the weekly market wrap-upnefs.org.uk/wp-content/uploads/2016/12/wrap-up-8.compressed.pdfwrap-up ....

Week Ending 9th December 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 3

United States United Kingdom

Eurozone

Japan South Korea

Australia & New Zealand Canada

Emerging Markets

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India China

Russia and Eastern Europe

Latin America Africa

Middle East South East Asia

Equities

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Financials Technology

Oil & Gas

Commodities Agriculturals

Energy

Currencies EUR, USD, GBP

AUD, JPY & Other Asian

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MACRO REVIEW

United States You can tell a lot about a person by looking at who they surround themselves with. The same goes for President-elect Trump. His cabinet picks are a glimpse into his vision for future American economic policies. Here is what we may expect from nominated Labor Secretary, Andrew Puzder and Secretary of Health and Human Service nominee, Tom Price.

Andrew Puzder, head of Carl’s Jr. fast food

restaurants, is a known critic of a $15 an hour minimum wage and the new Labor Department rule extending overtime pay. He says such government regulations force businesses to lower their work force by raising the cost of labour. He argues that these costs force businesses to invest in cheaper automated technology, which ultimately leads to laid off workers. Although in March, Puzder said he was willing to see the national minimum wage pegged to inflation, he stands firm on the belief that a sudden wage rise from $7.25 to $15 would lead to layoffs. That having been said, here is an overview of the current state of the American labour force. As of last week, the unemployment rate was at a nine-year low of 4.6%. With Thursday's claims report showing the number of people still receiving benefits after an initial week of aid fell 79,000 in the weekend of November 26th. Signs of a strong labour market with a strengthening economy. The chart below shows the growth of the minimum wage rate since its conception in 1938. As shown in the chart,

the minimum wage, adjusted to inflation, has risen $3.06 in the past 78 years.

Georgia Representative, Tom Price is a vocal critique of Obamacare. Saying in 2011 “the purpose of health reform should

be to advance accessibility, affordability, quality, responsiveness, and innovation…

None of these [have been] improved”.

Price has published his own versions an ideal Obamacare replacement which falls in line with the visions of both the President-elect and Speaker of the House, Paul Ryan. The Empowering Patients First Act of 2015, calls for refundable tax credits to those who buy policies from the individual market. With Obamacare Premiums set to increase on average by 25% in 2017, many who were unable to purchase insurance before are willing to pay the increase in deductibles. Senate Minority Leader Chuck Schumer says Price is “far out of the mainstream of what

Americans want when it comes to Medicare, the Affordable Care Act”.

Disun Holloway

NEFS Market Wrap-Up

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United Kingdom Mixed bag this week in Blighty; the trade deficit shrank, the services sector boomed, both the FTSE 100 and FTSE 250 rallied – Christmas has come early! Unfortunately not; alongside all of this positivity comes not only sluggish construction figures, but expert scepticism, which predicts a latent shock to the UK economy following Brexit.

The UK trade deficit narrowed for the first time since records were established in 1998, according to the ONS. A 4.6% increase in month-on-month exports and a 3.6% decrease in month-on-month imports amounted to a £3.8 billion fall in the deficit. This is strong news, and a rebuff to post-Brexit economic gloom; it does seem, however, that the UK is on a slightly precarious path. Indeed, economically-speaking, things seem to have unfolded a little too well. While the export surge is largely down to the sterling depreciation, it is likely that over the medium to long-term, its concomitant, in the form of higher import prices, will show its face, taking its toll on consumers through higher prices on the high street. We have, in fact, seen a rise in firms’ input costs (see graph) at the fastest

rate for 5 years: indeed, either margins will be squeezed, or, as expected, consumer prices will rise.

Further, construction output fell in October by 0.6%, supposedly driven by a 0.9% decrease in the volume of ‘new work’ i.e.

new construction orders like schools and hospitals. This is particularly worrying, as it is indicative of more trouble to come, and made particularly sour by the 0.2% growth that had been forecast following growth of 0.9% in September. Should this be - and it

could very well be – offset by the service sector boom, which, despite predictions of an easing to 54.0 on the Markit/CIPS UK services PMI, rose to 55.2 in November from 54.5 the month before, then UK growth may end 2016 on a relatively solid footing. Allied with the early Santa rally on the FTSE, the UK economy looks to be in a massively better position to where many would have envisioned it after the referendum (it would have been almost unfair of me not to have mentioned the R-word.)

The media certainly have not tired of talking about it, and it would seem that the current mood is again one of negativity, as commentators predict a major cut in immigration to produce a damaging long-term hit to future economic growth, while yielding only a modest boost of under 1% to the wages of low-paid workers.

Let the rumours abound I say. Not even Father Christmas knows whether the UK will get any presents this year.

Thomas Dooner


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Eurozone The result of the Italian referendum this week has again put the Eurozone under great pressure, with the defeat and resulting resignation of Italy’s Prime

Minister Matteo Renzi. The referendum regarded altering Italy’s constitution, so

that more power could be shifted from the Senate to the executive, hence making it easier for the Prime Minister to pass laws.

The short-term impact of Renzi’s

resignation could cause Italy’s on-going banking crisis to flare up and threaten its economy. Amongst heightened political uncertainty and turmoil, Italy is going to struggle even more to raise the capital needed to support its zombie banks, which are inadequately capitalised, in large amounts of debt and riddled with bad loans.

The long-term impact looks equally bleak. With a general election now anticipated sometime between next spring and late 2018, Italy’s Five Star Movement could be

elected. The Five Star Movement is Italy’s

anti-establishment party led by the comedian Beppe Grille, which currently leads in opinion polls and wants to hold a referendum over Eurozone membership. Consequently, if the Five Star Movement were to come to power, Italy may find itself exiting the Eurozone. In being the Eurozone’s third largest economy, such an

act could put the single currency at great risk.

Many Italian political commentators argue this is unlikely however. Firstly, it is possible that electoral laws could be reformed to prevent the Five Star Movement from ascending to power. Furthermore, even if the movement acquires a majority in the lower house of the Italian parliament, it will not have a majority in the Senate, hence it will be unable to form a government. Finally, it is doubtful if Italy would leave the Eurozone even if a referendum were held. According to the 2016 Global Attitudes Survey, 58% of Italians are still in favour of Italy’s single

currency membership, even though support has declined massively in recent years (see Figure 1).

Nonetheless, markets have remained stable despite the resignation of Italy’s last

pro-EU leader, who was considered Italy’s

final hope for delivering the growth-enhancing reforms needed to securely rebuild its economy. It has been argued that the political turmoil seen merely reflects Italy’s long-running crisis of domestic governance. It is subsequently hoped that Italy’s political and economic

turbulence will remain within Italy.

Charlotte Alder

NEFS Market Wrap-Up

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Japan Last week Japan adopted international standards for compiling the national accounts as defined by the UN. These standards include research, development, patents, and copyrights as investment in gross domestic product (GDP) estimates. On account of Japan’s large R&D

expenditure, this new method of number crunching boosted Japan’s nominal GDP

significantly, and the measured size of the economy for 2015 grew overnight 6.3%, from ¥499tn to ¥531tn.

While this is of but an accounting significance, and only demonstrates production heretofore unexpressed, it is an important political boon to PM Shinzo Abe. He has vowed to lift the economy’s output

to ¥600tn by 2020, and this artificial change alone consists a third of the required expansion. Also, Japan’s public debt is

more than double its annual output, and the boosted GDP will ease the severity of that ratio. Yet this change is but superficial, and, unless the economy responds strongly to the economic policies under Mr Abe with growth, it will remain worthless political capital.

The previous week also saw a downwards revision of annual growth from an early estimate of 2.2% in the third quarter to 1.3%. Capital expenditure, particularly from steel and real estate companies, fell -0.4% in the new data, whereas the earlier

estimates had such investment flat. Encouragingly, however, private consumption, which accounts for roughly 60% of the economy, was revised up 0.2 percentage points, which aligns with the Bank of Japan’s faith in the resilience of the Japanese consumer.

Economists estimate an annual 0.5% long-run growth potential, and the economy appears to be growing well above the trend, despite the downgraded estimate. Should this persist – as all signs currently indicate – excess productive capacity will diminish, and the unemployment rate will fall below its already low 3.0%. Wages should rise, and inflation reignite.

However, this trajectory is a fragile one. Under favourable trade conditions and robust consumer spending, growth for the fourth quarter will likely improve on the performance of the third quarter (as seen in the graph below) but the economy is far from clear of turmoil. According to the governor of the central bank, Haruhiko Kuroda, the tenuous present is a “crucial

moment for Japan before it fully escapes deflation and achieves continuous growth.”

The Bank’s influence, as well as the

policies of the government, should guard carefully against the uncertainties coming in the year ahead.

Daniel Blaugher


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South KoreaOn December 9th, the South Korean national assembly decided to impeach President Park Geun-hye. Her dismissal would require new elections, which must take place before December 2017. Although the stock market in Seoul entered a period of volatility after the impeachment of President Roh Moo-hyun in 2004, the KOSPI index this week closed just 0.3% down. Political uncertainty clouds the nation’s

economic outlook, however, economists for the HI Investment & Securities in Seoul believe that “things can improve if the

president taking over power makes his stance on economic policies clear”. In

contrast, if the impeachment motion had been rejected, it is likely that consumption and corporate investment could have seen a turn for the worse as protestors for President Park’s impeachment would have

returned to the streets. Moreover, if the impeachment of President Park was to be overturned, this could create large public anger and political alliances would reunite, effects that would have a significant impact on the economy, as predicted by Chang Jae-chul, an economist for Citibank Korea. The political uncertainty following the breakout of the scandal in October has already translated into economic uncertainty as economists

cut South Korea’s GDP forecasts for the

following year. Furthermore, the decrease in consumption at a national level is predicted to persist until the second half of next year, as the uncertainties brought upon by the election begins to ease and uncertainties decline. However, an early election brings hope to the growth of the nation, as South Korea could potentially “gain traction in the

second half of 2017”, argued by Lee at

Eugene Investment & Securities. The eruption of the scandal brought front links between the executive office to the chaebol (large family-owned business conglomerate), such as that of South Korea’s largest companies including

Samsung, Lotte, and Hyundai. This has made South Korea’s citizens to belittle the relationships that once underlined the rapid growth of the country, as income inequality widens, youth unemployment increases and the steel and shipping industry take a large toll. However, on Tuesday, chaebol leaders denied soughing out political favours in exchange for the millions of dollars donated by them to foundations controlled by Choi, President Park’s close

friend who is at the centre of the scandal. Maria Fernandes Camaño Garcia

NEFS Market Wrap-Up

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Australia & New Zealand

This week we will discuss updates on economic growth in Australia and the dairy industry in New Zealand.

Last Wednesday, Australia released third quarter GDP annual growth figures coming in at 1.8%. This marks the lowest annual growth Australia has experienced in over six years. Consensus forecasts predicted 2.5% in growth. So why is this figure so low? According to the Australian Bureau of Statistics, weak performances in private investment in new buildings, new engineering, and other housing market indicators contributed significantly toward the reduced growth figure. The household savings ratio decreasing from 6.7% to 6.3% provides a 0.4% increase in household financial consumption, which supports Australia’s growth levels in the positive direction. While there are many believers that a recession is due in Australia, it would not be wise to despair over a single quarter’s annual GDP growth. The country

has a proven track record of rebounding after disappointing GDP growth reports and hasn’t reported reduced growth over

consecutive quarters for more than two years.

Last Monday the Global Dairy Trade Price Index released the 3.5% increase in the weighted average price of nine dairy products sold at auction. The Global Dairy Trade Price Index is especially significant to the New Zealand economy because exports account for about 30% of the nation’s GDP and dairy is its biggest

export. According to DairyNZ Economics Group, the 2015-2016 New Zealand dairy industry generates 12.2bn NZD in exports,

supplies 3% of all the world’s milk, and

employs 49,110 of the country’s 4.47

million population.

Next Monday, New Zealand releases year-on-year manufacturing production for the third quarter. Previous second quarter data marked a 4.5% increase in manufacturing production. This was the strongest quarter of manufacturing production since the year 2014. Production volumes for petroleum/coal products and non-metallic mineral lead the way, increasing by 13.4% and 7.4%, respectively. Manufacturing represents roughly 13% of the New Zealand’s GDP compared to the United

Kingdom where manufacturing accounts for roughly 10% of GDP. The country hopes to continue the upward trend.

The next few weeks will see Australia release data on housing prices, consumer and business confidence. Amid the recent decline in growth and talks about a potential recession ahead, these three indicators should provide a clearer roadmap for the future of the country’s

economy.

Dan Minicucci


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Canada The Bank of Canada (BoC) maintained the overnight interest rate at 0.5% on Wednesday (the 7th), unchanged since it was lowered in July last year, and the lowest since rates were 0.25% around the time of the Great Recession in 2009 (diagram below).

In their corresponding statement, the Bank acknowledged a strengthening of the global economy – in line with their October Monetary Policy Report – though they noted persistent uncertainty and poor business confidence. On the domestic economy, the statement said that “the

dynamics of growth are largely as the Bank anticipated. Following a very weak first half of 2016, growth in the third quarter rebounded strongly, but more moderate growth is anticipated in the fourth quarter.”

Opinion among economists reflects a general view that the Bank is exercising caution in this decision. Derek Holt, of the Bank of Nova Scotia, said that he “see[s] it

as just a placeholder until they're prepared to think about things a little bit further and we get more information out of the U.S." Citibank’s Dana Peterson echoed the

uncertainty and dependency on U.S. policy under President- Elect Trump, though added that further rate cuts may be

necessary - “unless there is strong

evidence that Canada is regaining momentum and can weather likely increasing headwinds from U.S. policy changes, the [Bank of Canada] will need to lower interest rates again.”

With the U.S Federal Reserve expected to hike rates to 0.75% this month, the BoC’s

dovishness signals the first time Canadian rates have lagged the Fed’s since 2007.

This perhaps should not come as a surprise as both economies are at very different stages in their recovery and Canada is still recovering from the oil price shocks last year. Low rates will help to ease borrowing for the fiscal stimuli in child benefits and planned infrastructure spending – a policy central to PM Justin Trudeau’s Liberal government’s successful election campaign.

As BoC Governor Stephen Poloz acknowledged, divergence from the U.S. is likely to continue – the progressive and anti-austerity fiscal policy of Canada’s

Liberal government is unlikely to be mirrored by President-elect Trump’s

Republican, and conservative, government.

Jamie Peake

NEFS Market Wrap-Up

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India The Reserve Bank of India surprised many this week with its decision to keep interest rates at 6.25% despite the recent financial uncertainty following the Indian government’s demonetisation programme.

The diagram below illustrates the trend for interest rates in India over the past year which shows how the interest rate has been steadily declining.

The decision from the Indian government to withdraw 86% of India’s cash from

circulation has led to a stagnation in consumer spending and business transactions. In a society where the monetary system is less formalised in the banking sectors, a clear majority of transactions are dealt with in a cash and informal format. The financial shock of the cash withdrawal was reflected in last week’s GDP growth statistics, which revealed that India’s third quarter growth

was a respectable 7.3% but this was lower than market expectations of 7.5%. The Indian government has reflected the lack of confidence within the Indian economy by lowering growth expectations for the upcoming months to lower than 7%.

There have been calls in some sectors for the Reserve Bank of India to take control of the situation and act during this potentially difficult time for Indian citizens. Pressures have risen for the bank to cut the interest rate to incentivise an upturn in consumer spending and look to reverse the feeling of low confidence which currently resides over the Indian economy.

However, the Reserve bank has chosen not to act and has decided to keep benchmark repo rate at 6.25%. One of the reasons that the bank has used to justify its decision is that officials in the bank believe that their main objective is to focus on the inflation rate rather than economic growth. RBI governor Urjit Patel has previously suggested that inflation was his primary priority following his appointment as leader of the RBI in September. Patel has told reporters that following a previous cut to interest rates in October to combat an unexpected rise in inflation, ‘a further reduction in the policy rate is not warranted at this juncture."

Nevertheless, the RBI has faced criticism for its lack of flexibility to act appropriately when it is most required to do so. Ashutosh Datar, an economist at IIFL Institutional Equities, has stated how he expected to the bank to be proactive given the circumstances and that the bank’s decision

has come as a ‘negative surprise’ for him.

Isher Hehar

EMERGING MARKETS


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China The past week saw the release of a plethora of indicators, reflecting both consumer and business confidence & sentiment within the economy despite minor rises in inflation rates. They were all illustrative of a potent economy. Producer price inflation, which measures costs for goods at the factory gate, exceeded market expectations to reach a five-year high in November, according to the National Bureau of Statistics, mainly due to rising industrial commodities. The producer price index rose 3.3% on year last month, the highest since 2011, and up 1.2% from October. Rising coal and steel prices may prompt further rises in PPI. The PPI figures were complemented with the release of the Consumer Price Index (CPI), which also increased year-on-year by 2.3% in November, compared to a 2.1% rise in October. The highest rate since April, much of the rise can be attributed towards a sharp rise in food prices, by 4.0%, and consumer goods, which rose by 2.1%. The result caused the government slightly alter their inflation target to 3.0 %. China’s services sector, comprising 58.5%

of GDP growth in the first 3 quarters, expanded at its quickest rate in almost 16 months in November, according to a private survey. Emblematic of enduring confidence and stability in the economy, the Caixin China General Services Purchasing Managers Index rose to 53.1 in November, up from 52.4 in October. A reading exceeding 50 indicates growth in the sector. According to surveyed companies, the expansion was consequential of increased new projects/orders, with job creation in the sector rose at the fastest rate in one and a half years. The trend correlates with the

official indicators released by the National Bureau of Statistics, which showed China’s

non-manufacturing activity expanded to 54.7 in November from 54 in October. The services sector is currently under scrutiny, given that growth is needed to offset lacklustre export growth and a subdued manufacturing sector. Exports rose by 0.1% on-year in November, reversing Octobers 7.3% decline in a surprising rebound. Imports, however, grew at the fastest pace since 2014, rising 6.7% from a year ago, China’s

trade surplus (shown below) unexpectedly fell to $44.61 billion in November, from $53.97 billion a year earlier.

Despite enduring confidence and growth in the economy, Zhu Haibin, China chief economist at JP Morgan, warned of increasing ‘pressure on the economy in

2017’ because of cooling ‘real estate

investment and auto market’.

Usman Marghoob

NEFS Market Wrap-Up

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Russia & Eastern Europe

One thing that strikes you when examining macroeconomic factors in Eastern Europe is the volatility of results for most countries.

It is not out of the question, for example, to record a trade deficit of €-200m in October, but to have a forecasted trade surplus of €289.2m for December – as in the case of Poland. Neither are the high inflation rates, by world standards, with which Russia has been struggling for years. After fears of hyperinflation as a result of the 2014 economic crisis within the country, caused by the low oil prices, and a record-high inflation rate of 12.9% in 2015, the country’s latest reports show a record-low 5.8% consumer price increase. Thus, what Eurozone members would raise eyebrows at, Russians call success.

Nothing seems more striking, however, than Ukraine’s development. In the

aftermath of the 2008 economic crisis that hit the country, the IMF approved a stand-by loan of $16.5bn. In November this year, the organisation initiated further discussions with Kiev on the authorities’

economic reform programme supported under the Extended Fund Facility (EEF) arrangement. The conclusions were that Ukraine shows signs of recovery, despite the fact it has a long way ahead on implementing the IMF-directed policies and tackling corruption. In the past two years,

the Ukrainian central bank’s international

reserves have shown a robust increase, external and internal imbalances have been reduced, and Year-on-Year growth for 2016 is forecasted at 1.8%. Furthermore, inflation has been brought down to 12.1% in November, from the jaw-dropping 43.3% in January, as seen below.

Yet, below the surface of these numbers, the country has struggled to cope with IMF’s requests. Take inflation for example.

A relatively low consumer price increase (below 10%) was recorded in sectors such as food, clothing and footwear, furnishing, health, and recreation and culture. In contrast, housing and utilities sectors saw their prices accelerating, at +47.2% from +44.4% in October. This is a result of the IMF’s request to hike utility tariffs, and has

resulted in a staggering +88.2% rise of heating and hot water prices, +42% natural gas price increase, and +60% electricity price increase. With per capita GDP in the country taking the second lowest position of Eastern and Central European countries, such a hit in utility prices, especially during winter, is more than worrying. It raises the debate on the relative importance of ‘good-on-paper’ numbers and standards of living

exploited to achieve them.

Desislava Tartova


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Latin America

In the past seven days, the leaders of both Brazil and Venezuela have undertaken measures to stabilise the economy with interesting consequences. Separately, Mexico reaped the benefits of its oil hedging scheme of 2016, whilst also announcing the latest inflation figures.

On Tuesday, President Michel Temer of Brazil announced a plan to increase the average retirement age in Brazil from 54 to 65, amidst concerns about the long-term health of the Brazilian economy. Despite being an emerging market favourite for investors due to strong performing currency, the Brazilian economy is far from strong. In fact, Q3 of 2016 was the 7th consecutive quarter in which national GDP fell. Brazil has one of the most generous social security systems in the world, and with government deficit figures holding around 10% of GDP, drastic reform to the budget is both necessary and inevitable. The effect on investor confidence remains to be seen, especially in the short term since the new regulation will only apply to working males aged below 50 and females aged below 45.

The Venezuelan central bank (BCV) announced this week that is will begin circulating new denominations of the nation’s currency, the Bolivare, in the next few days. Venezuelan inflation currently sits at a staggering 476% according the IMF. Carlos Alvarez, a senior economist at reporting group

Ecoanalitica, the FT estimates inflation for 2016 will be over 500%. The new notes, in 500, 1000, 2000, 5000, 10000 and 20000 denominations will assist day-to-day transactions, which have begun to take place via weight of notes rather than value. The measure will have only a short-term effect though, if inflation continues at current rates the new notes will soon also become valueless.

The Mexican government received $2.65 billion on Wednesday from this year’s oil hedging programme. The sum was slightly below analyst expectations, standing around the $3 billion mark. The 2016 programme placed an option of $49 per barrel on 212 million barrels. The 2017 programme is on an even greater scale with the option at $38 per barrel on 250 million barrels, demonstrating the pessimistic outlook for oil prices next year. Also in Mexico, annual inflation figures released on Wednesday showed that prices rose by 3.3% in the year to November. Inflation will likely stay within the central bank’s (BdM) target of 2% +/- 1% this year, but may overshoot in 2017. Food, electricity and fuel price rises all contributed to the latest figure. In the coming weeks, it is expected the BdM will raise interest rates further, we will wait to see if this becomes a reality.

Alistair Grant

NEFS Market Wrap-Up

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Africa This week we delve into the economic decline of Africa’s most populous nation; a nation with arguably the most disappointing growth, and one riddled with issues of governance that have both enabled and aided the current recession. Nigeria, in short, is a nation in economic turmoil.

Nigeria had over these years depended solely on revenue from crude oil, whose price was being determined by fluctuating international market forces, and when crude oil was booming, Nigerian governments paid little attention to economic diversification, neglecting other sectors of the economy. However, in the last year, a faltering oil price has directly impacted the nation’s economy, a problem

that has coincided with the 18-month presidency of Hosni Mubarak. Earlier in the week, United States Consul-General in Nigeria, Mr John Bray, accurately commented on the state of affairs, stating that “this dependence [on oil production]

coupled with the huge cost of running and maintaining our political structure was always a recipe for disaster.” Such is the

state of the current economy, the country’s

worst economic crisis in 25 years, that many state governments are now unable to pay salaries of workers and also provide much needed infrastructural development. Data released last week show the economy shrank for the third consecutive quarter.

The International Monetary Fund forecasts Nigeria’s economy will contract 1.7 per cent

this year — a sign of the dire fiscal straits African commodities producers are in, one of the major economic challenges affecting member states that have slowed down the proposed Economic Community of West African States (ECOWAS) integration.

Militant attacks in the oil-producing delta have also slashed crude outputs, the country’s biggest revenue-earner, and hopes for the start of an economic recovery this year faded with the central bank’s

introduction of capital controls, a measure supported by President Buhari’s. Hence, investors doubt the ability of the government to transform into an investment friendly institution, and Nigeria into an investment hospitable state. The situation becomes particularly startling when considering the fact that Nigeria ranked 169 out of 190 countries on the World Bank’s ease of doing business index

this year, a figure taking into account it’s

persistent corruption and failing bureaucracy. Nonetheless, Buhari and his government remain hopeful that Nigeria can reorganise its economy, regaining the confidence of investors’ through fair

treatment, profit repatriation and most importantly, the rule of law.

Mikun Olupona


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Middle East At Doha’s Euromoney conference, Qatar’s Finance Minister said that the country would invest up to $13 billion in major investment projects in 2017, in line with the government’s economic outlook of achieving “sustainable development and economic diversification”.

Regulatory reforms such as improving transparency and enhancing the importance placed on small business’ in the economy are planned steps to develop Qatar’s economy away from focusing on the oil sector, which is predicted to account for 47% of GDP next year, and into developing the country’s trade and service industries. Mr Sherif al-Emadi explained the success of the country’s diversification strategy through stating that Qatar’s non-oil sector has had a growth rate of 5.8% so far in 2016.

The $13 billion of investment funds will be focused on Qatar’s construction and transport sectors. Investment in these sectors is vital considering the country’s aims of making a strong global impression through its hosting of the 2022 World Cup. Construction is to account for 45% and transport 30% of investment, according to Qatar National Bank’s chief executive officer. Other sectors including education and health are also set to feel the benefits of added investment.

Mr Sherif al-Emadi quoted the International Monetary Fund’s economic growth estimates which predict a 3.4% growth rate

for 2017, and 3.2% and 2.9% in the following two years. This increase from the projected 3.2% growth rate of 2016 is the “highest forecast growth in the Gulf Co-operation Council”. This bolstered economic growth is set to come from growth in the financial sector and more efficient public spending. The graph below shows Qatar’s GDP growth over the past 5 years.

Turkey meanwhile faces a different picture. With the value of the lira having plunged by almost a fifth against the dollar since the beginning of this year, President Erdogan this week encouraged businesses and individuals to change their foreign currencies into lira. By Wednesday the lira was reported to have increased in value by nearly 2%. A statement released by the government detailed that $262.7 million of the defence ministry’s support fund was switched to lira, showing perhaps that they are practicing what they preach.

Turkish businesses have also started giving freebies to individuals who can prove that they have made the currency switch in an attempt to increase the incentives of holding lira. One example is a restaurant in Konya offering a free dish of “etli ekmek” to anyone who can show that they have exchanged $500 into lira. Despite being an unusual way to improve the value of the lira, it is one that has already made some progress.

Nikou Asgari

NEFS Market Wrap-Up

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Southeast Asia This week we assess foreign exchange reserves figures for Indonesia, Thailand and the Philippines. We also consider the medium to long-term future of Malaysia in the face of a weakening currency and on-going political instability.

Indonesia, Thailand and the Philippines all posted lower than expected levels of foreign exchange reserves this week, as emerging markets continue to suffer from subdued currencies (see chart). On Friday Indonesia announced that its reserves had fallen to US $111.5 billion in November of 2016 – the lowest level since July. Likewise, reserves for Thailand and the Philippines both fell to their lowest levels since February, decreasing to US $174.7 billion and US $82.7 billion respectively. These figures have been partly attributed to the recent US elections, as Donald Trump’s

shock victory triggered the countries’

currencies to weaken considerably. Indeed, the Filipino peso reached an eight-year low in November. In Indonesia, the central bank was even forced to intervene in currency markets in an attempt to halt the outflow of money. However, the long-term risks should not be overstated – a recent IMF forecast found that all three countries have adequate reserve levels to withstand

further downward pressure on their currencies.

In contrast, the medium-term stability of Malaysia looks less certain. The same IMF measure found that Malaysia’s foreign

exchange reserves were lower than adequate, with a short-term external debt exceeding projected reserves by $28.2 billion. These findings corroborate fears that the threat of ‘original sin’ (the risks of

borrowing in a foreign currency) has grown in the country in recent years, as firms and households have taken on large sums of dollar-denominated debt. Indeed, the country has the highest level of household debt and one of the highest levels of corporate debt in the region, at 89% and 70% respectively. With the recent decline in the Malaysian Ringgit, many analysts are now questioning whether the country will be able to service this debt in the coming year.

Next week both Singapore and the Philippines release unemployment figures for the third quarter of 2016. Indonesia is also announcing balance of trade figures and the central bank’s interest rate decision

for November.

Daniel Pettman


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EQUITIES

Financials Whilst the FTSE 100 remained on track for its best week since July, shares in Capita have continued their incremental fall. The FTSE 100 market was up 18.75 points to 6950.30 – on track to record five consecutive days of gains - but shares in Capita fell more than 14% on Thursday, a ten-year low. The outsourcing group hands have been forced and they issued a second profit warning in three months, immediately precipitating a further 3% fall on Friday. It seems as if Capita’s announcement of their

wish to replace staff with robots in an attempt to slash costs – ameliorating investors’ concerns - has not gone down as well as first thought.

Capita intended to use the accrued savings from sacking thousands of staff to fund investment in automated technology. This would follow the trend of Apple and Samsung supplier Foxconn’s decision to

replace 60,000 workers with robots earlier this year. In related news McDonald’s

responded to demands from low-paid for workers for better pay with threats of adopting a similar approach. Capita’s chief

executive, Andy Parker, believed the move would ‘have a more positive reaction’ but

investors have rightly been stunned by the company’s macabre outlook. Rehana

Azam - National Secretary for Public

Services - asserted that public service efficacy is at its best when delivered by people and it was ‘hard to see how they’re

going to provide a cost-efficient service from call centres in another country’. From

an ethical standpoint, I am as surprised as I am happy to see that investors are standing up for the rights of workers. Workers are ends in themselves, not merely a means to an end to be discarded when their usefulness has been maximised.

In other news, the ‘Trump bump’ on stocks

has seen the S&P 500 rise 3% since the election, however more than a third of the companies in the index have actually been subject to unwelcome and unaccounted for losses. Utility companies and consumer staples have felt the brunt of uncertainty within their markets, continuing a trend prevalent throughout 2016. Immediately following the election there was a minute rise in consumer staples, but stocks in the market are down 4% on average. Tyson Foods (down 19% since Election Day), Coty (down 16%) and Mondelez (down 11%) are probably lobbying for a recount in the face of their recent performances.

Vincent Egunlae

NEFS Market Wrap-Up

18

Technology Fitbit, known for its fitness tracking products, confirmed on Tuesday that it has acquired the struggling smartwatch start-up, Pebble. The acquisition includes Pebble’s software, intellectual property, as

well the start-up’s software engineers and

testers. Technology wearables has been a sector which has failed to grow as quickly as initially anticipated, as industry shipments declined by 52% in the third quarter of this year, according to research firm IDC. Pebble has been amongst the struggling firms, as they cut a quarter of their staff earlier this year.

Fitbit has also been struggling, as their stock price fell by more than 73%in 2016. The acquisition of Pebble is seen as an attempt to transform itself from a “consumer electronics company” into a

“digital healthcare company.” James Park,

chief executive officer and co-founder of Fitbit said that: “With basic wearables

getting smarter and smartwatches adding health and fitness capabilities, we see an opportunity to build on our strengths and extend our leadership position in the wearables category.” Following the

acquisition, Fitbit shares rose by 1.1% to $8.07 on Wednesday.

The other major tech story of the week comes from Amazon. The e-commerce giant has unveiled its plans for a checkout-free grocery shop, called Amazon Go, which will allow shoppers to purchase items without having to physically scan and pay for them in store. The new technology

detects items that have been taken or returned to shelves, tracks them in a virtual shopping trolley, and charges the shopper on their Amazon account when they leave. The unveiling of this new technology caused Amazon shares to rise by 1.45% between Monday and Thursday which is shown in the chart below.

Amazon expect their first shop to be opened to the public in Seattle, United States, in early 2017. This marks a dramatic departure from Amazon’s online-only strategy, and it also continues their goal of expanding into the grocery market. The company has already entered and expanded their presence in the market with their grocery delivery service, Amazon Fresh, however, they still only control 1% of the $800 billion US grocery market. John Blackledge, an analyst from Cowen and Company, says that: “Grocery is the

company’s biggest potential for revenue upside,” and estimates that Amazon’s

grocery sales could grow from $9 billion this year, to $23 billion in five years.

Bunyamin Bardak


19

Oil & GasOil and gas stock prices continued to be buoyed over the past week by news of the representatives of OPEC nations meeting with non-OPEC countries in Vienna on Saturday to seek an agreement to cut oil production. According to the International Energy Agency, global oil supply was at 97.8 million barrels per day in October, 0.8 mb/d above a year ago and with higher OPEC supply offsetting non-OPEC declines. Members of the oil cartel on November 30 pledged to cut oil production by 1.2 mb/d from January 2017. They are hoping non-OPEC producers can limit supply too.

The optimism on international oil price outlook is reflected in oil and gas stock prices. Analysts at Barclays Capital reiterated its “OVERWEIGHT” recommendation on Royal Dutch Shell (RDSA: LSE) and set a target price of 2,650 pounds on the stock, representing a potential upside of 28%. Share price of the industry giant gained 2.43% over the week to close at 2,086.5 pounds on Friday.

British Petroleum (BP: LSE) climbed to 476.2 pounds on Friday, its highest since November. It gained 2.22% over the week. The stock price of Total (FP: EPA) is near its highest in 12 months at 46.42 euros on Friday after rising 3.39% over the week.

In the United States, Exxon Mobil (XOM) closed at $88.32 on Thursday, its highest since July, while Chevron (CVX) rose to $115.17 from $113 at the end of the

previous week. The NYSE Energy Index rose to 11,493.12 on Friday, gaining 1.86% over the week.

The Brent Crude futures were trading at $54.17 on Friday, and the West Texas Intermediate (CLF7) at $51.46, high enough for many shale oil wells to be productive again.

The market is expected to continue watching for clues of policies on climate issues and following news from Vienna, where the OPEC and non-OPEC nations meet on Saturday. Khalid Al Falih, the minister of energy of Saudi Arabia, has said that OPEC is expecting a cut of 600,000 b/d from non-OPEC countries.

Russia has said that it is prepared to commit to a cut of 300,000 b/d. The OPEC and non-OPEC nations managed to agree on cutting oil production in 2001, though the non-OPEC countries fell significantly short of OPEC’s preferred target at that time.

Michael Chen

NEFS Market Wrap-Up

20

COMMODITIES

Agriculturals The good times are back for rubber investors. Prices have soared by 21% over the past month (as shown below), resuming a bull market that is showing no sign of cooling down any time soon. Tokyo futures reached an 18 month high of 246

¥/KG on Wednesday, mirroring the recent bullish sentiment in crude oil markets (with Brent Crude rising by 15% since OPEC agreed a production cut on 28/11/16). The resurgent oil market is positive for rubber prices as crude oil is a significant feedstock used in the production of synthetic rubber.

The recent spike in buy-side interest is largely a result of the positive comments made by the Association of Natural Rubber Producing Countries (ANRPC) on Wednesday, who together control 90% of global rubber exports. The data released in a statement showed a meagre 0.4% growth in production during 2016, while consumption grew by a significantly healthier 4.3% over the same period.

The “favourable supply-demand fundamentals” have also been supported

by increased speculator interest since the Chinese government slashed tyre purchase taxes back in October. Despite initially threatening to intervene further by increasing trading transaction fees, the Chinese government have been surprisingly quiet in recent weeks. Further unexpected Chinese intervention remains a key risk for investors, who should be wary of the government’s aversion to volatile

futures markets. It is worth noting that the

price spike has also been impacted by recent currency movements. The yen has depreciated by 9.4% against the dollar since the start of November, which has the effect of making Tokyo rubber futures appear artificially higher. Should the Federal Reserve not increase interest rates as expected next Wednesday, this would likely impact negatively on rubber prices in Tokyo.

A volatile first few trading sessions in December has done nothing to ease fears of a price crash in coffee markets. Benchmark Arabica bean prices fell by 5% this week, confirming its status of the worst performing agricultural commodity since the start of November. Since the 9 month high of $1.75/lb was reached on 08/11/16, supply expectations for the current season have increased dramatically. This has been a result of the improved weather conditions in major production regions as well as a successful tree-replanting program in Columbia, which the Federation of Coffee Growers of Columbia believe have improved crop yields by approximately 50%.

Aidan Dominy


21

Energy The surge continued on from last week for natural gas prices, with prices hitting the highest level seen since 2014, as shown on the graph below. The continued increase comes after further forecasts of a cold US winter, leading to more homes using natural gas and recent colder temperatures reducing the natural gas stockpile. The reduction in the reserves of 42 billion cubic, compounded by the cold outlook meant that on Thursday, natural gas was up 9.2 cents (2.55%), settling at $3.695 a million British Thermal Units, following into Friday, up a further 1.76%. However, the cold temperatures have raised concerns over the stockpiles of natural gas which analysts believe could soon be in a deficit.

Last week saw oil prices gain large ground after a successful OPEC agreement to cut oil production by 1.2 million barrels per day, leading to a final price of $54.19 per barrel for the global benchmark – Brent Crude. This headway was continued into this week, amid speculation over a meeting in

Vienna on Saturday, between OPEC members and non OPEC oil producing countries, with the former hoping to see a further cut in production by 600,000 barrels per day by those countries not in the organisation. Russia stated last week that they would cut their production by 300,000 barrels per day with other countries such as Kazakhstan and Azerbaijan having proposed to lower output but without releasing figures as of yet. This led to an increase in the price of Brent Crude, up by 25 cents at $54.14 per a barrel after rising 1.7% on Thursday. However, there are still question marks over the potential success of the agreement, with Russia’s oil sector

being only partly state owned, the companies will need to be compensated over the potential production cuts. Moreover, Saudi Arabia and Iraq plan to supply full contracted volumes of crude to Asia in January despite cut commitments.

William Bunnis

NEFS Market Wrap-Up

22

Major Currencies

A tumultuous week for the Euro as the ECB and Italy caused a stir. The outperforming sterling faced setback from data releases and the dollar continued to go strong.

Starting with the US dollar, opening at £0.7946 and closing slightly higher at £0.7951, the week has been rather unexciting, initially falling mid-week, before picking up following the fiasco in Europe. An on-consensus Non-Farm Payrolls release (178k) provides an air of inevitability to this month’s FOMC meeting, with policy makers almost 100% ‘priced-in’

for a hike.

GBP has been a clear outperformer in recent weeks, as the market has interpreted comments from key politicians, as indicative of a change in stance from the UK government towards ‘soft’ Brexit. Opening at $1.2587 and flatlining at close, the pound peaked at nearly 2 basis points higher than opening mid-week, but following the weak data that UK industrial production (worth about 15% of UK GDP) fell for the third consecutive month, at its worst rate in more than four years. It fell 1.3% in October. This was against forecasts of a growth by 0.2%. The sector could now provide a drag on the UK’s fourth

quarter GDP, after subtracting 0.1% from growth in the previous quarter.

Finally, the interest of the week comes from Europe. Following the Brexit-esque referendum outcome and the sombre

resignation of Italy’s prime minister, Renzi,

the euro has surprisingly not been affected as badly as one would think, with the risk of an Italian exit from the Eurozone very small. The Italian banking sector is shaky, as the world’s oldest bank and Italy’s third

largest, Monti dei Pashci di Siena, failed to gain more time from the ECB and watched a €5bn middle eastern equity injection

breakdown, dropping the euro to a week low of 0.831 to the pound. The euro however has not been too effected as Draghi sent some reprieve to the euro announcing the continuation of the asset buying programme, spiking the euro to mid-week highs of 0.857 to the pound. This sentiment was short lived as it was reversed by the close of the week to 0.839.

As the holiday looms, the markets should quieten down, with inflation expectations looming in both the US and UK, we wait on monetary news and in Europe we await the fate of Italian banking.

Robert Tse

CURRENCIES


23

Minor Currencies This week we look at how the JPY and other Asian currencies have been reacting to some market moving events, especially from the European Central Bank.

The Japanese yen is at its lowest level since February 2016.The currency is down by 0.5% at 114.62 per dollar as of Friday. This helped shares of Japan’s exporters,

as a weaker yen makes their goods cheaper in dollars. The yen has been weakening against the dollar since early November as the election of Donald Trump has ignited a broad-based US dollar rally.

"The rising yields and equity markets weigh on the yen," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

Looking forward, a Morgan Stanley team wrote that they think the dollar will continue appreciating against the yen. This is because the US capital market appears very attractive and I expect the USD to continue moving higher against foreign-asset-holding currencies such as the JPY.

The ECB said Thursday it would extend its bond-purchase program by nine months to the end of 2017, though starting in April it

will reduce its monthly purchases to €60

billion ($64 billion) from €80 billion.

The ECB decision triggered a sharp drop in the euro in late New York trading, bolstering the U.S. dollar broadly. That spilled over into Asian trading Friday, sparking losses in Asian currencies against the dollar. China’s yuan was 0.35% weaker

against the dollar on Friday.

The Reserve Bank of India panel’s move to

hold rates, which caused the benchmark 10-year yield to jump the most since 2013, could revive overseas demand for rupee debt as its yield advantage over US Treasuries improves. Local sovereign notes due in a decade pay 400 basis points more than similar-maturity U.S. bonds, with a rate increase by the Federal Reserve next week fully priced in. This led analysts to predict the rupee to outperform other currencies in Asia, as can be seen in the figure below.

We now await currency market reactions to the predicted US Fed rate hike on 14th

December.

Angelo Perera

NEFS Market Wrap-Up

24

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

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 Homairah Ginwalla at [email protected]. Sincerely Yours, Homairah Ginwalla, Director of the Nottingham Economics & Finance Society Research Division

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