nefs market wrap up week 9

Week Ending 7th February 2016

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NEFS Research Division Presents:

The Weekly Market

Wrap-Up

NEFS Market Wrap-Up

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Contents Macro Review 2 United Kingdom

United States Eurozone

Japan Australia & New Zealand

Canada

Emerging Markets

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China India

Russia and Eastern Europe Latin America

Africa South East Asia

Middle East

Equities

16

Technology Oil & Gas

Pharmaceuticals Financials

Commodities

Energy Precious Metals

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Currencies 22

EUR, USD, GBP


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MACRO REVIEW

United Kingdom

George Osborne stated that 2016 was opening

with “a dangerous cocktail of risks from the

global economy”, referring primarily to global

stock market volatility caused by the slowdown

in China, weak commodity markets, and the fall

in oil prices. Last Wednesday, the World Bank

revised down their prediction for global GDP

growth in 2016 from 3.3% to 2.9%.

The Bank of England (BoE) published their

quarterly ‘Inflation Report’ on Thursday. This

provides an assessment of the economy and

acts as a tool for transparency, allowing the

central bank to share their thinking and explain

their decisions to the people it affects.

In this report, the BoE cut their forecast for UK

growth in 2016 to 2.2%, down from the 2.5%

forecast in November’s Inflation Report. Annual

growth in 2015 was 2.2%, down from 2.9% in

2014, and is the slowest pace of growth the UK

has experienced for three years. Despite this

the UK is still one of the fastest growing

advanced economies. Last week, official

figures were released stating that the UK

economy grew by 0.5% in the last quarter of

2015, as shown in the graph below. On

Thursday, George Osborne wrote in an open

letter to Mark Carney, Governor of the BoE, that

he is concerned about the risks of a weaker

outlook for nominal GDP.

The forecast for average weekly earnings was

also revised down in the Inflation Report from

3.75% to 3%, due to persistent low inflation

alongside increases in population. The BoE

predict that average weekly earnings will return

to pre-crisis growth rates only in 2018, which is

the same year that they expect inflation to

return to target.

Markets had been expecting a rate rise this

year, however following the publication of the

dovish Inflation Report, expectations have

considerably changed. Markets now anticipate

the first rate rise to occur in August 2018. This

is bad news for savers who have had low

returns on their money for almost 7 years now,

but good news for those in debt or with

mortgages.

Shamima Manzoor

NEFS Market Wrap-Up

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United States

The US Labour Market started the year with a

sharp slowing in the pace of job creation from

the final quarter of 2015. In a statement

released by the US Bureau of Labour, the

department stated that the economy created

151,000 jobs in the first month of 2016, a

number which is significantly lower than the

revised figure of 262,000 in December 2015.

This trend is in line with the graph below, the

US economy has witnessed a downwards trend

in the unemployment rate since mid-2010

despite the occasional short-term upsets.

However, things are not as bad as they look.

The wage growth in hourly earnings

accelerated above forecast by 0.5% despite

slow hiring which brings optimism that the jobs

market is holding its ground in the face of the

market turbulence. Surviving the damaging

winds of poor overseas demand and a stronger

value of the US dollar, the manufacturing sector

created 29,000 jobs in January which is almost

equivalent to the total number of jobs created in

the whole of 2015 for this sector.

Interestingly, some economists may argue that

the prolonged poor expectations and low

consumer confidence that follows high

unemployment are the real plague for the

developed economies. The scars of the

subprime mortgage crisis can now be

witnessed in the shockingly low US home

ownership rate, especially amongst the

“millennials”- those aged 18-34, who represent

the largest proportion of the US population.

Being victims of mortgage defaults, almost a

third of this group lives with their parents.

Moreover, given poor credit scores on their

profiles the struggle to find a successful lender

may persist even longer if the slowdown in the

labour market creates doubts amongst these

economic agents.

In other news, all eyes are set on the US 2016

Presidential elections which have been set

underway following the first caucusing of voters

in the state of Iowa. Hilary Clinton clinched a

narrow victory at the start of the week, edging

out Bernie Sanders by a close margin. A

successful start for the democrats may be hit by

several roadblocks as the campaign seems

unpopular among the younger voters who do

not see Ms Clinton, the former secretary of state

as sufficiently progressive and “very liberal”.

Infamous for his controversial statements and

hysterically radical propositions, Mr Donald

Trump claims that this year’s elections will

cause a dramatic upheaval in US politics -

something only time can tell.

Vimanyu Sachdeva


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Eurozone

Inflation in the Eurozone has hit its highest level

of since 2014, now at 0.4%. However,

economists remain convinced that the

European Central Bank will unleash another

round of monetary stimulus in March. While

headline inflation has not been as high since

October 2014, it remains well below the ECB’s

target of just below 2%. Price pressures will

almost certainly become more subdued in the

months ahead as the latest slump in oil costs

are factored into the index.

Headline inflation across the single currency

Eurozone rose in the year to January to 0.4%

from 0.2% the previous month, according to

Eurostat, the European Commission’s statistics

bureau. The core measure of inflation, which

strips out more volatile price changes for goods

such as food and oil, rose from 0.9%to 1.1%.

The ECB looks set to react to the drastic fall in

oil prices and the China-led slowdown in

emerging markets after central bank’s president

Mario Draghi said his policymakers would

“review and possibly reconsider” their policy

stance at their next policy vote, held in early

March.

The Bank of Japan’s decision earlier on Friday

to follow the ECB’s lead into negative territory

and cut a key interest rate to minus 0.1% has

raised the prospect of more action from officials

in Frankfurt.

“The ‘currency wars’ may have entered a new

phase. The Bank of Japan’s announcement of

a negative interest rate, with its communication

today leaving the proverbial door open for

further reductions, has seen the yen fall

sharply,” said Ken Wattret, economist at BNP

Paribas. “The exchange rate implications for

the Eurozone of the Bank of Japan’s actions

increase the already high likelihood of a further

deposit rate cut by the ECB in March and will

add to speculation of a bigger than 10 basis

point cut.”

With retail sales rising, and better than

expected unemployment levels in 4 years

despite the fears surrounding the slowdown

and volatility of the markets, coupled with

monetary stimulus, the Eurozone is slated to

have a slow but stable growth and comeback

into the global economy.

Erwin Low

NEFS Market Wrap-Up

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Japan

Against the backdrop of last week’s surprise

decision by the BoJ to cut interest rates into

negative territory, this week, in which markets

have had time to digest the news, has been

relatively subdued. The intended

consequences of the cut, and likewise the

immediate effects it had, have to a large extent

been reversed with both the Nikkei 225 stock

index and the dollar exchange rate against the

yen falling to the same level they were before

the cut.

On Wednesday, BoJ governor Haruhiko

Kuroda made an announcement regarding the

outcome of a monetary policy meeting. In

response to assertions that the BoJ was

running out of policy options he insisted that

there was no limit to monetary easing and that

they were prepared to cut interest rates even

further if it would help them to achieve their

inflation target of 2%. What’s more, he claimed

that he would invent new tools if necessary.

In other news, two new surveys for January

were released this week; one regarding

business confidence and the other consumer

confidence. The final manufacturing PMI

(purchasing manager’s index) for Japan, which

is based on a survey that asks purchasing

managers to rate the relative level of business

conditions, was released on Monday.

Meanwhile, the figures for consumer

confidence, which are based on a survey that

asks households to rate relative economic

conditions, were released on Wednesday. For

both measures a score above 50 indicates

overall confidence and means that, in the case

of the final manufacturing PMI, businesses are

likely to expand and, in the case of consumer

confidence, that households are likely to

increase spending. The forecasted score for the

final manufacturing PMI was 52.4 and the

actual score was 52.3. For consumer

confidence the forecasted score was 43.8 and

the actual score was 42.5.

As we can see in the graph (see below)

consumer confidence has been stagnant for

many years, and after last month, when a

government official said that it was ‘showing

signs of picking up’, sliding oil prices and an

equities rout have prevented it from improving.

The score for final manufacturing PMI is a

positive sign though, and as production

processes are usually medium to long term, it

indicates that businesses remain positive about

the overarching economic environment and that

they are unwilling to be swayed by short term

market woes.

Daniel Nash


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Australia & New

Zealand

Reports on Australia’s trade balance came in

this week, presenting the fourth worst trade

deficit on record. The diagram below shows that

the previous 2.91 billion deficit rose by 30%,

overshooting the 2.45 billion forecast by coming

in at 3.54 billion, the largest deficit since June

last year. Goods and services exports fell by 5%

and non-rural goods fell by 7%. In addition, the

value of iron ore and mineral exports fell by

16%, with coal down 8%. Andrew Hanlan,

Westpac economist, stated that iron ore was

the “big story of the month’s figures”.

Meanwhile imports of goods and services fell by

1% but imports of non-monetary gold rose 39%,

whilst services debits rose 1%.

This weakening of trade performance may

result in the next international investment

figures, released in March by ABS, showing

that Australia’s net foreign debt may surpass

the $1 trillion marker.

New Zealand’s unemployment rate in

December 2015 was released this week. The

rate fell from 6.0% from the previous period to

5.3% in the three months to December, well

below the 6.1% forecast. Meanwhile

employment increased by 0.9%. However, data

suggests that although the number of people

employed has risen, there has been a rise in the

number of people who are not participating in

the labour market, resulting in a fall in the labour

force participation for the third quarter in a row.

The information suggests that more people are

opting out of the labour market therefore

becoming inactive. So the rate of

unemployment was falling as there fewer

people are actively seeking jobs and instead

may be studying or staying at home.

But employment has been strong for 20- 29

year olds, as 26,800 more are employed, with

the largest rise in the construction industry.

New Zealand’s economy has created 21,000

jobs over the last quarter of 2015. The

Economic Development Minister, Steven

Joyce, claimed that the figures were “a real

tribute to the New Zealand businesses that

continued to grow and invest in the economy”.

He added that these results had a number of

contributing factors including a strong

construction industry, especially in Auckland,

increases in trade and technical professions as

well as significant regional improvements.

Meera Jadeja

NEFS Market Wrap-Up

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Canada

It has been announced that the Canadian

unemployment rate has increased by the small

amount of 0.1% to 7.2%. It had been stable at

7.1%, as you can see from the diagram below

for two consecutive months. This is the highest

unemployment rate recorded by Canada since

December 2013. By looking the graph of the

Canadian unemployment rate below you can

see that unemployment in Canada had been

stable at 6.8% for six months. However, it is of

importance to note that the increases in the

unemployment rate since August 2015 have

been relatively small.

The increase in the Canadian unemployment

rate was caused by the increase in the number

of unemployed people in Canada, which

increased by 3,900. The number of part time

employed people decreased by 11,300 and

those working full time rose by 5,600 people.

Therefore, there was an overall decline in the

number of people in employment of 5,700. The

size of the Canadian labour force declined by

1,800 in the month up to January 2016.

Between January 2015 and January 2016 the

unemployment rate increased by 1.0% from

6.2% to 7.2%.

The largest increase in the number of job losses

was in the Canadian provinces of Alberta,

Manitoba and Newfoundland. Alberta

experienced a decrease of 10,000 in the

amount of jobs available, in the month to

January 2015. In comparison, the number of

jobs available in Ontario has increased by 1.5%

over the previous year.

In other news, it has been announced that the

Canadian trade deficit is the smallest since July

2015. Exports increased by 3.9% to $45.4

billion (CAD) and imports rose by 1.6% to $45.9

billion (CAD). This created a merchandise trade

deficit of $585 million. Whilst the trade deficit

has become smaller, the existence of the trade

deficit is disappointing if we consider that in

2014 Canada had a merchandise trade surplus

of $4.8 billion (CAD).

Kelly Wiles


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EMERGING MARKETS

China

Before the majority of the mainland population

take a break to visit their families for the Lunar

New Year celebrations next week, Chinese

authorities have released several key statistics

indicating sentiment within both sides of the

Chinese economy.

The Chinese Federation of Logistics and

Purchasing released PMI figures for both the

manufacturing and non-manufacturing sectors

for the month of January on Monday. The

official factory gauge came in at 49.4, a three-

year low, signalling the sixth straight month of

declines. The figure was slightly below a

forecast of 49.6 and last month’s figure of 49.7.

According to the National Bureau of Statistics,

manufacturing PMI fell due to weak demand

and efforts to reduce overcapacity. Non-

manufacturing PMI came in at 53.5, falling short

of last month’s 16-month high figure of 54.4, as

shown in the graph below.

The divergence in sentiment between the

manufacturing and services sectors is evident

once again in the figures released this week.

The key question here is whether the growth of

the services sector can offset the deterioration

in the manufacturing sector, the main driver of

the “old” Chinese economy. This only adds to

the problem of the balancing act that

policymakers face. An injection of monetary

stimulus would support the slowdown in growth

but could also exacerbate capital outflows,

adding further pressure to the yuan. Capital

outflows from China reached approximately $1

trillion for 2015. Policy has been

accommodative to stabilise the manufacturing

sector so far. Between the end of 2014 and the

end of 2015, the People’s Bank of China

(PBOC) cut the interest rate six times to a

record-low of 4.35%. The Chinese central bank

has also lowered the reserve-requirement ratio

for big banks, another form of monetary

stimulus.

Confidence in the Chinese economy has been

a global concern. Deflation seems to be the

biggest risk factor in the Chinese economy this

year. Markets should see a shift from monetary

to fiscal policy in 2016 as the government

leaders and policymakers try to stimulate

growth. Next week’s foreign exchange reserve

and trade balance figures should give an

indication of the extent and outcomes of local

stimulus as well as consequences of weak

global demand.

Sai Ming Liew

NEFS Market Wrap-Up

10

India

The RBI this week maintained India’s interest

rate at 6.75%, a move anticipated by

forecasters but criticised by some who believe

that keeping the rate constant is holding back

the economy. Elsewhere, the pace of growth in

India's manufacturing sector improved slightly

along with infrastructure output which came in

at 0.9%, a swift rebound from the 1.3% drop

seen in the previous month.

With economic expansion for the current fiscal

year recently being revised down to 7-7.5%

from 8.1-8.5%, the interest rate and speculation

surrounding the annual budget will be the two

factors guiding investors in Indian shares this

month. Within the past year the RBI has

lowered the rate four times, going beyond the

expectation of forecasters, as shown in the

graph below. This time however, it decided to

keep rates on hold until it can assess the

economic reforms due to be announced in the

government budget on February 29th.

Raghuram Rajan, the central governor, stated

that despite leaving the interest rate

unchanged, the Reserve Bank remains

accommodative and that in order to create

more space for monetary policy to support

growth, it is crucial that structural reforms in the

forthcoming budget boost growth whilst also

controlling spending. Rajan’s push for a

reduction in state spending seems to contradict

the government’s recent decision to increase

the salaries and pensions for approximately 10

million current and former government

employees by 24%. How this planned pay hike

is implemented could determine the path of

inflation in coming months.

On a more positive note, growth in

manufacturing reached a four-month high in

January, climbing into expansion territory

following the contraction seen at the end of last

year. The Nikkei Purchasing Manager Index for

manufacturing measures the sectors

performance and is derived from a survey of

500 manufacturing companies. Last week the

index posted a cheerful reading of 51.1 in

January, compared with 49.1 in December. A

reading above 50 denotes expansion.

Infrastructure output also displayed a

marginally improved performance, but the

many voices stressing the importance of

boosting infrastructure investment sooner

rather than later, cannot be ignored. On one

hand, government reforms are making it easier

to do business in India whilst at the same time,

the infrastructure that firms need and expect to

be in place just does not exist.

For now, the ball is firmly in Finance Minister

Arun Jaitley’s court, and his budget

announcement is sure to be an interesting

affair.

Homairah Ginwalla


11

Russia and Eastern

Europe

Russia is continuing to delve deeper into

economic meltdown as the year progresses,

with the Ruble’s value falling even further.

Resulting high inflation, and the recent 2016

budget cuts to education, health care and social

spending, are greatly eroding the Russian

standard of living. To halt the impending

likelihood of a repeated 1998-99 financial

crash, the Kremlin is considering privatising

various large, state companies, including

Rosneft, Sberbank and Aeroflot. Yet as the

situation worsens, many hope that Russia will

eventually be forced to remove troops from

Ukraine, and end all financial support being

sent to Syria.

However the financial crisis in Russia is making

evident the overreliance of Belarus on Russian

energy imports. Russia provides 90% of

Belarus’ energy, and a third of Belarusian

export revenue is derived from refining Russian

oil ($16 billion annually). With Russia facing

financial difficulties, the Belarusian economy is

struggling to remain stable (see graph below).

Whilst many are in favour of investment into

nuclear power, or turning to new trade partners

(although very unlikely), it is clear the

Belarusian energy sector needs reforming. The

sector is extremely inefficient, having been built

during the Soviet Union with out-dated

technology. It faces abnormally high energy-

consumption rates and requires large

Government subsidies to keep prices low.

Consequently, any sector reforms will see huge

costs for the public.

In the Czech Republic, economists are noting

the excellent state of its economy for adopting

the Euro, which could potentially be achieved

by 2020. In the meantime however, it is still

necessary for the Czech Republic to increase

incomes to EU standards. Whilst many look

forward to the increased trade that a removal of

trade barriers would induce (no exchange rate

risk and uncertainty), others still fear the

consequences of a loss of control over

monetary policy, especially in the event of

financial crisis.

Elsewhere, many Eastern European states are

looking away from Western European support

to increased links with other developed

countries. Bulgaria, for example, is extremely

keen to establish trade ties with Brazil, which is

home to the second-largest Bulgarian

community in Latin America. It is hoped

cooperation between the two nations will

greatly advance car manufacturing, agriculture

and pharmaceuticals. Likewise, Hungary and

Indonesia are hoping to strengthen their trade

ties (with 2015 trade totalling US$139million),

and achieve large developments in

communication technology, infrastructure and

tourism.

Charlotte Alder

NEFS Market Wrap-Up

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Latin America

Venezuela is facing an imminent economic

collapse and a possible humanitarian crisis.

Plummeting crude oil prices, paired with years

of economic mismanagement have crippled the

country’s economy and now the country could

face a default.

There are widespread food shortages due to

falling imports. Imports have collapsed from a

value of $50bn in 2007, when Brent crude

averaged $72 a barrel, to $30bn last year, a

remarkable 40% contraction that has led to

shortages of medicines, nappies and basic

foods such as milk and rice. Despite the

complete failure of his policies, Mr Maduro has

made it a priority to meet payments on

sovereign debt, even at the cost of squeezing

imports further. This is because a default would

threaten the regime’s existence: it could allow

creditors to seize oil cargoes and assets

abroad, choking off the revenues on which the

regime depends. The theme seems to be that

political instability is hampering economic

progress and solutions.

The country is also witnessing an all-time high

in corruption of 17 points out of 100 on the

Corruption Index. A country or territory’s score

indicates the perceived level of public sector

corruption on a scale of 0 (highly corrupt) to 100

(very clean).

The woes of the current government will be

compounded in the coming years as the

economy looks set to shrink at 7% in 2016.

Furthermore the IMF estimated that output

shrank by a tenth last year; and it is clear that

people are suffering acute hardship. As

discussed earlier, due to Venezuela’s

dependence on oil as is source of primary

income the performance of their economy is

likely is likely follow oil prices. So the fact that is

that oil prices have reached record lows, circa

$34, has meant that the value of Venezuela’s

exports have been slashed.

Unless oil prices recover, even cutting imports

further will not be enough to plug the financing

gap. With the risk of social unrest rising, most

analysts believe a default is inevitable.

On a closing note this week the Zika virus,

which seems to be spreading rapidly through

South America, has been declared as an

International Public Health Emergency by the

UN. There is no vaccine and there could be up

to 4 million cases in the coming years.

Max Brewer


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Africa

The US-Africa Business Summit is underway in

Ethiopia on Tuesday as African Heads of State

and American business leaders meet with the

objective of boosting trade and investment

between the region and the US. In the opening

of the summit, Ethiopian Prime Minister

Hailemariam Desalegn highlighted the need to

increase economic interaction, between the two

sides. Challenges such as poor infrastructure

and corruption in the African continent have

kept American companies away despite the

continent being an investment magnet for

emerging economies such as China. In the

coming days, the summit is expected to explore

investment opportunities in various sectors in

Africa and announce business deals.

After reaching initial agreements with several

neighbouring countries, Ethiopia aims to

become a leading electricity exporter in Africa.

The Country has recently signed agreements

with countries such as Uganda, Rwanda,

Burundi and Tanzania to interconnect with

infrastructure, including electric power. The

Ethiopian government is aiming to develop into

a middle-income country by 2025 and electricity

is a major player and the driver of socio-

economic development.

The new crude price estimate as contained in

the World Bank's latest Commodity Markets

Outlook report is $36 a barrel, a significant

climb down from the average of $51 a barrel

predicted in October last year. In reviewing the

crude prices, the World Bank cited prospects

for continued abundant supplies and weak

demand. It said oversupply of crude oil is

expected to be sustained during the year as

members of the OPEC have declined to reduce

output to protect their market share. Further

supply would be heightened by Iran's

comeback into the crude market following lifting

of sanctions imposed by the West. However,

the global demand for crude oil is expected to

decline during the year in response to slowing

economic growth in China, one of the largest

consumers globally.

Royal Dutch Shell, the parent company of Shell

Petroleum Development Company of Nigeria,

has unfolded plans to cut its global workforce,

including Nigeria's, by about 10,000 in 2016, as

it battles increasing pressures from declining

global oil prices on its operations. Mr. Beurden,

the CEO of the group, said on Thursday that

this was part of holistic changes the company

was undertaking to restructure and refocus its

operations in 2016 and thus significantly curtail

spending by reducing the number of new

investment decisions and designing lower-cost

development solutions in its operation.

Sreya Ram

NEFS Market Wrap-Up

14

South East Asia

With a slowdown in the Chinese economy and

a decrease in the price of commodities, which

represents more than 50% of Indonesia’s

exports, the Indonesian economy is now

growing at its slowest pace in five years.

However, President Joko Widodo’s efforts to

boost public spending began to come to fruition

after it was announced South East Asia’s

largest economy expanded faster than

expected in the last few months.

According to government figures, gross

domestic product growth reached 5.04% in the

last quarter of 2015 driven by a 7.3% increase

in public spending shown in the graph below.

Additionally, many economic analysts are

signalling this growth and latest data will drive

investor optimism and lead to a multiplier effect.

Beyond the immediate pick-up in demand for

extra jobs, goods and services for the

infrastructure projects, there will be even further

rises in consumption in sectors such as retail. It

seems Widodo is putting government spending

as the driving force to growth even though

private consumption makes up more than half

of the country’s GDP. Fuel suffered a sharp

subsidy cut last year and as a result private

consumption grew just 4.92% in the last quarter

of 2015. This meant consumers had less

disposable income to spend on goods within

the retail sector, particularly luxury goods.

Moreover, Widodo has announced a series of

economic reforms which include streamlining

and cutting overlapping regulations, making the

minimum wage more predictable and providing

greater benefits to foreign investors.

Additionally, the finance ministry continues to

extend large tax cuts in nine major industries,

including crude oil and telecommunications.

There is a clear intent to secure Indonesia as

South East Asia’s largest economy; at the heart

of the administration plan there is a $450bn

target for infrastructure spending in the next five

years.

What is particularly worrying, however, is that

investors will expect quarter on quarter growth.

The economic reforms are expected to take a

few years to impact the Indonesian economy.

With the threat from rising interest rates in

partnering countries and China’s economic

slowdown, it seems vital that Indonesia have a

focus on the situation at present to retain their

position as South East Asia’s largest economy

and to prevent countries such as Singapore and

Vietnam from overtaking them.

Alex Lam


15

Middle East

The World Bank’s latest Quarterly Economic

Brief for the MENA (Middle East & North Africa)

region on Wednesday has revised estimates of

economic growth to 2.6% in 2015, falling short

of expectations from the 2.8% predicted in

October. Being constrained by war, terrorism

and cheap oil, short term growth prospects

remain “cautiously pessimistic”.

The report examines the different ways in which

civil wars are affecting the economies of the

region, including the important channel of

forced displacement, which has become a

crisis. It also explores how economic fortunes

will turn around if there is peace.

Five years of civil strife in Syria and spillovers

to the neighbouring countries, including

Lebanon, Jordan and Iraq have cost close to an

estimated $35 billion in output, measured in

2007 prices, equivalent to Syria’s GDP in 2007.

As seen in the graph below, Syria has

experienced a drastic drop in its GDP annual

growth rate, with a 2.3% fall.

Continued conflict has reversed the years of

educational attainments in Syria, Yemen, Iraq

and Libya, while more than half of all school-

age children in Syria were prevented from

attending school during 2014-2015. Shanta

Devarajan, World Bank Chief Economist for the

MENA region has stated that the forced

displacement crisis created by the civil wars is

the “biggest since World War II”.

However Lili Mottaghni, World Bank economist

and author of the report, did maintain optimism

in the region’s prospects if peace was reached.

“A peace settlement in Syria, Iraq, Libya and

Yemen could lead to a swift rebound in oil

output allowing them to increase fiscal space,

improve current account balances and boost

economic growth in the medium term with

positive spillovers to the neighbouring

countries,”

In the event that conflicts subside in the region,

a peaceful transition to democracy will surely

increase economic growth by encouraging

investment, schooling, economic reforms,

public-good provision, and reducing social

unrest. Some estimates have gone so far as to

state that if nations in the region were able to

transition to full-fledged democracies, average

GDP growth, currently expected to be about

3.3%, may reach 7.8% in five years.

Harry Butterworth

NEFS Market Wrap-Up

16

EQUITIES

Technology

The NASDAQ 100 again continued its recent

trend this week by falling from its peak if 4300

to 4166 by Friday. This, again, is perhaps a

reflection of the macroeconomic environment

we find ourselves in coupled with the

uncertainty surrounding central banks’

monetary policy decisions.

The social media site, LinkedIn, suffered a huge

drop in its share price following a revision in its

expected profits, as well as announcing a loss

of $8m for 2015. Analysts had forecast the

earnings per share of the company to be $0.74,

however, the recruiting website announced

they expected this figure to be $0.55. The

market reacted as one would expect, with the

share price falling 28% during Friday’s trading,

as shown below, wiping $7bn from its stock

market value. Many analysts speculated

whether these poor figures were due to the lack

of demand in global labour markets or a

fundamental problem with the company’s

structure. Chief Executive, Jeff Weiner, pointed

to the firm’s continued expansion into markets

outside of the USA, while the decision to end

part of the failing business-to-business

marketing service will reduce the expected

profit of the company by $50m this year.

Meanwhile, the portable camera firm, GoPro,

announced this week that it would be

discontinuing three of its six camera products,

on top of job cuts due to a fall in sales forecasts.

This followed the miserable holiday period the

firm experienced when sales fell $65m short of

analysts’ forecasts of $500m. The founder and

chief executive, Nick Woodman, explained that

these figures were not due to heightened

competition, as some analysts have said, but

rather GoPro needed to develop improved

software to improve its user experience. The

company has announced that it will be

releasing three more products this year, which

could bolster sales and improve the share price

which has slipped 85% since august last year.

However, with no back up plan if these products

do not reap reward, I expect the company to be

a risky investment.

Sam Ewing

(Chart showing the significant fall of LinkedIn’s share price Source: Yahoo! Finance)


17

Oil and Gas

The dismal affair of oil prices unfortunately has

seen little improvement since last week’s

update.

The number of oil rigs in operation has declined

sharply just in the past 7 days; oilfield services

group, Baker Hughes, quantified this with the

knowledge that only 467 rigs were drilling this

week, down a full 31 from last week. To put his

in perspective, it was the steepest drop for the

last 10 months. By extension, the number of

operative rigs has dropped 71% from its 6 year

peak in October 2014. It’s clear and expected

that these declines are likely to contribute to a

vacancy in US oil production over the coming

months. While drop-off in drilling has had little

effect on US crude production (peaked last April

at 9.7m barrels a day), analysts expect

production to drop after the 16% drop in

benchmark US crude this year to $31 per barrel,

amounting the total decline since June 2014 to

71%.

All this bad news comes with US producers

announcing their outlook: a decline in output

and another round of capital spending cuts in a

desperate effort to liquefy. By example,

Continental Resources has planned this year’s

spending to be 66% lower than last years; oil

and gas output is also expected to drop by 5-

9% in 2016, ending the year as it has

undoubtedly started: dwindling. (The graph

below shows exactly why these evasive actions

are being taken).

On the contrary, BP boss Bob Dudley is

optimistic, expecting the market to rebalance

over the next six months as, supposedly,

demand converges with supply. While the

majority of analysts are dismissive of his

sanguinity, he went on to say that the return to

equilibrium should augur a price recovery from

$50 to $60/barrel by the end of the financial

year. These announcements came after

revelation that BP made a record loss of $5.2bn

in 2015. There is some truth in what he says,

especially when we consider the price elasticity

of oil demonstrated last year when low prices

led to a steep increase in demand – 1.8m

barrels/day, which was double the average

growth of the last 10 years.

It is becoming quite clear that this slump will

have its winners and losers, only time will tell

whether there will be more of one and less of

the other.

Tom Dooner

T

o

m

D

o

o

n

e

r

NEFS Market Wrap-Up

18

Pharmaceuticals

This week has been rather stable as we have

seen the FTSE 350 Index - Pharmaceutical &

Biotechnology fall by 4.43% and the NASDAQ

Biotechnology Index fall by 3.11%. This is due

to the systematic risk in the market and the

Pharmaceuticals & Biotechnology sector is still

poised to outperform the S&P 500. Also this

week, we have seen the first two IPOs of 2016,

with BeiGene and Edita listed on the NASDAQ.

These two IPOs can be viewed as a measure

of the market sentiment’s appetite for biotech

companies, and whether or not it would be able

to raise money on the public markets after a

month long of sell-offs triggered by the

announcement of Hillary Clinton’s to tackle the

drug pricing problem if elected as president of

the US. BeiGene is a company that develops

cancer treatments that raised $158m by pricing

6.6m shares at $24 each on its IPO and

managed to meet its expected valuation range.

Editas is a company working in the area of gene

editing and managed to raise $94m by pricing

5.9m shares at $16 a share.

This week we have continued to see

Pharmaceutical M&As flourish from last year’s

record of $724bn in M&A activity.

GlaxoSmithKline (GSK) has further expanded

its alliance with Adaptimmune to speed up the

development of a ground breaking cancer drug

in a $500m deal. US healthcare company

Abbott Laboratories have also announced this

week that it has agreed to acquire Alere, a

diagnostic group, for $5.8bn. Alere shares

soared by 45% to $53.84 when the deal was

announced. Also on the same day, medical

device group Stryker also announced a $2.7bn

deal to buy Sage, which makes products to

prevent infections in hospitals

In other news, GW Pharmaceutical’s CEO

Justin Gover has to make important decisions

in the next few weeks as his company has

continued to push for medicines made from

marijuana. There are positive results from trials

of Epidiolex, an experimental drug for childhood

epilepsy and this would be make or break for

the UK Company’s success. Initially GW was

not favoured by the market for most of its first

decade, but since adopting a dual listing on

NASDAQ in 2013, it has managed to raise

$450m.

As the M&As of the Pharmaceutical & Biotech

Sector continue to flourish, I believe that the

sector would continue to be the best performing

sector in the short to mid-term. Given the

volatility and uncertainty in the stock markets,

fundamentals of a company may not give you

an accurate picture of the price of stocks.

Prudence should continue to be maintained and

investors should remain defensive.

Samuel Tan

NASDAQ Biotechnology Index (NBI)


19

Financials

The start of 2016 is continuing to prove difficult

for the financial industry due to an exposure of

slowing economic growth and intensifying credit

losses, causing companies to consistently

underperform than previous years, leaving a

sense of doubt in investors. Indeed, this

uncertainty is proven through the tumbling

stock prices across the financial industry, with

some shares reaching their lowest yet.

A view on the bigger picture sees poor financial

performance being a frontrunner in the decline

of the FTSE 100 index, along with other

measurements of the stock market’s

performance. The FTSE All Shares Bank index,

as shown by the figure below, has fallen 15.7%

in the year-to-date, undoubtedly representing a

huge loss in confidence within the sector. But

this performance is not restricted to London

only, but is of a similar concern in the US, where

the financial sector is the worst performing

major sector so far this year, with the S&P 500

Banks index being down almost 14%. Indeed

this is a pattern seen on a global scale, with the

Euro STOXX and Topix bank indices,

representing Europe’s financial sector and

Japans financial sector respectively, also

dropping in value this year.

Looking more specifically, we see that one of

Europe’s leading financial firms, Credit Suisse,

has recently had stock prices fall to a 24 year

low. This massive downfall for the company

came around due to far worse than expected

fourth-quarter results last year, establishing a

gloomy outlook for the company’s future. Upon

digestion of the recent company report on the

4th February, investors retaliated by dumping

shares in the Switzerland based firm amidst

fear of greater losses being inevitable, causing

share prices to plummet a massive 11.49% in a

single morning to 14.4 Swiss Francs.

With Credit Suisse experiencing a year-on-year

fall in revenues, from 37.42bn to 35.06bn Swiss

Francs, and net income dropping 19.4% from

2.33bn to 1.88bn Swiss Francs, it is an

unsurprising reaction from investors to discard

this stock. Further analysis shows that

dividends per share have remained flat over the

past few years, whilst earnings per share have

fallen 17.9%. The repercussions of such poor

performance should offput investors from

further purchases of this stock, whilst certainly

instituting a sustained reason for selling.

Daniel Land

Figure: Global Bank’s Performance

NEFS Market Wrap-Up

20

COMMODITIES

Energy

Shell and BP have announced this week that

they expect the oil price to rise by the end of the

year as demand begins to re-equilibrate with

supply. BP CEO – Bob Dudley stated ‘supply is

levelling off’ and if the trend of rising demand

continues, then prices will stabilise late this

year. Most analysts agree with the sentiment;

despite expecting prices to fall further in the first

quarter of 2016, some temporary pressure is

expected on demand as a multitude of

refineries are requiring essential maintenance.

However, there are indicators that this

bullishness might be overly optimistic. Currently

the market is oversupplied by 1 million barrels

per day. Once trade sanctions are lifted on Iran,

there will be a further influx of supply into the

market. This means it is unlikely that the gap

between oil output and consumption will close

during 2016; and by some forecasts, it is

thought it could rise to 1.5 million barrels per

day. This excess supply could therefore weigh

down further on prices, and even cause an

overall drop in the oil price in 2016. That would

make a run of three years in a row in which the

price of oil has dropped.

William Norcliffe-Brown

Brent Crude Price Chart (Source: MoneyAM)


21

Precious Metals

The beginning of 2016 forecasts a number of

significant shocks in the precious metals’

market. The three main uncertainties

concerned with China’s economy will have a

strong effect on the market. These include

predicted economic growth in the country,

influenced Chinese consumer demand on

commodities and identification of other markets

to replace China’s growth gap.

With increasing confidence in the market, Gold

continues to appreciate. On Thursday, 4th

February, gold prices peaked at 1148.76 USD/t

oz. (Figure 1) – highest in the last 3 months.

Analysts identified a number of contributing

factors; the US Dollar remains in a relatively

weak position, aided by the expectations that

Fed. Reserve is not likely to raise interest rates

soon. Dropping European bank shares and

falling bank stocks cannot be ignored either.

Apart from rising metal prices, buyers and

sellers can observe an increasing global

uncertainty in the market. London Gold’s

market, covering ¾ of the bullion dealing, might

experience significant changes. London Bullion

Market Association proposed an introduction of

electronic systems, recording historic Gold

trade transactions. At the moment, the direct

exchange is not transparent as they usually

take place over a telephone call. The key issue

involves lack of information on the amount of

Gold exchanged daily. However, the dilemma

of whether a change would be beneficial

remains and, due to the increasing uncertainty

and falling trust, R. Norman, chief executive of

Sharps Pixley, commented on the rising

consumers’ preference on investment in

physical Gold and jewellery rather than the

papers.

In general, a positive future is expected in the

precious metals market. Silver prices also

experienced a slight positive shift as were

supported by increasing Gold prices. From mid-

January to 4th February (Figures 1,2), when

Gold experienced the greatest appreciation,

Silver shifted upwards by 8.34%, from 13.748

USD/t oz. to 14.895 USD/t oz.

London Bullion Market Association’s findings

expect metal prices to rise in 2016, with

Platinum and Palladium already appreciating by

5.4% and 12.7% respectively during 1st-15th

January, 2016. These effects were mainly

caused by increasing importance of US Fed

price hikes, weakening US Dollar as well as

political and economic uncertainty in the EU,

Asia and the Middle East.

In contrast, ISM Non-Manufacturing index is

expected to soften slightly from 55.1 to 55.3,

while the US ADP is expected to print 193K this

year. The latter forecast might strengthen the

US dollar, dragging Silver prices towards

depreciation. Differently, the increasing index

may weaken Gold’s position in the market,

slightly strengthening Silver.

Goda Paulauskaite

Silver prices (2012-2016)

Figure 1 Figure 2 Gold Silver

NEFS Market Wrap-Up

22

CURRENCIES

Major Currencies

This week the US Dollar’s performance has

been highly volatile. A 2.88% depreciation in

the middle of the week was followed by 0.5%

increase on Friday. The labour market

performed particularly well, with the

unemployment rate declining to an eight-year

low of 4.9%. Additionally, wages rose more

than expected (by 0.5% instead of a 0.3%

forecast), which supports the Fed’s intention to

keep increasing interest rates. Thus, the

expectation that the Fed would further tighten

its monetary policy led to the appreciation of the

US Dollar to $1.1161 per Euro at the end of this

week. However, most economists see the

scenario of raising the interest rate four times

this year as overly ambitious, given that the

Chinese economy is struggling and could

complicate the recovery of the US, pushing the

inflation rate even further below the 2% goal.

Thus, many traders bet in January that there

won’t even be one further raise of the interest

rates. However, this week, US short-term

interest rates futures contracts slid as a result

of the new labour market strength, suggesting

that there is a 45% chance that the Fed will

increase the interest rate by December 2016,

up from 20% before the report.

While the Fed is expected to follow restrictive

monetary policy less quickly than initially

expected, there are signs that the ECB will also

wait before choosing to loosen its monetary

policy further. The ECB Director Yves Mersch

stated recently in an interview with the Wall

Street Journal published on the 2nd of February

that the decision about future steps will be

made in March and that there are several

options: “I would not be carried away by

analysts in some institutions who want us to do

what they like, what they would consider to be

helpful.” Thus, when the monetary policy in the

US won’t be as restrictive as predicted while the

policy measures by the ECB will be more

conservative than expected this would explain

why the Euro appreciated against the US

Dollar, as shown in the graphic below.

The GBP/USD and GBP/EUR fell below 1.454

and 1.3, respectively, although the Bank of

England stated on the 4th of February that there

won’t be any change in its policy, which was

originally expected. The fall could probably be

explained with Monetary Policy Committee

Member, Ian, McCafferty, who previously voted

for a slight rise, changing sides.

Alexander Baxmann

Euro per US Dollar


23

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

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

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

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

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

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

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

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