
news published that the European Central Bank
would lower interest rates to historic lows to
further stimulate the region’s economy. Another
reason can be attributed to the speculation of
the strength of US Dollar by investors, as seen
from the Dollar Index (Fig. 1). A fall in the Dollar
Index pushed Gold prices higher due to the
correlation between stronger US economic data
and the likelihood of an interest rate hike.
Silver prices have followed the same trend as
Gold prices, dropping significantly before
bouncing back, fluctuating between the 14.16
USD to 13.90 USD range. On the other hand,
prices of Platinum and Palladium have dipped
this week: Platinum fell from 852.8 USD to 831
USD and Palladium fell from 557.1 USD to
528.6 USD. Some of the precious metals have
seen a short term decline, and this can be
attributed to the investor’s speculation over the
key decisions made by both the Federal
Reserve and the European Central Bank.
It is unlikely that Gold will continue to rally as we
will have to wait for the FOMC meeting on the
17th and 18th of December 2015 for the long
awaited decision of an interest rate increase.
The dollar index is a strong indicator of how well
US economy is doing and it would be critical to
observe this trend.
Samuel Tan
Gold Price Trend (Fig. 2)
Dollar Index (Fig. 1)
NEFS Market Wrap-Up
22
Agriculturals
As forecasted last week, the trend in cotton
prices changed once the festival weekend
ended. The reduced interest in buying by mills
and spinners initiated a decline from the peak
at $63.93/lb on the 27th November down to
$60.43/lb on the 3rd December. The
International Cotton Advisory Committee
(ICAC) reported a slowing increase in global
demand for cotton, irrespective of the global
population growth. ICAC concludes that this
tendency can potentially result in 2015/2016
imports decreasing by 3% relative to 2014/2015
cycle.
As we are approaching the end of the year, this
week I would like to provide an overview of the
agricultural news in 2015 and the likely futures
in January 2016.
While dry weather usually is a factor shifting
agricultural prices upwards, it had quite an
opposite effect on lean hog (and meat in
general). Figure A illustrates a steady
devaluation since June, when the price reached
$84.35/lb, up to 3rd December, signifying a six-
month low at $56.275/lb. The identified cause
includes rising animal feed costs, especially
after sudden price jumps in June, October and
November (Figure B). Persisting poor weather
conditions resulted in lowered yields of animal
feed.
As the cost to feed the cattle still keeps steadily
rising, farmers more often choose to increase
slaughtering of animals instead and avoid
extended unprofitability. According to Paul
Makube, senior economist at FNB, this
increase in supply will reduce prices not only
over the festive season; it is also likely to reduce
meat prices between 8 to 15% in December and
January 2016.
Kona Haque, head of research at ED&F Man,
concluded that price fluctuations in agricultural
goods such as wheat and soya beans were
highly affected not only by the dynamic weather
or the level of production. This time the
explanation emphasises the impact of currency
exchange rate stabilities on the prices. As the
US dollar remained at a relatively strong
position, the relative prices of these goods fell
by an average of 28.3%. In contrast, the
Brazilian Real weakened, and the outcome
resulted in the respective price appreciation of
32.5%. This factor had a significant effect on
redistribution of the agricultural market. US
exports are already decreasing and, according
to the Department of Agriculture, will continue
to do so. Although the outcome in Brazil is more
favourable for local farmers, Brazilians
experience a sharp rise in input prices as well.
Consequently, farmers’ profits will be reduced,
forecasting yet another shift in the market
distribution.
Goda Paulauskaite
A B
Rapid price
jumps
Week Ending 6th December 2015
23
CURRENCIES
Major Currencies
By Thursday morning, Ahead of the ECB policy
meeting, EUR/USD was pushed further
towards a 7 month low, where it hovered around
the 1.0545 level, as investors digested further
signals of divergence between central banks in
the US and Europe. However, Euro short
positions have built up to the point where there
is little room left to sell into, unless the ECB
comes out with action far exceeding market
expectations.
At 12.45pm the ECB policy meeting details
were released; the decision was made to cut
interest rates by a further 10 basis points to -
0.3%, as the central bank attempts to inject life
into the Eurozone’s struggling economy. It was
also announced that ‘further policy measures’
would be released during a news conference
later where Mario Draghi would speak; a
reference to expected changes it might make to
its 60bn euro quantitative easing measures.
In the immediate trading following the 12.45pm
release, the euro shot up to 1.0625, before
meeting resistance at 1.0725.
Later that day at 1.30pm, Draghi then
announced in his speech that the ECB was to
launch a new stimulus package to boost the
Eurozone; the programme would be extended
by 6 months to March 2017, or ‘until the EBC
council sees a sustained adjustment in the path
of inflation’. He added that the ECB would re-
invest the proceeds of the bonds it is holding as
they mature; and would now be prepared to buy
regional and local government debt from within
the euro, as well as sovereign bonds.
The ECB said it would leave other interest rates
unchanged, including the key refinancing rate,
which ripples out to borrowers across the
economy. This rate has already been slashed
to just 0.05%.
Stephen Macklow-Smith, head of European
equities strategy at JP Morgan Asset
Management, said that the ECB was trying to
“do three things: maintain euro weakness, keep
interest rates lower for longer and boost liquidity
with a view to stimulating credit”.
GBP/USD continues its 7 month sideward
trend, ranging in the 1.50-1.59 zone, although
we are now seeing the pair test the 1.50 support
level, as it was breached for the first time on
Wednesday and Thursday. The greenback is
facing a wave of selling across the board on the
back of sudden Euro strength, despite the
ECB’s decision to cut the deposit rate.
Adam Nelson
NEFS Market Wrap-Up
24
The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups.
For any queries, please contact Josh Martin at jmartin@nefs.org.uk. Sincerely Yours, Josh Martin, Director of the Nottingham Economics & Finance Society Research Division
This Publication has been prepared solely for informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, product,
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About the Research Division The Research Division was formed in early 2011 and is a part of the Nottingham Economics and Finance Society (NEFS, formerly known as NFS and UNIS). It consists of teams of analysts closely monitoring particular markets and providing insights into their developments, digested in our NEFS Weekly Market Wrap-Up. The goal of the division is both the development of the analysts’ writing skills and market knowledge, as well as providing NEFS members with quality analysis, keeping them up to date with the most important financial news. We would appreciate any feedback you may have as we strive to grow the quality and usefulness of weekly market wrap-ups. For any queries, please contact Jack Millar at jmillar@nefs.org.uk Sincerely Yours, Jack Millar, Director of the Nottingham Economics & Finance Society Research Division
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