nefs market wrap up week 7

Week Ending 6th December 2015

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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

9

China India

Russia and Eastern Europe Latin America

Africa South East Asia

Equities

15

Oil & Gas Retail

Technology Pharmaceuticals

Industrials & Basic Materials

Commodities

Energy Precious Metals

Agriculturals

20

Currencies 23

EUR, USD, GBP


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MACRO REVIEW

United Kingdom

This week saw the release of the Purchasing

Managers’ Indices (PMI), for manufacturing and

services. The PMI are an indicator of economic

activity, derived from monthly surveys of

businesses, and therefore are a useful measure

of current economic performance in different

sectors. The services index rose to 55.9 in

November from 54.9 in October. In contrast, the

construction index fell to a seven month low

from 58.8 to 55.3 and manufacturing also fell

from 55.2 to 52.7. While these are still above

the 50 mark, which separates expansion from

contraction, it is clear that there is a significant

slowdown in these sectors. Therefore it is likely

that construction and manufacturing output will

be stagnant or contract in the final quarter.

However, services is maintaining a healthy rate

of growth and as a result, the economy is set to

grow for the final quarter despite weak data

from other sectors, due to the dominance of

services in the UK economy.

Following Chancellor Osborne’s spending cuts

last week, the government aims to be on track

for its target to wipe out the public sector deficit

by 2020. However this is mainly the result of the

Office for Budget Responsibility, OBR,

announcing a £27 billion windfall due to

expectations for higher tax receipts and lower

interest payments on government debt.

Nevertheless the government is following a

plan of short term pain for long term gain.

Looking towards the economic outlook for the

UK in 2016 it is likely to be positive, yet one-

sided. Domestic consumption seems likely to

remain the main driver of growth well into 2016

due to high wage growth coupled with low

inflation. Inherent problems in manufacturing

and exports will likely mean the economy will

further shift towards services, despite the

government’s plan to rebalance the economy.

Nevertheless, with manufacturing and exports

currently struggling, domestic consumption

must be reinforced as the sole driver of

economic growth, benefitted by consumer

confidence remaining high, as illustrated below.

However, the surge in consumer spending puts

into question how long inflation, and therefore

interest rates, will remain low. Falling energy

and oil costs are offsetting wage growth to keep

inflation low but 2016 could finally see the Bank

of England raise the current base rate above

0.5%.

Matteo Graziosi

NEFS Market Wrap-Up

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United States

Three key releases of labour market data from

the US this week have all but cemented the

Fed’s interest rate decision at its next meeting

on the 15th and 16th of December. It could be

argued that the decision was already certain

prior to this and that this week’s data was just a

quality check.

A report from the Bureau of Labour Statistics

showed that the change in non-farm payrolls

beat forecasts by 10,000 to reach 211,000 for

the month of November. Last month’s report of

growth of 271,000 jobs was also revised

upwards to 298,000, another positive sign for

the consumer-driven economy. The

unemployment rate remained at its 5.0% level,

in line with forecasts. Month-on-month growth

in average hourly earnings did not match last

month’s growth of 0.4% but still remained

positive and in line with forecasts of 0.2%. This

represented year-on-year growth of 2.3%. The

Fed is close to achieving its dual mandate of

maximum employment and stable prices as the

unemployment rate continually lowers and

inflation rises to its 2% target.

Over the next month, the Fed will decide on

whether it should raise the Federal funds rate

for the first time since 2006. Currently between

0.00% and 0.25%, the rate will likely be raised

to the range of 0.25% to 0.50%. The real

question that needs answering now is how

quickly the Fed will tighten monetary policy over

the course of 2016. Some economists have

suggested two rate hikes while others have

suggested up to four, depending on predictions

for inflation and unemployment rates. An

overview of the probabilities of the Fed funds

rate over the next six months, based on Fed

funds futures prices, is shown in the graph

below (as of 5pm on Friday). From her mid-

week speech to the Economic Club of

Washington, Janet Yellen’s conservative

outlook on the US economy suggests to me that

the Fed is likely to remain cautious not to raise

rates too quickly in order to avoid an early

recession, which would probably be followed by

a rate cut. I believe that we will see a rate rise

in December and another one in March or April

as this gives the economy some time to react to

the change, but also the Fed some time to

analyse the effects of its decision.

Sai Ming Liew


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Eurozone

The unemployment rate of the Eurozone

decreased slightly from 10.8% to 10.7% in

October 2015. This is the lowest jobless rate

recorded in the Euro area since January 2012.

17.240 million people living in the Euro zone

were unemployed in October 2015, with the

number of unemployed Eurozone citizens

declining by 13,000 in October of this year.

The unemployment rates of many Eurozone

countries were released this week. Amongst

the countries with the lowest unemployment

rates was Germany and the Czech Republic.

They recorded rates of 4.5% and 4.7%

respectively. The German unemployment rate

has remained constant for August, September

and October 2015, while Spain possesses one

of the largest unemployment rates in the

Eurozone with 21.6% unemployed.

In other news, as we can see on the below

graph the EU inflation rate has remained

constant with the 0.1% in October and

November 2015, while markets had predicted

an inflation rate of 0.2%. Food, alcohol and

tobacco experienced the largest increases in

prices of all goods in the Euro area, rising by

1.5%. Energy prices are expected to decline by

7.3% in November 2015. Whilst this is

significant for the Eurozone, the fall in energy

prices in November is smaller than the decline

in October; energy prices fell by 8.5% in

October 2015. Energy price deflation is having

a notable impact upon the EU inflation rate, if

we exclude energy prices from the inflation rate

calculations then consumer prices would have

increased by 1.0% in November 2015 - this is

below the ECB’s target of 2.0%.

Moreover, the ECB held a meeting on 3rd

December to discuss interest rates and

stimulus within Euro area countries. They

announced that they are going to decrease the

interest rate on the deposit facility (the deposit

facility allows financial institutions to make

overnight deposits with the ECB) by 10

percentage points to -0.30%, while the ECB

refinancing rate will stay at 0.05%. The ECB

stated that in order to achieve the target of 2%

inflation in the Euro area, their asset purchasing

programme, involving the spending of €60

billion a month will be extended until March

2017.

Kelly Wiles

NEFS Market Wrap-Up

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Japan

This week’s headline purchasing managers’

index reading shows that the rate of output

growth in Japanese manufacturing has

accelerated to a 20-month high. Given the

speed with which firms react to market

conditions, this is a positive sign that managers

seem to consider Japan’s economy to be

healthy. Contributing to this boost has been the

increase in new business orders, which has

been due to an increase in new customers,

particularly from Asian countries. This shows

Japanese manufacturing has remained resilient

in shaking off the emerging market slowdown

currently sending ripples through the global

economy.

November saw manufacturers hire additional

workers to deal with the additional international

demand, but the rate of job creation in the

sector remains about the same as for October

– the fastest pace in 18 months. However, the

further tightening of Japan’s labour market does

also increase its exposure to some risks. With

low unemployment, high participation rates and

an ageing population Japan has few idle

resources. This means the scope of fiscal

policy, and monetary policy in particular, are

rather limited in boosting an economy which is

at full employment. The current rate of

population decline mean that even optimistic

forecasts predict the trend rate of growth is at

most 1%.

Having run a budget deficit of around 8% since

the financial crisis, as shown on the graph

below, a trend growth at 1% puts the

sustainability of the nation’s public debt into

question. While this has not caused any issues

so far, and will have prevented a prolonged

deflationary era, the current ‘liquidity trap’

conditions mean monetary policy has reached

saturation and will not be able to offset fiscal

retrenchment.

Reflating the economy would be one way to

make fiscal adjustment more feasible, but the

success so far has been mixed. Speaking on

Wednesday, Bank of Japan Deputy Governor

Kikuo Iwata said the slowdown in China and

emerging markets still remains as the greatest

threat to the bank reaching its 2017 inflation

target of 2%. More intervention will certainly

follow in the future but with analysts divided on

whether further quantitative easing will be

announced in the New Year, its timing cannot

be easily predicted. The policy decisions made

at the start of the New Year will therefore signal

the future direction Prime Minister Shinzo Abe

intends to follow, and ultimately, shape the

legacy of his Abenomics programme.

Loy Chen


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Australia & New

Zealand

Data on Australia’s trade balance in October

was disappointing, as the trade deficit widened

to AUD -3.30 billion, a shock to economists who

forecasted a AUD 2.61 billion deficit. As shown

by the graph below, this 38% increase (from

AUD -2.40 billion) was attributed to a 3% fall in

exports, as non-rural goods fell by 3% and rural

goods by 4%. In addition imports rose

significantly from AUD 74 million to AUD 29,900

million.

There has been much speculation in Australia’s

economy over the past year. Economists were

adamant that the economy was in trouble.

Following a rise in variable home loan rates,

large trade deficits and consistent speculations

over the cash rate, many contemplated whether

a recession was possible. However, strong

employment provided a light at the end of the

tunnel. In addition, this week we learnt that the

economy grew by 0.9% in the third quarter. So

Australia has managed to battle off some of the

economic blues, but how will it cope over the

holidays?

In other news, as New Zealand enters the

holiday period there are expectations for a pre-

Christmas interest rate cut. Despite the fact that

the economy has started to pick up, the head of

the Reserve Bank, Graeme Wheeler, may

lower the 2.75% rate through a 25 point cut,

making it the fourth cut in 2015.

The last review the bank makes this year will be

held on the 10th of December. The ASB stated

it was “a done deal” that the Reserve Bank

would reduce interest rates as the failure to do

so would result in an appreciation in the dollar,

making NZ goods less competitive in

international trade. Westpac and BNZ, two of

the Big 4 banks in NZ, both predicted a cut in

rates, however there are still sceptics. Chief

economist at ANZ, Cameron Bagrie, believes

that the Bank should wait until January to cut

rates. The reason being because the housing

market is “really starting to pick up”, especially

in cities such as Auckland. An even lower

interest rate will make borrowing cheaper and

increase the number of buyers in the housing

market, tempting a potential housing bubble.

Bagrie stated that waiting until January is the

“most sensible approach” to see how inflation

acts. So we could still expect significant

changes in New Zealand’s economy over the

last few days of 2015.

Meera Jadeja

NEFS Market Wrap-Up

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Canada

On Wednesday the Bank of Canada (BoC)

made the decision to keep the target for the

overnight rate of interest, otherwise known as

its key policy interest rate, unchanged at 0.5%.

Some Economists anticipate that the rate will

be cut further, perhaps to 0.25%, despite

having already been lowered twice since

January 2015. Further stimulus may be

required as the economy still struggles to adapt

to the fall in oil prices, alongside weak domestic

demand and business investment. Other

Economists, such as Diana Petramala of

Toronto-Dominion bank, anticipate that rates

will remain unchanged until mid-2017 as “the

economic impact of lower oil prices is likely to

prove longer lasting and further reaching than

was originally expected.” Correspondingly,

Stephen Poloz, the Governor of the Bank of

Canada, has stated that inflation may only

reach the 2% target in mid-2017 due to excess

capacity, or slack, in the economy – therefore

strengthening the case to hold interest rates

steady. Inflation currently stands at 1.0%.

Statistics Canada revealed this week that the

economy grew by 2.3% to 1.77 trillion CAD in

Q3, close to the BoC’s forecast of 2.5%. This

marks Canada’s official exit from recession,

following two quarters of negative growth, as

shown in the graph below. This has been due

to an increase in consumer spending, a

buoyant housing market, and moreover a 9.4%

increase in exports. Exports were primarily in

the automobiles and consumer goods market,

helped by growth in the US, a weak currency,

and accommodative monetary policy.

However, there was in fact a non-annualised

drop in growth of 0.5% in September. This

signals that the growth rebound may not be

robust. Avery Shenfield of Canadian Imperial

Bank of Commerce described Q3 GDP as

“coming in like a lion and out like a lamb”. The

BoC have already forecast lower growth of

1.5% for Q4 in their recent monetary policy

report.

As the outlook for Canada’s economy is

uncertain, with no strong influences for either a

rate rise or cut, the BoC’s governing council will

wait for some convincing evidence before

considering a rate change. They meet again on

the 20th of January to make their decision. It is

likely that there will again be no change, making

Canada another of the many advanced

economies who have adopted extended

periods of monetary easing.

Shamima Manzoor


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EMERGING MARKETS

China

This week there were two major news stories

regarding China’s economy: there has been the

vote of the IMF to decide if China is to be

included into the SDR basket. Furthermore, the

monthly Purchasing Managers Index (PMI)

which provides early indication of China’s

manufacturing sector has been published. To

put it briefly, there is good and bad news for

China.

Starting with the bad news, the industrial sector

has seemed to stagnate. The monthly PMI (see

graphic) fell from 49.9 in October to 49.6 in

November, meaning that the PMI has been

under the critical 50-mark for four consecutive

months. In 2015, China’s biggest 101 steel

companies, which have been the driving fuel of

China’s enormous economic aggrandisement,

lost a combined RMB 72bn in the first 10

months of 2015. Additionally, the government’s

efforts to stabilize the domestic steel industry

have obviously failed and thereby led to new

debts. China’s largest state-owned steel

company, Sinosteel, defaulted on a bond

repayment due in October. Also, Beijing’s

stimulus actions led to an excess supply of

steel, resulting in deflationary pressures.

However, there are many who expect further

action of the government. Contrarily, services

PMI rose to 53.6 in the last month, which shows

that further fiscal boosts are not absolutely

necessary. China’s government stated several

years ago that it wanted to pursue a change in

its economic growth strategy by focusing more

on domestic consumption, in other words, a

switch from manufacturing to services.

Historically, it has proved that this is impossible

without a relative slowdown in manufacturing. It

will be interesting to see whether China’s

government try to further stimulate its

manufacturing sector or if there really is

structural change over the next weeks and

months.

Meanwhile, the good news is that, on Monday

28th November 2015, the IMF finally decided to

include the RMB into the SDR basket. This

decision comes at a crucial time for China as it

has suffered deep falls in financial markets this

year as it is highly questionable that Beijing is

actually willing to stick to reforms. Furthermore,

this decision proves how much the IMF actually

needs China and that the Fund was actually

drastically forced to bend its own rules.

Accordingly, it is not far-fetched to say that it is

a political decision as the SDR would lack

legitimacy if the world’s largest economy,

measured by purchasing power parity, would

not be included.

Alexander Baxmann

NEFS Market Wrap-Up

10

India

Finance Minister Arun Jaitley breathed a sigh of

relief this week as news regarding India’s

growth rate was released. The world’s fastest

growing economy maintained its position,

growing at a satisfying rate of 7.4%. This is

fractionally higher than what was expected by

forecasters and higher than the 7.0% clocked in

the previous quarter. Reflecting fairly stable

growth and inflation, the RBI chose to end the

year with an unchanged interest rate of 6.75%,

leaving room for further monetary easing in the

coming months.

Driven primarily by a strong revival in

manufacturing, which grew by 9.3% along with

increased domestic demand, India is now

outperforming China by half a percentage point.

Investments also increased, growing 6.8% from

a year earlier, compared with 4.9% in April-

June. This is a reflection of India’s

expansionary fiscal policy through which the

government has boosted investment in

infrastructure, complementing private

investment. Further investment has been

promised by the government but more private-

sector capital expenditure will also be required

in order to sustain investment levels.

However, whilst investment in infrastructure

has proved beneficial for growth, India must

also lay robust foundations for development by

investing in health and education, creating

room for social mobility and pulling people out

of poverty. If not, we may see growth quickly

peter out. Moreover, when looking at other

sectors the figures are less impressive, with

exports still acting as a lag on economic growth,

along with sluggish agricultural performance,

which stood at 2.2% after a rainfall shortage for

the second year in a row. Slow progress in

terms of reform is also an issue, as discussed

in previous weeks.

Another consideration is the environmental

implication of India’s accelerating growth, with

some experts warning that India’s growth

addiction is deadly for the planet. They have

cautioned that pursuing aggressive expansion

of industry and energy production will have

hefty global consequences. The government

instead argues that half of the India of 2030 is

yet to be built and expansion is necessary in

order to lift 300 million people out of poverty.

Clearly a balance between seriously

addressing climate change whilst also

maintaining growth needs to be found.

Whilst there are concerns about a rate hike by

the Federal Reserve within the next few weeks,

many hope that a positive outlook, coupled with

strong economic growth, will negate any

potential volatility, which has been predicted for

emerging markets. It is difficult to say for sure,

but when looking at the global scheme of things,

India is looking very attractive in relative terms.

Homairah Ginwalla


11

Russia and Eastern

Europe

There was controversy on the roads of Russia

this week, as long-distance truckers blocked a

lengthy section of the Moscow ring road to

protest against a national toll. The alleged

target of demurral was the planned fee to be

imposed on truckers travelling on federal

highways. This comes in the form of a GPS-

based system of which Igor Rosenberg –

oligarch and close confidant of Vladmir Putin –

owns a 50% stake.

It is likely, however, that this anger was more

deeply-rooted and actually primarily aimed at

attacking Putin himself. Of late, concern has

arisen that the Russian upper class are

attempting to create revenue streams that

advance their own position at the expense of

the lower and middle classes. Nikolai Petrov, a

professor at Moscow’s higher school of

economics, analogises the idea, suggesting

that the “[oligarch] clans are trying to keep their

portion [of the pie] or even cut a bigger slice.”

This comes with the discovery that an 800-mile

round trip between Moscow and St Petersburg

now costs an extra $33 at the current exchange

rate and is scheduled to rise to $66 next month.

Lumped with truckers’ already dear

transportation taxes, it is estimated to have

reduced their monthly wages by around $500-

600 – a significant amount when we consider

the current inflation level of 15%. A blow like this

is likely to give rise to a serious drop in the

standard of living of the lower classes. Maxim Y

Sokolov, transportation minister, has dismissed

the issue completely, drawing attention to the

expected generation of $700bn a year as a

result. While he says that “this is how a

transportation system functions worldwide,” the

truckers complain that “we live like hell, [while

the rest of] the country is very rich.”

Perhaps what we are beginning seeing here is

something that is untoward of the Russian

people: a disillusionment of their government.

This all comes in tandem with Putin’s speech to

the federal assembly where he described his

country’s economic situation as “complicated

but not critical.” He made clear that Russia

needs to explore export revenue from products

that aren’t to do with energy. It seems that the

government is coming to terms with the

ailments of its primary product dependency

which, until now, has served them well.

Russia’s future success depends on finding

new, profitable revenue streams and to

maintain public confidence while driving down

inflation. The new target is to knock 11

percentage points off the 15% mark to reach

4% by 2017.

Tom Dooner

NEFS Market Wrap-Up

12

Latin America

Fears are deepening in Brazil, as on Tuesday

third quarter figures showed that the largest

economy in Latin America is on track for its

worst recession since the great depression.

The figures mark three consecutive quarters of

contraction as Brazil saw its economy shrink by

4.5% year-on- year in Q3. Many have blamed

weak commodity prices, fiscal contraction and

a fading consumer credit boom.

The poor Q3 figures reflects that almost every

sector of the economy facing continuous

pressure. This even includes exports, which

had been expected to come to the rescue after

the country’s currency, the real, lost circa 52%

of its value against the dollar this year. Further

disappointing factors that add to Brazil’s woes

are that, although President Rousseff is trying

to implement austerity measures, the budget

deficit is currently at 9.5% of GDP. The austerity

comes at a time when Rousseff is witnessing

appalling approval ratings, with the WSJ

quoting ‘only 10% of the country think the

government is doing a good job’. On the upside,

National debt is at 66% of GDP – a relatively

low level in comparison to other troubled

countries (Greece’s national debt is 177% for

example). However the cost of servicing

Brazil’s debt is at about 20% a year, which is

astronomical. What’s worse, last month figures

showed that Brazil’s inflation rate was at its

highest for 12 years, at 10.28%.

In my opinion the key event to watch over the

Christmas break is the Fed’s interest rate

decision on the 16th December. The predicted

rise may have adverse effects on Latin

America, causing possible capital flight and

pushing dwindling equities even lower. This

may quash any hopes of investment, as

emerging markets, especially in Latin America

are not looking like sound investments, so a

more stable return in the US could signal that

low investment is here to stay. Furthermore

Chile, Mexico and many others face interest

rate decisions but all look set to keep them

constant. Meanwhile, on the 6th December the

Venezuela Parliamentary elections will be held.

The ruling socialist party currently holds a

majority, but polls indicate that if the election

were held today, the opposition coalition would

win in a landslide. The 29-party coalition is

benefiting from widespread discontent with

President Nicolás Maduro, driven by mounting

shortages, high inflation and rampant crime as

highlighted in last week’s article.

Max Brewer


13

Africa

In the south of Africa, the worst drought since

1992 is increasing food prices dramatically. The

price of corn, a staple food for cattle, has

increased by 55% since the beginning of 2015,

due to crop failures. To avoid paying higher

cattle food prices, farmers will kill nearly 36%

more cattle this year than normal. With low crop

and meat availability, food inflation is expected

to rise more than 10% by mid-2016, double the

rate of normal food inflation. Economies

throughout southern Africa have struggled

greatly this year with reduced investment from

China and the appreciation of the US dollar.

Higher food prices will worsen this situation,

with lower consumption, export levels and

standards of living. Many economists and social

activists are criticising the governments of

Africa’s southern regions, who have been

discussing the prospect of designating more

farming land to solar panels and growing

biofuels. This is extremely popular in Europe

and the US, and would hence help trade,

however it does threaten the availability of food.

Following the Paris Climate Summit from earlier

this week, great global focus has been placed

on African economies. Many worry that if

current levels of pollution continue, economies

that are too reliant on primary good trading will

be most vulnerable to its effects, as seen

greatly in Africa. Moreover, many African

economies lack the systems necessary to deal

with Supply Shocks and the resources to help

the population after disaster. Whilst it is

therefore essential carbon-emissions are

reduced, some argue that African economies

will see limited growth and prolonged poverty

levels if prevented from accessing cheap,

carbon fuels. To face this issue, the World Bank

has created the Africa Climate Business Plan,

which will issue USD 16bn investment over the

next 4 years. It will also include the restoration

of arable land lost due to desertification, and the

creation of systems that warn of extreme

weather.

Business confidence in South Africa has fallen

even further in the final quarter of 2015 to 36,

(see graph), its lowest in 5 years. This is due to

great uncertainty about the impact of the US

dollar appreciation, the prospect of future

recession, the depreciation of the South African

Rand and the timing of US interest rate hikes.

With a falling business confidence rate,

investors and businesses are looking

unfavourably on South Africa for future growth

prospects. Policies are subsequently urgently

needed for recovery, to help boost business

confidence.

Charlotte Alder

NEFS Market Wrap-Up

14

South East Asia

As China’s growth slows and India’s future

remains unpredictable, businesses are looking

to ASEAN countries and their combined

population of 625 million to pick up the slack.

The aim of the ASEAN is to integrate the ten

Southeast Asian economies, ranging from

economically deprived Laos to the region’s

biggest economy, Indonesia, who retain their

top 3 position as the manufacturing destination

in Asia and have a population of more than 250

million. ASEAN’s population expects to grow by

approximately 120 million by 2030, adding to an

abundant pool of labour that businesses are

already taking advantage of, with many firms

moving from China to Southeast Asian

countries such as Vietnam, Asia’s fastest

growing foreign direct investment location.

In addition to this, Singapore is currently

suffering from all-time productivity lows and

aims to put their services sector as the driving

force behind their economic growth starting with

closer ASEAN markets integration. Singapore’s

financial regulator has said that stock markets

in Singapore, Malaysia and Thailand should

develop trade systems allowing companies to

connect with their clients more easily, to

improve cross-border transactions to aid

growth.

In relation to services, Thailand sees little

prospect of economic pickup due to a slowdown

in the country’s vibrant tourism industry. For

many years, Thailand has relied on tourism for

a disproportionate chunk of its economic

growth, highlighting an unbalanced economy

which their neighbour Singapore has been

guilty of similarly. Almost all the recent boom in

tourism has come from the overwhelming

demand from China in recent years. However,

with China seeking to make the transition from

manufacturing to services and their slowdown

in growth, a better integrated trading bloc such

as ASEAN will therefore provide more

opportunities for Thailand to reach out to

Southeast Asia’s fastest growing economy,

Vietnam, which is now experiencing 6.8%

annual GDP growth, as shown in the graph

below. However, there is a lack of

administrative capacity within ASEAN; the staff

in charge of implementing policies had a

worrying budget of only $17m in 2014.

The major concern is that ASEAN only

accounts for 3% of global GDP although it

consists of 9% of the world’s population.

Therefore, the greatest challenge for ASEAN

members is whether they can make progress of

increasing integration between the ten

Southeast Asian nations, or whether the

underachievement continues and the focus

shifts towards the Trans-Pacific Partnership.

Alex Lam


15

EQUITIES

Retail

Following on from last week’s black Monday

centric report, retailers have posted relatively

disappointing results from not only Black

Friday, but also the following “Cyber Monday”.

Whilst Black Friday and Cyber Monday have

little bearing on a retailer’s yearly financial

results, and even less on long term share price

prospects, analysis of sales figures from

retailers could provide an insight into the

decision-making of consumers and the

performance of retailers over the holiday

period.

The first notable fact about black Monday and

cyber Friday is the continued prevalence of

shifting consumer tastes in favour of online

shopping. Matt Boss, a JP Morgan retail

analyst, stated that “online clearly stole the

show over the weekend”, a statement

supported by most sales figures. For example,

around 25% of sales on Black Friday, a day

focused on physical retail sales, were online,

with a total of 103 million US customers

choosing to shop online, significantly more than

in retail stores. This is congruent with general

trends in the retail sector, for post-2000 online

sales growth has been around 15% YoY, vastly

outstripping both inflation and physical sales.

Online growth did not, however, translate into

particularly impressive results for the retail

sector as a whole on both Black Friday and

Cyber Monday. Analytics firm RetailNext stated

that combined online and in-store sales fell

1.4% relative to last year, adjusted for inflation.

Whilst 1.4% is not necessarily statistically

significant, and is not indicative of any particular

changes in the retail industry, it is in line with

retail equities as a whole in the year to date, in

which sales have been “perfectly average”

according to Dana Telsey, a retail analyst

writing for CNBC.

As such, it is difficult to predict any significant or

notable changes over the holiday period, as the

retail sector has been devoid of any significant

structural changes throughout the year, with the

exception of adjustments post-Walmart slump.

As such, it is the author’s opinion that the

holiday period shall retain the same

unremarkable tint, and 2016 shall potentially

hold more exciting news in this venerable

sector.

Jack Blake

NEFS Market Wrap-Up

16

Oil and Gas

After this week’s meeting in Vienna, OPEC

raised its production ceiling to 31.5 million

barrels of oil a day, which led to crude oil prices

to fall more than 3%, to below $40 a barrel.

Following the news, the UK’s benchmark stock

index closed at its lowest level in more than two

weeks on Friday, capitalised by the slump of all

major heavyweight European oil companies.

Shares of Royal Dutch Shell PLC (RDSA: LSE),

for example, dropped 1.8% to $48.13 while BP

PLC (BP: LSE) also gave up 2.4%. Among oil

producers, Tullow Oil PLC (TLW: LSE) fell

massively with a 5.4% decrease in its stock

price, while Norway’s Statoil ASA (STL: OSL)

dropped 4.6% and France’s Total SA (FP: PAR)

declined 2.3%. Meanwhile, Sweden’s Lundin

Petroleum AB (LUPE: STO) also slumped

2.8%, as it was under the additional pressure of

a ratings downgrade from RBC Capital

Markets, from sector outperform to perform.

Oil equipment and services groups were also

hit substantially, with Norway’s Subsea 7 SA

(SUBC: OSL) decline of 5% and Seadrill Ltd.’s

(SDRL: OSL) 5.6% drop. Petrofac Ltd (PFC:

LSE), another provider of oilfield services, also

lost 2.5%.

All in all, the STOXX Europe 600 Oil & Gas

Index (SXEP: INDEXSTOXX), a benchmark

that offers exposure to large, mid and small

capitalisation energy stocks from European

developed countries, declined by 1.98%,

closing at 275 Euros, as can also be seen by

the graph below.

Passing onto more specifics, RWE (RWEX:

GER) announced a radical action this week to

adapt to Germany’s shift to renewable energy.

As the second largest utility company in the

country, RWE followed EON (EOAX.N: GER) in

unveiling plans on Tuesday to divide

renewables, electricity distribution and retail

sales into a new company altogether, with a

10% stake due to be to sold to investors in an

initial public offering next year. Analysts

estimate that RWE can secure up to 2.5bn

euros in proceeds from an IPO of its

renewables business, and the company plans

to invest half of this in wind and solar energy.

By separating out the assets that have good

prospects for growth, both RWE and EON,

which is decentralising its fossil fuel and energy

trading businesses into a separate company

called Uniper, hope to be in a better position to

raise money from investors.

With this move, RWE is fighting to upturn a

difficult year, with its shares losing more than

half their value since January. Eon’s stock has

also fallen 37% since the beginning of the year.

Andrea Di Francia


17

Pharmaceuticals

The NASDAQ Biotechnology Index fell by 2.4%

and the FTSE 350 Pharmaceuticals and

Biotechnology Index fell by 2.6% this week. Yet,

on Wednesday, Morgan Stanley had upgraded

a number of stocks in the industry, citing

European equities as 'fairly priced'. Off the back

of this news UK Pharmaceutical equities

including GlaxoSmithKline, Shire and

AstraZeneca rose by an average of 2.1%, but

they had all subsequently resumed a negative

position by the end of the week, as illustrated

by GlaxoSmithKline's graph below.

The industry lost out to investor uncertainty as

most analysts remain cautious about

pharmaceutical equities, despite the fact that

some major analysts including Barclays and

JPMorgan are becoming more confident. Star

fund manager, Neil Woodford, had also

expressed his belief that recent issues are only

'bumps in the road' by investing £120million in

Northwest Biotherapeutics.

As speculated last week, it is apparent that the

recent agreement between Pfizer and Allergan

will negatively impact R&D. Despite highlighting

its commitment to R&D in the UK when it

proposed a bid for AstraZeneca in 2014, Pfizer

has announced that it will close an early-stage

pain therapy research and development facility

in Cambridge, leading to a loss of up to 120

jobs. This is perhaps more evidence to suggest

that big Pharma will slowly curtail research led,

organic growth by instead snapping up smaller

companies and slashing costs such as R&D to

ultimately increase profit. Yet, it is not all bad

news on the development front. Astrazeneca

updated investors on a late-stage drug pipeline

during the middle of last week which helped to

assure Morgan Stanley of its double upgrade of

the stock. Morgan Stanley justified the upgrade

by citing Astra's heavy investment into

developing new drugs to offset its expiring

patents, for which it is likely to soon reap

rewards from.

Given the fact that there are numerous

restructuring headwinds facing the

Pharmaceuticals sector in the short term, I

predict that pharmaceutical equities, especially

in the US, will fall slightly in the next few

months. Investor sentiment and confidence

remains shrouded because of certain deceptive

tactics (most obviously price hikes and deceitful

accounting practises), so I would assume that

short-term growth will not yet emerge.

Sam Hillman

GlaxoSmithKline PLC Share Price

Morgan Stanley upgrades GSK

NEFS Market Wrap-Up

18

Technology

Last Tuesday, Samsung announced that it has

replaced the head of its mobile business for the

first time in six years. The action arose as a

result of falling smartphone sales, and the huge

tech-firm is aiming to reverse this downwards

trend, with the previous head of mobile

research and development, Koh Dong-Jin,

taking the former head’s position.

Whilst being the leading producer of

smartphones by sales, Samsung’s handset

profits fell in the first half of 2014, which came a

result of losing its shares in the low-end of the

market to Chinese competitors, and facing a

resurgence in Apple at the high-end. With

competition high, and increasingly intensifying,

it’s inevitable to see a shift in management at

the South Korean company. Furthermore this is

hugely understandable given that, whilst this

year’s third quarter operating profits rose year-

on-year, reaching $2.06 billion, Samsung’s

global market share in smartphones has fallen

from 33% to 24%.

Looking at next year we can see no significant

driver for sales in Samsung’s smartphone

division, but with a hugely anticipated launch of

phones that feature flexible screens (most

certainly to be released in 2017) Samsung

remains the competitive tech-giant that it is. As

a result we should, given a lack of negative

shocks, expect steady growth in the company’s

market value and capitalisation, with a median

target for the share price forecast of $790.50

within the next 12 months – a massive 43.86%

increase on this week’s closing price of $549.50

as shown in the graph below

Indeed, with this year now coming to a close, it

seems appropriate to predict and forecast the

future trends of more of these technological

firms. Through evaluation of this year’s

performance and analysis of upcoming product

releases, we can review the best predicted

performances over the next 12 months.

Facebook has experienced a yearly rise of

39.88% in their share prices, and this progress

is projected to continue with a forecasted

median price target of $125, which is an

increase in the current value of $105.25 by

18.26%. Meanwhile, Apple possesses a

median estimate representing a 30.21%

increase from the current $115 to the predicted

$200. These two companies, alongside

Samsung, are the top technological companies

regarding future performance, and so each

create opportunity for a great investment and

for what is ultimately an excellent return through

dividends in addition to the future sale of these

greater-valued shares.

Daniel Land

Samsung’s Forecasted Growth


19

Industrials & Basic

Materials

Ball Corporation has announced that it is

planning to sell around €1.5 billion worth of

bonds as it seeks to raise funds to complete its

takeover of UK can maker Rexam. The three-

tranche notes offering have maturities in 2020,

2023 and have a Fitch rating of 'BB+'.

The merger would create synergies, better

manage capital spending and cut costs. The

European Commission, however, fears that this

deal would push up prices for companies and

consumers. The creation of the world’s biggest

drinks can manufacturer, with $15bn in annual

revenues and 60% of the beverage can market

in North America, 69% in Europe and 74% in

Brazil, would raise regulatory issues and likely

require disposals in some regions.

Ball is prepared to divest four factories in

Germany, three in the UK, one each in Spain,

France, the Netherlands and Austria. Nine of

the plants make cans and two of them can

ends. This offer was submitted to the

Commission last week.

Ball will be able to materially improve its risk

profile, profitability and financial flexibility and

strength, owing to the combined capabilities,

production efficiencies and scale of this

massive company after the merger. Thus, this

merger will improve Ball's competitive position

to better optimise beverage can prices to

customers relative to other alternative

packaging substrates. The merger will also

allow the company to tap onto additional

geographies and new customers, increasing

Ball's exposure to growing beverage segments

along with the ability to take advantage of

specialty package technology and efficiencies.

The financial standing of the company would be

immense, with approximately $15 billion in

revenue and $2.4 billion in adjusted EBITDA.

Analysts also believes Ball should have

opportunities to exceed the net synergy target

of $300 million on an annual basis.

Ball's shareholders has approved the

transaction in July 2015 and the transaction is

expected to close in the first half of 2016 and is

subject to approval from Rexam shareholders,

regulatory approvals and customary closing

conditions.

Rexam’s share price has been slowly creeping

up since news of the merger and closed at

597.07 on Thursday closing.

Erwin Low

NEFS Market Wrap-Up

20

COMMODITIES

Energy

Energy Prices have slipped slightly this week as

OPEC agreed to keep pumping near to current

production levels, despite a global oil glut. Oil

futures dropped on Friday, with the US

benchmark briefly falling back below $40 a

barrel and 1.4% for the week. The other main

oil benchmark - Brent crude futures – fell

similarly over the week at 1.6%, while both

Natural Gas and Heating Oil dropped 1.5% and

0.4% respectively.

Cartel members meeting in Vienna on Friday 4th

December made no mention of a production

target in the final stages of their meeting. OPEC

President Mr. Kachikwu told reporters that

“members saw no need to mention a hard figure

but that there had been agreement to maintain

a ceiling that reflects current actual production.”

This roll-over policy adopted by OPEC had

been widely expected, even though there was

pressure from poorer members of the cartel for

a cut in output to prop up the price of oil. Despite

this expectation, there was a strong market

reaction to the news, with WTI Oil falling 3.5%

for the day, by far its biggest tumble this week.

While the official OPEC ceiling is 30 million

barrels a day, the number is largely symbolic,

as the organization has been overshooting it for

months. In September, OPEC produced 31.57

million barrels a day, according to its own data.

Anticipate this trend to continue over the

coming months as OPEC won’t meet again until

June 2, 2016 to reassess policy.

With the purpose behind OPEC’s policy being

the preservation of their market share, the main

reason behind this continuation of policy stems

from evidence that it’s working. Data recently

showed that the number of active US oil-drilling

rigs fell by 10 to 545 as of Friday. Furthermore,

they’re down by 1,030 compared with last year.

In other news, Gasoline plummeted 8.5% for

the week as a re-stabilisation from last week’s

dramatic price increase due to limited supplies

in North-eastern America ahead of

Thanksgiving. Falling to pre-limited supply

levels, Gasoline has equilibrated back with the

rest of the market and general trend.

Over the coming month there is an expectation

that prices of oil will thus remain relatively low

due to this policy roll-over. However, I believe

that Natural Gas and Heating Oil prices will

increase since consumers will generally stay

indoors for the festive period and winter

weather typically intensifies.

Harry Butterworth


21

Precious Metals

This week we have seen the same trend

looming over the precious metals sector as

investors around the world await the upcoming

meeting of Janet Yellen’s decision. Gold in

particular has seen some short term

fluctuations this week due to the strength of the

US Dollar but still remain at its lowest levels

since early 2010.

Gold prices hit multi-year lows and yet bounced

back on Thursday 3rd December after the

hawkish comments from the Federal Reserve

chairwoman Janet Yellen and positive US

economic data lifted the US dollar against major

currencies. Spot Gold was last at 1,050.50

USD/oz., down $3.30 from Wednesday’s

closing price but bounced to 1063.33 USD/oz.

(See Fig. 2 between 2nd Dec and 3rd Dec) This

can be attributed to the announcement made

after this Thursday morning, 3rd December

news published that the European Central Bank

would lower interest rates to historic lows to

further stimulate the region’s economy. Another

reason can be attributed to the speculation of

the strength of US Dollar by investors, as seen

from the Dollar Index (Fig. 1). A fall in the Dollar

Index pushed Gold prices higher due to the

correlation between stronger US economic data

and the likelihood of an interest rate hike.

Silver prices have followed the same trend as

Gold prices, dropping significantly before

bouncing back, fluctuating between the 14.16

USD to 13.90 USD range. On the other hand,

prices of Platinum and Palladium have dipped

this week: Platinum fell from 852.8 USD to 831

USD and Palladium fell from 557.1 USD to

528.6 USD. Some of the precious metals have

seen a short term decline, and this can be

attributed to the investor’s speculation over the

key decisions made by both the Federal

Reserve and the European Central Bank.

It is unlikely that Gold will continue to rally as we

will have to wait for the FOMC meeting on the

17th and 18th of December 2015 for the long

awaited decision of an interest rate increase.

The dollar index is a strong indicator of how well

US economy is doing and it would be critical to

observe this trend.

Samuel Tan

Gold Price Trend (Fig. 2)

Dollar Index (Fig. 1)

NEFS Market Wrap-Up

22

Agriculturals

As forecasted last week, the trend in cotton

prices changed once the festival weekend

ended. The reduced interest in buying by mills

and spinners initiated a decline from the peak

at $63.93/lb on the 27th November down to

$60.43/lb on the 3rd December. The

International Cotton Advisory Committee

(ICAC) reported a slowing increase in global

demand for cotton, irrespective of the global

population growth. ICAC concludes that this

tendency can potentially result in 2015/2016

imports decreasing by 3% relative to 2014/2015

cycle.

As we are approaching the end of the year, this

week I would like to provide an overview of the

agricultural news in 2015 and the likely futures

in January 2016.

While dry weather usually is a factor shifting

agricultural prices upwards, it had quite an

opposite effect on lean hog (and meat in

general). Figure A illustrates a steady

devaluation since June, when the price reached

$84.35/lb, up to 3rd December, signifying a six-

month low at $56.275/lb. The identified cause

includes rising animal feed costs, especially

after sudden price jumps in June, October and

November (Figure B). Persisting poor weather

conditions resulted in lowered yields of animal

feed.

As the cost to feed the cattle still keeps steadily

rising, farmers more often choose to increase

slaughtering of animals instead and avoid

extended unprofitability. According to Paul

Makube, senior economist at FNB, this

increase in supply will reduce prices not only

over the festive season; it is also likely to reduce

meat prices between 8 to 15% in December and

January 2016.

Kona Haque, head of research at ED&F Man,

concluded that price fluctuations in agricultural

goods such as wheat and soya beans were

highly affected not only by the dynamic weather

or the level of production. This time the

explanation emphasises the impact of currency

exchange rate stabilities on the prices. As the

US dollar remained at a relatively strong

position, the relative prices of these goods fell

by an average of 28.3%. In contrast, the

Brazilian Real weakened, and the outcome

resulted in the respective price appreciation of

32.5%. This factor had a significant effect on

redistribution of the agricultural market. US

exports are already decreasing and, according

to the Department of Agriculture, will continue

to do so. Although the outcome in Brazil is more

favourable for local farmers, Brazilians

experience a sharp rise in input prices as well.

Consequently, farmers’ profits will be reduced,

forecasting yet another shift in the market

distribution.

Goda Paulauskaite

A B

Rapid price

jumps


23

CURRENCIES

Major Currencies

By Thursday morning, Ahead of the ECB policy

meeting, EUR/USD was pushed further

towards a 7 month low, where it hovered around

the 1.0545 level, as investors digested further

signals of divergence between central banks in

the US and Europe. However, Euro short

positions have built up to the point where there

is little room left to sell into, unless the ECB

comes out with action far exceeding market

expectations.

At 12.45pm the ECB policy meeting details

were released; the decision was made to cut

interest rates by a further 10 basis points to -

0.3%, as the central bank attempts to inject life

into the Eurozone’s struggling economy. It was

also announced that ‘further policy measures’

would be released during a news conference

later where Mario Draghi would speak; a

reference to expected changes it might make to

its 60bn euro quantitative easing measures.

In the immediate trading following the 12.45pm

release, the euro shot up to 1.0625, before

meeting resistance at 1.0725.

Later that day at 1.30pm, Draghi then

announced in his speech that the ECB was to

launch a new stimulus package to boost the

Eurozone; the programme would be extended

by 6 months to March 2017, or ‘until the EBC

council sees a sustained adjustment in the path

of inflation’. He added that the ECB would re-

invest the proceeds of the bonds it is holding as

they mature; and would now be prepared to buy

regional and local government debt from within

the euro, as well as sovereign bonds.

The ECB said it would leave other interest rates

unchanged, including the key refinancing rate,

which ripples out to borrowers across the

economy. This rate has already been slashed

to just 0.05%.

Stephen Macklow-Smith, head of European

equities strategy at JP Morgan Asset

Management, said that the ECB was trying to

“do three things: maintain euro weakness, keep

interest rates lower for longer and boost liquidity

with a view to stimulating credit”.

GBP/USD continues its 7 month sideward

trend, ranging in the 1.50-1.59 zone, although

we are now seeing the pair test the 1.50 support

level, as it was breached for the first time on

Wednesday and Thursday. The greenback is

facing a wave of selling across the board on the

back of sudden Euro strength, despite the

ECB’s decision to cut the deposit rate.

Adam Nelson

NEFS Market Wrap-Up

24

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

For any queries, please contact Josh Martin at [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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