INTERVIEW BRIEFING
02.09.14 ISSUE 39
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The informa,on, news and data provided below highlight the key macro economic and corporate events currently affec,ng global markets. You should ensure that you are familiar with these issues in order to demonstrate your market knowledge and interest. MACRO ECONOMIC NEWS WEAK EUROZONE DATA INCREASES CHANCES OF ECB MONETARY EASING, OFFSETTING CONCERNS OVER UKRAINE •
Equity markets finished the last two weeks on a firm note with the S&P 500 index hiGng a fresh all ,me high, closing above 2000 for the first ,me. The markets focus was the possibility that the ECB chairman, Mario Draghi, will soon embark on further monetary easing, poten,ally including a program of quan,ta,ve easing. We have gone back to the situa,on we had at the end of last year, that is, bad economic news can be good news for markets. GDP data for the Eurozone showed no growth in the second quarter with Germany contrac,ng as the situa,on in Ukraine takes it toll. However, Spain was the one bright spot with its economy growing in the period. The ECB have appointed BlackRock to help advise on a possible bond-­‐buying scheme to combat defla,on and ease credit condi,ons in the Eurozone, figures for July show that infla,on is running at just 0.3%, the ECB has a target of 2%. In further evidence of a divergent economic backdrop, US GDP growth was upgraded from 4% to 4.2%. Markets in the US were further encouraged by the FED’s dovish comments on the ,ming of an increase in interest rates. EUROPEAN SOVEREIGN BOND YIELDS HIT ALL TIME LOWS With the likelihood of QE and con,nued lose monetary policy the bond yield of the German 10 year bond fell to a record low of just 0.87%, down 9 basis points on the week. All German bonds with a maturity of less than three years now have a nega,ve rate. The cost of borrowing for Spain is now lower than that of the US. •  Q: What are central banks hoping to achieve by ins6ga6ng a program of QE •  A: QE is the purchase of government bonds and some mortgage backed securi6es by a central bank, causing yields to fall and thus forcing real interest rates down. Another effect of QE is to increase money supply and encourage banks to lend more and thus s6mulate economic recovery. A by product of QE can be higher infla6on, which in the case of the Eurozone, would be seen as desirable, although it is worth no6ng that the purchase of $85bn of bonds and MBS per month had liIle effect on prices in the US. •
RATE DECISIONS DUE FROM BANK OF ENGLAND, ECB AND BANK OF JAPAN •
Acer a quiet start to the week, US markets were closed yesterday for the Labour Day holiday, investors will be looking to Thursdays announcements by central bankers on monetary policy. It is not expected that the Bank of England will change rates at this point (expecta,ons are for a move in early 2015), however 2 members of the 9 strong commigee voted for a rate increase at the last policy mee,ng. Even though the rate of infla,on in the single currency zone fell to 0.3% no change in policy is an,cipated. Acer very poor GDP data from the Eurozone and deteriora,ng business confidence in Germany, investors will be watching German industrial produc,on for July, released on Thursday. Economic data in the US has been steadily improving recently and more evidence of this could come on Friday with publica,on of the non-­‐farm payrolls, the US employment situa,on. THE CRISIS IN THE UKRAINE SENDS THE RUSSIAN ROUBLE TO FRESH LOWS Whilst the situa,on in the Ukraine is undoubtedly bad news for the economy in Europe , especially in Germany with its close business ,es, it is worse for Russia. Last week the ruble fell to a record low against the USD, it has now devalued by 13% this year against the US currency. Commentators have suggested that a long term affect of the situa,on in Ukraine could see a shic in energy policy in the EU and diversifica,on away from Russia, with poten,al beneficiaries being Norway, UK and the US. •  Q: How much does the Russian economy rely on energy produc6on? •  A: Russia supplies Europe with about a third of its coal, natural gas and oil. Russia is the worlds second largest oil producer, behind the US and receives 50% of its budget revenue from it. In the last few weeks the price of oil (Brent) has fallen over 10%, even with the unstable situa6on in the Middle East, further hur6ng the Russian economy. Part of the reason for the fall in the price of oil comes from the increased produc6on from America with the CEO of Exxon saying that he expects the country to be self sufficient by 2020, way ahead of previous forecasts •
DEMAND FOR AN END TO AUSTERITY SEES FRENCH PRESIDENT DISSOLVE GOVERNMENT French economic minister, Arnaud Montebourg, calls for an end to austerity. In an interview with La Monde the minster said that '"France is a free country which shouldn't be aligning itself with the obsessions of the German right,” •  Hollande took a poli,cal gamble and ordered his PM, Manuel Valls, to form a new government that will exclude Socialist dissidents who are demanding an end to austerity. Many see this as Hollande's last chance to make a successful Presidency, in a recent poll his ra,ng fell to just 17%, the lowest of any post-­‐war President. •
CHINA'S PROPERTY BUBBLE SHOWS FURTHER SIGN OF DEFLATING •
Acer years of soaring property prices and fran,c construc,on across the country China's property boom is showing signs of strain with the countries largest developer, China Vanke Co offering discounts of up to $325,000 in an effort to shic unsold housing. The discount is being offered through the online e-­‐commerce plaoorm of Alibaba. In the first 7 months of 2014 Chinese residen,al property sales have fallen nearly 10%. More than 30 ci,es have removed purchase restric,ons introduced in 2010 to restrain price growth amid public anger over high prices. So far the discounts being offered by developers have failed to lic demand. The ci,es that have seen the largest reduc,ons include Beijing, Shanghai, Guangzhou and Chongqing. To illustrate just how huge the Chinese construc,on industry is, China produced more cement in 2 years than the USA did in the en,re 20th century. CORPORATE NEWS TESCO'S SLASHES DIVIDEND PAYMENT BY 75% AND ISSUES ITS THIRD PROFITS WARNING OF 2014 •
Although analysts had not been expec,ng good news from Tesco the magnitude of the companies problems s,ll came as a surprise, pushing the share price down over 7% to trade at just £2.3, it lowest level for 11 years. Dave Lewis, Tesco's new CEO who was due to takeover in October has bought his start date forward to this week. Lewis will have to find a strategy that will revive the countries biggest supermarkets fortunes amid a savage price war that is cos,ng the majors millions in profits and reducing their market share. Tesco, Morrison and Sainsbury are all facing compe,,on from discounts such as Aldi and Lidl and also from the higher end stores such as Waitrose and Marks and Spencer. Compe,,on has had a drama,c affect on Tesco's profitability, last year the group made £3.3bn, this year it expects to make £2.4bn. By reducing the dividend that it pays to shareholders the company will save £900m but by doing so it will upset ins,tu,onal investors such as pension funds who rely on receiving an income from their holdings. Shares in Morrison and Sainsbury both fell 5% on the day of the announcement as speculators assumed that price compe,,on would intensify in the coming months. ASTRAZENECA SHARES RALLY AS INVESTORS SPECULATE ABOUT RENEWED BID INTEREST •
In the last two weeks shares in AstraZeneca have risen 12% as we approach the date that Pfizer would be able to table another offer for the company. Pfizer made a $118bn offer for the company back in May, under takeover rules they are precluded from making a new approach for 3 months, that deadline was passed on the 26th August. Shares in Zeneca last week touched £45.70, just £2.50 below their high at the ,me of the Pfizer offer. BURGER KING BIDS FOR TIM HORTON IN LATEST 'TAX INVERSION' DEAL •
Burger King has made an offer for the Canadian company Tim Horton that would see BK move its tax domicile north of the border where corpora,on tax is just 15% compared with the US rate of 35%. Many observers believe that the US government will soon close the loophole that allows US companies to avoid paying the higher tax rate. Another reason behind the move by BK is to try and take on McDonald's and Starbucks in the lucra,ve breakfast market. Warren Buffeg's Berkshire Hathaway will help finance the deal, lending BK $3bn, approximately 25% of the financing required, and in return it will receive 9% annual interest. In another poten,ally tax related deal UK chip maker CSR has rejected on offer from its larger US rival, Microchip Technology, shares in CSR went up 35% on news of the approach. ALIBABA LOOKS SET FOR NEW YORK FLOAT LATER THIS MONTH •
Chinese online retailer Alibaba looks likely to list on the New York Stock Exchange (NYSE), possibly as early as 18th September, in one of the largest IPO's ever. If the floata,on goes ahead it is an,cipated that the company will raise around $20bn making it the third largest IPO ever, the biggest being the Agricultural Bank of China. There has been a lot of specula,on about where Alibaba would chose to go public with many believing that Hong Kong would be the most likely venue, however due to the type of vo,ng structure that the company wishes to adopt it makes a NYSE lis,ng the most agrac,ve. The company is highly profitable, making $1.8bn in the last quarter, and would have a market capitalisa,on of around $150bn. The Hong Kong Stock Exchange is believed to be reviewing its lis,ng requirements acer missing out on the IPO. US INVESTMENT BANKS INCREASE STARTING SALARIES FOR NEW ENTRANTS •
In an agempt to lure top talent back to investment banking some of the largest US banks have increased star,ng salaries for 2015 by as much as 20%. Last week saw a survey published that found that investment banks are s,ll paying the most to new recruits, with average star,ng salaries of £45,000, followed by law at £39,000. Post the financial crisis and subsequent damage to its reputa,on investment banking has faced s,ff compe,,on from other professions for the top graduates. Ci, is the latest bank to boost the base salaries of some of its highest earners to mi,gate the effects of the bonus cap. •  INTERVIEW QUESTION: Trading volumes throughout the summer have been lower than usually, is that trend likely to con6nue through •
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the rest of the year? ANSWER: The lack of volume that we’ve seen this year in trading has gone way beyond the “seasonally slow” trading typical of the summer months. Stock volumes and volaBlity have generally been on paCern of decline for years, accompanied by a significant drop in volumes for bonds and currencies as well. There are several explanaBons for this: Heavy regulaBon i.e. Dodd-­‐Frank is driving out market parBcipants as proprietary trading desks at banks have shrunk dramaBcally. The slow but steady rise of Exchanged Traded Funds (ETFs), now moving toward $2 trillion in assets in the US. Although such trading generates volume in the fund, it does not translate into higher flows in the stocks underlying most of these instruments, which are mostly based on indexes. The stocks underlying the ETF, e.g. the S&P 500 index, are not bought or sold when the ETF shares change hands; you only get acBvity in the underlying stocks when the ETF shares are created or redeemed in exchange for these underlying stocks. Low volaBlity has reduced the involvement of high frequency trading (HFT) firms that generally profit from higher volaBlity and price swings. Most compelling is perhaps the distorBon of volume acBvity by the move to electronic trading, as well as by the 2008 financial crisis. The move to electronic trading, which rose dramaBcally through 2008, helped create the HFT industry and a huge increase in trading volume. The crisis itself also caused a massive spike in volaBlity and trading volume as well. Beginning in 2010, volaBlity declined as the financial crisis began to abate and cut trading opportuniBes. High frequency trading became more widespread which also reduced trading opportuniBes. For example, average daily volume at the NYSE rose massively from 3 billion shares in 2007 to well over 7 billion in October 2008, from which it began to drop steadily, with the excepBon of events like the European crisis driving trading spikes. Today, trading volumes are down at a mere 2.3 billion FTSE: Price 6831 14 day change 0.9% DAX: CAC: US MARKETS S&P 500: 9558 4396 2003 2.4% 3.4% 1.6% 10051 4598 2003 NASDAQ: COMMODITIES BRENT: 4580 $101.85 1.6% unch 4580 $119 GOLD: BOND YIELDS (10yr) US TREASURIES: $1271 2.38% -­‐2.2% unch $1796 GERMAN BUND: UK GILTS: SPANISH: CURRENCIES GBP/USD: 0.89% 2.44% 2.28% 1.6535 -­‐11% 2% -­‐7% EUR/USD: JPY/USD: 1.3114 104.904 EUROPEAN MARKETS (02/09) 52-­‐wk High 6894 Job Opportunijes Instructus Markets – Student Ambassador Libra Investment Services – Intern and Graduate posi,ons available Olive Tree – Intern and Graduate posi,ons available VIX Index: 11.98 Course Calendar – www.instructusmarkets.com/core-­‐courses/students Capital Markets Careers Course – Book here hfp://instructusmarkets.com/core-­‐courses/students/capital-­‐markets-­‐careers-­‐course Monday 8th September Monday 15th September 3 Day Finance Career Launchpad – Book Here hfp://instructusmarkets.com/core-­‐courses/students/financial-­‐careers-­‐workshop Monday 8th – 10th September Monday 15th – 17th September Monday 22nd – 24th September Monday 29th September – 1st October www.facebook.com/instructustradingltd www.linkedin.com/company/instructus-­‐
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