The Week in Review

Week in review: Learning from history

This week, we have come to realise the importance of learning from history. With the British MPs choosing to bomb ISIS in Syria, they are promising to right the wrongs of the Iraq War. With Brazil embroiled in economic turmoil and political chaos, it is clear that President Rousseff has not learnt the value of sound economic governance. With the ongoing UN climate change conference, there is hope that the lessons have been learnt from the Copenhagen Conference in 2009 which ended with little to show for it. Finally, as the US prepares for its first rate hike in over half a decade, we hope that they have learnt from the ECB who tried to raise interest rates in 2011 despite the ongoing debt crisis and even today, is still paying the price.

Yuan be with us?

An employee counts Chinese one-hundred yuan banknotes in an arranged photograph at the Bank of China Hong Kong Ltd. headquarters in Hong Kong, China, on Thursday, Nov. 12, 2015. The People's Bank of China's 2015 edition of the 100 renminbi banknote, with new anti-counterfiting features, starts circulating today. Photographer: Xaume Olleros/BloombergRenminbi

What happened? The Yuan, finally gained approval this week to be included in the IMF “Special Drawing Rights” (SDR) Basket. The Chinese currency is the 5th to be included in the basket, along with the Pound, the Dollar, the Euro and the Yen, and cements the Yuan’s place as a global reserve currency.

What’s going behind the scenes? As noted by Christine Lagarde, Managing Director of the IMF, this marks a major ‘milestone’ for China in its steps to integrate with the global financial system. In including the Yuan in the SDR basket, the IMF is acknowledging that the Chinese currency plays a major role in global trade and is “freely usable” for fund transactions, the two conditions required for approval. Consequently, it signifies the IMF’s recognition of China’s efforts to liberalise its financial markets and allow for the free flow of capital across its borders; most notably, its August devaluation of over 3% where the Chinese central bank allowed the market to have a greater say in setting the daily trading band for the currency.

Why is this important? Within the SDR basket, the Yuan has a weighting of just over 10%, making it the third biggest currency in the basket after the Dollar and Euro. Its inclusion is no small matter, as the SDR is a very important asset which is traded internationally for the freely exchanged currencies that make up the basket and at the same time, the weightings of the SDR basket determine the interest rates that the IMF charges for loans to members. Nonetheless, as the Yuan will only be officially included in the basket from September 2016 onwards, the significance of this announcement lies in its symbolism.

A wild week adds to Brazil’s woes

President Dilma Rousseff

 

What happened? It’s been a truly tumultuous week for those in Brazil; even more corruption charges were thrown at the country’s biggest firm Petrobas, the economy apparently shrank at a record 4.5% year-on-year in the third quarter and to top it all off, its president  Dilma Rousseff is facing impeachment for playing with the national accounts.

What’s going behind the scenes?

  • For over a year, Petrobas has been at the centre of what is Brazil’s biggest corruption scandal in history and this week brought even more allegations. At its heart, Petrobas executives have been accused of bribing politicans for contracts, using company profit. Prominent Brazilian politicians and businessmen have already been arrested for their involvement; most notably, billionaire André Esteves who was chief executive of Brazil’s investment bank, BTG Patual, was arrested this week along with Delcídio Amaral, the first sitting congressman to be detained in Brazil’s democratic history.
  • Opposition politicians this week began impeachment proceedings against President Dilma Rousseff over claims that she used accounting tricks to make the state finances appear less dire than they actually were. This simply adds to the state of political chaos that Brazil is currently in, as it is the Speaker of the lower house Eduardo Cunha who is calling for the impeachment, likely to save his own skin as he also faces calls to be unseated.
  • Unsurprisingly then, the Brazilian economy is doing horrifically as all of the economic indicators are in free fall. Latin America’s largest economy is contracting at the fastest rate since the Great Depression, unemployment has almost doubled since last year to 8%, inflation is in double digits for the first time in over a decade 2012 and the budget deficit is now at 9.5% of GDP.

Why is this important? This simply demonstrates the importance of economic competence; voted in on a platform to raise standards of living in Brazil, Rousseff has catastrophically failed to meet that expectation and from there, everything has unravelled. The economy is in a dire state of affairs due to her economic mismanagement and overspending in her first term, and although she is now trying to pass spending cuts and fiscal reforms through Congress, her loss of popularity is preventing her from passing able to pass those measures, further exacerbating the problems.

The spectre of Iraq, Afghanistan and Libya looms

What happened? This week, the House of Commons debated a motion to extend air strikes against Isis from Iraq into Syria and after a gruelling parliamentary session of 10 hours, 397 MPs backed the motion with 223 against, a majority of 174 MPs.

What’s going behind the scenes? The build-up to the decision was not without drama; Prime Minister David Cameron was strongly criticised for making some highly personal attacks by suggesting that those who opposed the bombing were “a bunch of terrorist sympathizers”. At the same time, the very issue of bombing Syria created a sharp divide within the Labour party as their leader Jeremy Corbyn, who is strongly anti-war, backed down from his intentions to whip the Labour ministers into voting against the motion and gave in to pressure to give his cabinet ministers a free vote.

Why is this important? As mentioned by Jeremy Corbyn, “the spectre of Iraq, Afghanistan and Libya looms” over this decision and although the vote was technically voting for action in Syria, it was more a vote about the role of Britain on the world stage. The debate about British interventionism has lasted decades as back in the 1990s as it was the slowness of the Western allies (including Britain) to intervene in Bosnia that allowed war crimes to be committed, thousands to die and millions to become refugees. The stance on interventionism has changed dramatically over the years; from being pro-interventionism following the successes in Kosovo and Sierra Leone, Britain has been against it as the Iraq War and intervention in Libya have become engraved into the conscience of the public as a grave mistake. Perhaps, now with terrorism as a resurging threat, that mood has changed once again.

Other News:

Mark Zuckerberg, Priscilla Chan and their new baby, Max. (Screenshot from Facebook.com)

As mentioned in our previous blog posts, December is set to be the crucial month for monetary policy and just a few days in, there are clear signs that this is the case. Mario Draghi extended the timeline for the ECB’s QE programme to March 2017 and the asset purchases would be extended from just sovereign debt to municipal debt (i.e. debt issued by regional and local governments) but disappointingly, the pace of monthly purchases was maintained at €60bn a month. Nonetheless, the ECB did cut deposit rates even further to 0.3%. Meanwhile, on the other side of the ocean, Janet Yellen made the case for a rate hike as she stated that the US economy has “recovered substantially” from the Great Recession and is set for further growth and firmer inflation.

Delegates from 195 countries descended on Paris this week for the United Nations Climate Change Conference (COP21) to discuss the best way to tackle what is regard by the some as the biggest threat to humanity in history, climate change. After the failure of the Kyoto protocol to force countries to cut emissions, the focus is now on voluntary action plans where countries make pledges to do their part to save the environment. The key issue at the heart of the talks is that rich countries grew rich from exploiting fossil fuels during the industrial revolutions and poor countries who are now trying to do the same, are being told not to.

Mark Zuckerburg, founder and CEO of Facebook, made a bold statement by outlining a plan to donate 99% of his $45bn wealth in Facebook shares to charity, following the birth of his daughter Maxima this week. Nonetheless, the entrepreneur has attracted criticism because by donating the shares through the Chan Zuckerberg Initiative, a Limited Liability Company, Zuckerburg can avoid tax on the sale of his shares but he stresses that using this corporate structure gives him the flexibility to fund non-profit organizations and make private investments on issues of public policy.

Week in Review: Tensions flare

This week saw tensions rise up in all different areas of the world. Anger is being channelled by the French and Russians into their efforts to take down ISIS, with some blowback. Similarly, Pfizer provoked outrage by announcing their intentions to relocate from the US to Ireland through the acquisition of Allergan, mainly for tax reasons. On the other hand, George Osborne helped to settle tensions after he backed down from his plans to implement £4.4bn worth of public spending and tax credit cuts, which would have disproportionately hurt the poorest families.

The daddy of all megadeals

pfizer take over

 

What happened? So far this year, we’ve had the biggest tech deal in history, the biggest beer-brewing deal in history and the biggest hospitality deal in history. And now? The biggest pharma deal in history. That’s right; Pfizer, known for its production of Viagra, has agreed a deal to purchase Allergan, which makes Botox, for a record $160bn, to create the world’s largest pharmaceutical company.

What’s going on behind the scenes? Rumours had been circulating about whether this deal would actually go through for several month but after all of the anticipation, this deal has certainly made a splash. Not just for the size of the deal (it is set to be 2nd largest in history), but also for the motivations behind the deal; Brent Saunders, CEO of Allergan, has highlighted the “highly strategic” nature of the deal. This mainly stems from the tax inversion that Pfizer is desparately seeking; Pfizer is currently domicilied in the US where the corporate tax rate is 26% compared to the 17-18% that Allergan pays in Ireland, helping to save the company $2bn over the course of the first three years. Some analysts also believe this deal is simply a play to replenish Pfizer’s branded drugs portfolio before divesting its generics business, to leave the firm more streamlined.

Why is this important? Although this deal is very atypical in its size, the two key issues that plague almost every M&A transaction are especially pertinent to this deal; concerns over regulation and culture clashes. Politicians have been quick to denounce the deal with Hilary Clinton claiming that this leaves the US  taxpayer “holding the bag”, referring to how Pfizer has long benefited from US  taxpayer-funded research and American scientists and suggests that this deal could be blocked. Also worryingly, the chief executives of the firms have a very different take on the importance of R&D in ‘big pharma’; currently, Pfizer invests heavily in R&D whereas Allergan is known for buying or licensing drugs that have already been unearthed by smaller biotech firms.

Christmas come early?

Autumn Statement chart: Fiscal forecast

George Osborne faces the biggest test of his chancellorship.

 

What happened? This week saw George Osborne deliver his first budget for a wholly Conservative government and with it, the Chancellor of the Exchequer brought a nice treat in time for Christmas; he abandoned his plans to introduce £4.4bn worth of cuts to tax credits and public spending which were widely lambasted for their harm to the livelihoods of working-class families.

What’s going on behind the scenes? It is most likely that Osborne’s change of heart has come as a result of a more optimistic forecast by the Office of Budget Responsibility for the government’s coming five-year public finances, which was improved by a health £27bn, giving Osborne more leeway in his aim to achieve a £10bn surplus by 2020. On the other hand, it could also be that public opinion is turning against Osborne’s crusade of austerity, with a Populus poll by the FT showing that fewer people now support the notion that there is a need for ‘austerity and cuts in government spending over the next five years’, down to just 48%.

Why is this important? Given Osborne’s reputation as an opportunist, showcased by his outdoing of Labour through the repackaging of their minimum wage increase into a ‘living wage’, this U-turn by the chancellor seems to be just as well-calculated. In his budget, he outlined significant tax rises in the form of an apprenticeship levy on businesses and higher council taxes, as opposed to the spending cuts he has become known for in what appears to be a move to take the centre ground that has been left open by Corbyn’s Labour.

A “grand coalition” to fight a grand enemy



 

What happened?  This week, François Hollande made good on his promise to wage ‘war against ISIS’; not only did he triple the French air-strike capacity in Syria to bomb ISIS targets, but the French President himself has met up with numerous allies to form a ‘grand coalition’ of countries that will help him to take down ISIS.

What’s going on behind the scenes? Following the Paris terror attacks, for which ISIS claimed responsibility, the French feel very strongly about retaliating to “annihilate” the terrorist organisation and this sentiment is also shared by Russia who are equally furious at ISIS’ bombing of Metrojet Flight 9268, which killed over 200 Russians who were on board. With ISIS very clearly targeting Western Europe countries, this has made the possibility a collaboration amongst the Western allies and Russia very real.

Why is this important? Whilst Hollande’s efforts of a grand coalition were occurring, the week also brought further news that highlighted the point of a coalition; Turkey had shot down a Russian fighter jet for violating its air space, the first time a NATO member had entered hostilities with Russia since the end of the Cold War. With more co-operation, it is hoped that these countries can work together as opposed to working against each otehr, in order to achieve their common goal of eradicating ISIS from the world.

Other News:

This week marked the 100 years since Albert Einstein formulated his famous theory of general relativity. Even today, it is talked about with much admiration and is seen as one of the major milestones of scientific progress. At its heart, the theory explains gravity as a curvature of spacetime and has helped to explain an array of phenomena such as the nature of black holes and the state of the universe.

The US growth rate for Q3 was revised upward significantly from 1.5% at an annualised rate to 2.1%, with the bulk of the upward movement coming from inventories being overestimated. By putting a more optimistic spin on the data, this further raises the likelihood of a Fed rate hike next month.

Having announced five profit warnings in the last 2 years, the new chief executive of Rolls-Royce, Warren East, made her attempts to win back the trust of investors by laying out her plans to restructure the British engineering company. He intends to  cut jobs and slim down management whilst transitioning the company’s focus from jet engines, which are seeing declining demand to new generation turbines.

 

Week in Review: Animals galore!

The theme of this week’s post is animals! We have animal spirits are driving even more M&A activity, this time in the hotel industry. We see a fundamental divide between the hawks and doves in monetary policy, between those who want to see less monetary stimulus and those who want more. Finally, there is a tale about the mythical unicorns, the start-ups that are valued at over $1bn before even being public listed!

Hotels are getting in on the action!

A Marriott flag hangs at the entrance of the New York Marriott Downtown hotel in Manhattan, New York November 16, 2015. Marriott International Inc will buy Starwood Hotels & Resorts Worldwide Inc for $12.2 billion to create the world's largest hotel chain with top brands including Sheraton, Ritz Carlton and the Autograph Collection. REUTERS/Andrew Kelly

  • What happened? After the last few weeks were dominated by headline-making ‘megadeals’ in the beer, tech and pharmaceutical industry, it was the hotel industry’s turn; Marriott International approached Starwood Hotels & Resorts with an offer of $12.2bn to acquire them. However, the deal is not yet done as the door is still open for other hotel chains to propose an even better offer.
  • What’s going on behind the scenes? The hotel industry is known to be widely dispersed; the combined firm would be the largest hotel company in the world but would still only have a global market share of 7%. Nonetheless, growing in scale is highly significant as Marriott hopes to gain greater bargaining power against the internet booking companies of Expedia and Priceline who together control 61% of the market, and a greater ability to compete with the likes of Airbnb who have intensified the competition that the hotel companies face. Finally, this deal is perfectly in line with Marriott’s strategy of international diversification because they are already steadily opening one new hotel in China every fortnight but through the acquisition of Starwood who sell over 20% of their rooms in Asia, they can dive straight into the Asia-Pacific markets where incomes are rising fastest.
  • Why is this important? The hotel sector had been particularly quiet in the first half of this year, even when most of the sectors were seeing large amounts of M&A activity going on but within a fortnight, that changed dramatically. Firms such as Accor, the French hotel group and Travelodge, the budget UK hotel chain, were quickly immersed in deals before this bumper transaction was announced. Ultimately, it highlights that in the face of disruptive innovation and pressures from their distributors, firms must adapt and M&A is one way to do that. Only time can tell if that is a sufficient answer.

Are unicorns even real?

Jack Dorsey

  • What happened? Of course unicorns exist! No, we don’t mean the mythical horned creature, we mean the tech firms that have managed to amass a valuation in excess of $1 billion. However, one purported unicorn, the payment processing company of Square Inc, didn’t nearly as well as it hoped when it had its initial public offering last week. Its shares priced at $9, well below its indicated price range of $11-$13.
  • What’s going on behind the scenes? In its previous private fundraising round, Square had been valued at $6bn and if the IPO had gone according to plan, it would have been worth as much as $4.2bn but alas, its public valuation at debut was just a meagre $3.2bn. When we consider why the firm was valued at such a discount relative to its private valuation, there are many reasons. The most important factor to consider is almost always the fundamentals; behind all the optimism about its status as a unicorn, Square is still a loss-making financial services company and although its year-on-year adjusted revenue growth rate is high at over 70%, it is on a downward trend. In fact, in an competitive industry where there are at least 5 other unicorns, it is clear that the market has deemed Square as being simply not unique enough to command such a high price.
  • Why is this important? On the whole, tech IPOs have done rather poorly this year; there have been less than 30 tech IPOs in the US this year, the least since 2009 and there is good reason for this. Investors are suspicious of the high valuation that privately listed companies have received, as it is not clear how strong the fundamentals of the firm are and what terms private investors have been given by private tech firms. With unicorns being as illustrious as they are, just as with the mythical creatures, it seems that August’s market correction has made investors sceptical of the unicorns.

Hawks and doves
ECB president Mario DraghiJanet Yellen testifies before the House Finance Committee in the Rayburn House Office Building November 4, 2015

  • What happened? More and more evidence is accruing to suggest that the ECB and the Fed are going to change their monetary policy stance in December. The big sticking point is that the changes are almost certain to be in the opposite direction to one another.
  • What’s going on behind the scenes? The US is coming off the back of a strong jobs report in October where there was a record low level of unemployment and according to the minutes of the Fed’s October meeting, many members on the board support the view that the conditions for a Fed rate hike “could well be met”. In direct contrast, ECB President Mario Draghi echoed his famous call to “do whatever it takes” to save the Euro in 2012, by announcing that he “will do what we must to raise inflation as quickly as possible” after months of near-zero inflation rates and a paltry growth rate in Q3 for the Eruozone. As such, December looks set to be the month when the Fed finally abandons its rockbottom Fed funds rate with a hawkish rise but also when the ECB makes dovish moves to bolster its €1.1tn quantitative easing programme.
  • Why is this important? A change in the monetary policy for the two biggest economies in the world would individually be enough to attract the interest of most economists but the fact that they are set to occur in the same month and with a difference in direction has added a whole new element into the mix. This is most plain to see in currencies and bonds where the dollar is surging to a seven-month high against the Euro whilst the sovereign debt spreads on two year Treasury notes against their G7 equivalents has reached almost 80 basis points, the greatest since 2007.

Other News:

  • There were significant developments in the fight against ISIS, in the aftermath of the Paris terror attacks that killed at least 129 people and injured more than 300 others. French President Hollande declared war on ISIS and launched an air offensive in Syria against known ISIS strongholds in retaliation. Meanwhile, the US continued to launch air strikes against and claimed to have killed the leader of IS in Libya. Finally, calls have been made to restrict the flow of Syrian migrants into Europe and the US, in fear of letting in would-be ISIS terrorists.
  • Walmart reported positive results last week as its stocks rallied and its sales in its domestic stores were slightly higher in the third quarter but despite this, profit was down by 11%, owing to the poor performance of the international stores. In particular, sales at Asda were down 4.5% due to fierce competition from the discount retailers who have seen their market share double in the past 3 years.
  • The Japanese economy fell into recession in the third quarter as it saw a slight contraction of 0.8% at an annualised rate that added to Q2’s contraction of 0.7%. This is a severe disappointment for Japanese Prime Minister Shinzo Abe whose efforts to eliminate deflation and revitalise economic growth through fiscal and monetary stimulus have clearly been in vain. Fortunately, the underlying reason for the contraction was simply a sharp decline in inventories, as private consumption had actually grown by 2.1% at an annualised rate, suggesting this ‘technical recession’ isn’t nearly as bad it seems.

Week in review: Winners and losers

No matter what the story, this are almost always some losers and some winners. However, it really didn’t feel this way this week. The aftermath of the Paris terrorist attacks has left the Western world universally in a state of great fear and deep sorrow. The slowing growth of global trade implies that from our economic models of trade and the downward revision to the global growth prospects suggests that everyone can be made worse off. Even if this is the case, there were reasons to happy worldwide. as Myanmar made its first steps towards becoming an open democracy however unfair the election process might be and oil appears to be set for several more years of record low prices.

The pessimism keeps on coming
OECD GDP growth forecasts for 2015 and 2016Ship loaded with cargo

  • What happened? The OECD this week revealed that it had cut its growth forecast for the world economy, from 3% to 2.9% in 2015 and 3.6% to 3.3.% next year. It has strong evidence to support this prediction in the form of the sluggish trade data seen this year, which is only expected to grow in total by 2% in 2015, compared to the much higher rate of 3.4% last year.
  • What’s behind this story? The main reasons for such weak economic growth and trade growth is rooted in the emerging markets; as China transitions from investment-focused model to becoming more consumption-orientated, this has had a major implication for Chinese trade which is contracting significantly. For example, in October, Chinese imports fell by almost 20% compared to a year before and its exports were 7% lower than it was a year ago. At the same time, with this year’s collapse in commodity prices, partly caused by China’s falling demand for natural resources as well as a global oil glut, emerging markets are finding their terms of trade rapidly shrinking and this matters when emerging markets are as indebted as they are at the moment.
  • Why is this important? This new warning from the OECD adds even more weight to the pessimistic message of the IMF from just weeks ago who said that the global economy was set to grow at its slowest rate since the financial crisis began. In fact, the Economist paints a much more gloomy picture; it notes that with debt-to-GDP ratios in emerging markets having risen from 150% in 2009 to almost 200% currently, the capital outflows that emerging markets are set to face in the coming years make the possibility of another debt crisis much much greater and with the global economy just recovering from the last one, who knows how severe the scars will be this time.

No end in sight

fut_chart (5)

  • What happened? On the topic of falling commodity prices, after news that global oil inventories are at record highs, the trend of rockbottom oil prices does not look like it will be reversing any time soon.  The International Energy Agency revealed that it put estimates of oil stockpiles in developed countries at near 3bn barrels, roughly equal to a month’s supply of global oil production. Although Brent crude oil is trading at near historically low levels of around $44 a barrel, this new data concerning the extent of the oil glut suggests the oil price may continue to stay this low at least until the turn of the new decade.
  • What’s behind this story? On the supply-side, Opec, the well-known cartel of oil-producing countries, is at record levels of oil production as Saudi Arabia has forgone its policy of cutting production through quotas to keep oil prices afloat and is instead trying to fight tooth-and-nail with its other Opec members as well as Russia to sell more oil to China and Europe. On the demand point of view, although demand for oil is rising in response to lower prices as one would expect, such that the IEA expects demand to grow by 1.9% this year as opposed to 1% in the past decade,  demand for oil is on a downward trend for structural reasons as China is moving away from energy-intensive growth and developed countries move towards more environmentally friendly energy sources.
  • Why is this important? The effect of oil is simply put, omnipresent. On a micro level, the basic need for oil for most forms of transport means it is a key cost concern for almost all firms and consumers obviously benefit from lower transport costs. But the macro effects are even more important; we have already seen the effects of low oil prices devastate several economies across the world (to name but a few, Brazil, Australia and Canada) but as foreign reserves continue to shrink and as the potential for an even lower oil price grows, one must worry about how the global economy will respond to a prolonged situation of low oil prices

‘Too big to fail’ for too long?

Turkish President Erdogan Hosts Dinner in Honor of G20 Leaders

  • What happened? This week, the Financial Stability Board (FSB), the organisation responsible for co-ordinating banking regulation across the G20 economies that is chaired by the Bank of Governor Mark Carney, issued new guidelines for the world’s biggest banks to follow and demanded that they raise an additional $1.2tn to meet the requirements. The big change concerned Total Loss-Absorbing Capacity (TLAC), which is the amount of equity and at-risk debt that the bank has available to it as the FSB is demanding that banks hold a greater proportion of their risk-weighted assets in TLAC, as high as 16% by 2019 and 18% by 2022.
  • What’s behind the story? The drive behind these new regulations is to prevent the bank runs of the past where depositors were at grave risk of losing their money once the bank suffered severe losses and this in turn created a self-fulfilling prophecy as depositors withdrew their money in fear and gave banks even less cash to work with. These changes mean that there will be a new type of debt being issued that will be amongst the first assets to be liquidated when the bank faces liquidity problems whereas traditionally, equity holders are the first to lose out when bank losses occurred, acting to further protect depositors.
  • Why is this important? Even now, the scars from the global financial crisis of 2008 still remain across the global economic landscape; interest rates are still at rock-bottom, as a reminder of the attempts by central banks to stimulate their economy. In this view, the FSB is keen to avoid any repeat of that scenario from happening ever again and they are specifically applying these measures to Globally Systematically Important Banks (G-SIBs), that in other words are banks which have been deemed ‘too big to fail’.

In other news:

  • The world was in mourning this weekend as Paris was subject to a deadly string of terrorist attacks. In a series of 7 attacks instigated by at least 7 terrorists on behalf of Islamic State, at the time of writing, almost 130 people had been killed with over 350 being injured. In an announcement very shortly after the attacks begun, the French President Hollande announced that the country ‘was at war’ with Islamic State for what was the second most deadly terrorist attack in a Western city since 9/11
  • There was a major development in Myanmar as the country held its first freely contested election in 25 years and Aung San Suu Kyi, who was both placed under house arrest for 15 years and awarded the Nobel Peace Prize for her efforts in trying to bring an open democratic system to Myanmar in 1990, was the undoubted winner of the election. Her party, the National League for Democracy, won a significant majority in the election despite it being a unfair process (i.e. a quarter of the parliamentary seats are reserved for the military) and although the army-drafted constitution prevents her from being declared president of the country, the support that the electorate have given her make the position of the armed forces who effectively control the country untenable.
  • The UK economy replied to the US’ strong jobs report last week with the release of its impressive labour market data this week. In Q3 2015, the headline unemployment rate had reached 5.3%, the lowest rate for 7 years and even more impressively, the proportion of labour force that was employed reached a record high of 73.7%. The only blip in the tranche of good news was that the earnings data was surprisingly weak as pay excluding bonuses had risen by 2.5%, the slowest rate since the first quarter of 2015.
  • On mainland Europe however, a very different story was being played out; the Eurozone as a whole was revealed to have grown by a lacklustre 0.3% in Q3 2015, down from 0.4% in the previous quarter. All the big European economies had reported mediocre growth rates as Europe’s economic powerhouses of France and Germany grew by 0.3% and the Italian economy had grown by just 0.2%. It was this disappointing data along with ‘signs of a sustained turnaround in core inflation have somewhat weakened’ that pushed Mario Draghi to hint at more aggressive monetary stimulus to be  introduced in December.

Week in review: Turning the corner

It’s been a busy week, that’s for sure. The central theme this week is about how the Fed is finally overcoming its concerns about excess slack in the US economy with the release of the October jobs report, about how the equity markets have been doing much better in the past month to the extent that the US stock market reported its best month for 4 years and about how the Cross-Strait relations are apparently improving with a meeting between the Chinese and Taiwanese presidents. Nonetheless, in sharp contrast, both Volkswagen and Valeant appear to be subsumed by their scandals and rather than turning the corner, they appear to be walking towards the precipice.

Lift-off incoming?

Janet Yellen, vice chairman of the U.S. Federal Reserve in Washington, on April 16

  • What happened? This week saw the release of October’s US job data that was all by measures, impressive. The big number was that the US economy added 271,000 jobs last month, almost 100,000 than expected and it was the strongest rate of job creation this year. There were strong showings around the board in unemployment and wages as the jobless rate fell to 5%, the lowest rate in seven-and-a-half years and there was a significant 2.5% increase in average hourly earnings on the year before, the best rate of wage growth since 2009.
  • What’s behind this story? The strength of this jobs report is of great importance because it was just last week that Janet Yellen specified the strength of the US recovery in terms of jobs and prices as the key factor behind whether to raise rates in December. With very visible evidence that the US labour market is tightening and explicit comments earlier in the week from Yellen that a December rate rise was a “live possibility” , the likelihood that the US Federal Reserve puts into motion its great ‘lift-off’ is rapidly increasing; using the price of fed funds rate futures, the market now anticipates that the Fed will raise rates at a 70%% probability, double the 35% chance seen a month ago.
  • Why is this important? The decision has been coming for a long time but it cannot be understated how important the decision is. Many important questions will emanate from the rate hike; the emergence of monetary policy divergence between Europe and the US, the worry of heightened capital outflows from emerging markets and the concern of how the US economy will handle being on a higher Fed Funds rate for the first time in several years.

Valeant stocks  jump off a cliff

A board shows the name of Valeant Pharmaceuticals above the floor of the New York Stock Exchange shortly after the opening of the markets in New York in this October 22, 2015 file photo. Drugmaker Valeant Pharmaceuticals International Inc laid out a detailed defense on October 26, 2015 of its relationship with a little-known specialty pharmacy, but its arguments failed to calm all investors' concerns. REUTERS/Lucas Jackson/Files

  • What happened? Valeant, one of the world’s largest drugmakers, saw the price of its stock fall by over 20% in its first hour of trading on Thursday before closing down by 14% at the day’s end. This is in sharp contrast to the near 40-fold increase in its market value over the last five years, that has caused it to be the stock of choice for many hedge fund mangers with the most vocal backer being Bill Ackman. Having once been worth over $260 a share, its dramatic tumble to a share price of just over $70 has inflicted large losses on many hedge funds.
  • What’s behind this story? Valeant is under fire for its suspicious accounting practices of inflating sales using its in-house pharmacies as well as its controversial strategies which involve price-gouging, that has now caught the eye of regulators and Hilary Clinton who pledged to crack down on such activities, and its debt-fuelled acquisitions that now appear unsustainable as its net debt of $31bn now exceeds its equity value.
  • Why is this important? The pharmaceutical industry has been a very hot industry this year with a number of significant M&A transactions currently in progress such as Pfizer’s intentions to buy Allergan and Shire’s recently announced deal to buy Dyax for just under $6bn. As such, such regulatory pressure in the industry should most certainly be noted as it may severely affect the chances of any deals being completed.

The largest IPO of 2015

Taizo Nishimuro, president of Japan Post Holdings Co., poses for photographs before striking a bell during a ceremony to launch the company's listing on the Tokyo Stock Exchange (TSE) in Tokyo, Japan, on Wednesday, Nov. 4, 2015

  • What happened? Japan Post. Never heard the name? Neither had we. There wasn’t too much hype around it, or at least not as much as last year’s biggest IPO of Alibaba, but the stock listing of Japan Post Bank, Japan Post Insurance and their parent company Japan Post Holdings is by far this year’s largest IPO at a collective market value of $11.5bn.
  • What’s behind this story? Japan Post is a major player in the Japanese economy; it is Japan’s largest employer, Japan’s largest bank and Japan’s largest life insurance writer and as previously state-owned enterprises, the privatisation of these companies represents a big attempt to reform the economy. There is also another striking feature about the IPO; having been priced quite cheaply, to the extent that they ended 15-55% higher on their first day of trading, and with 80% of the stock being sold to Japanese retail investors, it is an apparent attempt by the Japanese government to create a new generation of Japanese stock investors, akin to Margaret Thatcher’s attempts in the 1980s with the privatisation of many British public entities.
  • Why is this important? Although it is from first impressions a very domestically-focused company, the ambitions of Japan Post Bank should not be taken lightly as the bank intends to use its substantial pool of reserves to make itself a major institutional investor. Indeed, it is well-known that the Japanese economy has characterised a very conservative attitude with very high rates of saving so trying to channel those funds towards more high-yielding securities may stimulate a significant increase in consumption.

Other news

  • The Turkish elections concluded this week with the ruling Justice and Development Party (AKP) winning the election with a notable majority of 317 seats out of 550. It puts President Recep Tayyip Erdoğan back into power but the election itself was highly controversial as censorship and political violence were rife.
  • This week saw a tragic plane crash as Metroject Flight 9268 crashed in an Egyptian desert after taking off after taking off in Egypt en route to Russia. With the crash being so recent, investigations are still ongoing but there are grave suspicions that ISIL were responsible for the plane crash, as British intelligence apparently have evidence to support this conclusion whilst technical failure has already been ruled by the French authorities.
  • The Chinese President Xi Jinping and Taiwanese President Ma Ying-jeou shook hands with on another in a historic meeting held in Singapore between the leaders of the two countries. There is a great deal of tension and history between the two countries as China asserts that Taiwan should be a part of China whereas Taiwan has long valued its independence, as it was where the Kuomintang fled to after failing in their fight to reunite China against the Communists in 1949.
  • Volkswagen sank into even more trouble as it emerged that certain Porsche and Audi cars were also fitted with devices designed to cheat the emissions testing system. What’s more, although the cheating on emissions test initially concerned just Nitrogen Oxide emissions, it was revealed that 800,000 VW vehicles also have “unexplained inconsistencies#” regarding their carbon dioxide emission too and most crucially, this includes petrol cars as opposed to just diesel cars. This is a major blow as this scandal has spread from being isolated to just a particular type of VW cars to the entire VW group and now threatens to bring the entire company to its knees as another €2bn was put aside to deal with the growing scandal.

Week in review: A spring in my step

This week saw many important developments, with the release of new data to suggest that some economies like the US and UK were doing worse than anticipated whilst others like the Eurozone finally caught some wind in their sails. Nonetheless, despite facing setbacks in a number of forms, both Osborne and Yellen seem committed to carrying out their intentions, whether it be the introduction of harsh budget cuts or the first Fed rate rise in years. In a similar vein, it seems that nothing can dampen the resurgent M&A pipeline with speculation of yet another megadeal. 

Another M&A megadeal in the making

Pfizer lab handout

Branded boxes of Allergan Botox, produced by Allergan Inc., are arranged in this photograph taken at a skin and beauty clinic in London, U.K., on Monday, Nov. 17, 2014. Actavis Plc agreed to pay about $66 billion for Allergan Inc., a deal that creates a new top 10 drugmaker and ends Valeant Pharmaceuticals International Inc.'s attempt at a hostile takeover of the maker of Botox. Photographer: Jason Alden/Bloomberg

  • What happened? Pfizer, the world’s largest pharmaceutical company, this week approached Allergan, most famous for their Botox drug, to discuss the possibility of creating the world’s largest drugmaker worth over $300bn.
  • What’s behind this story? Although the talks are just at a very early stage, there are very good reasons for Pfizer to pursue a deal. The most significant is the tax benefit; being based in the US, Pfizer paid an effective tax rate of over 25% last year compared to just under 5% for the Ireland-domiciled Allergan so by acquiring Allergan, Pfizer would be able to complete a tax inversion where it domiciles in Ireland and drastically reduces the amount of corporation tax it pays. Aside from the usual synergies that result from acquisitions of this scale, especially applicable to biotech firms that are heavily dependent of their drug pipeline for revenue, now is a particularly attractive time to seek a deal as US pharma stocks have lost a significant amount of value following a promise by Hilary Clinton, the Democratic presidential frontrunner, to regulate drug prices more heavily.
  • Why is this important? This follows what has been a record year for M&A transactions as just last week, a megadeal in the brewing industry between AB inBev and SABMiller was just agreed upon. However, just like with the ‘Megabrewer’ deal, there are numerous complications that make the likelihood of a deal slimmer; politically, there needs to be a lot of manoeuvring as the US government has already instituted a set of anti-inversion measures and is in the process of implementing more whilst it should be noted that it was the outrage of British politicians that prevented Pfizer’s acquisition of AstraZeneca last year.

All eyes on me

Janet Yellen

  • What happened? This week, there were a number of developments that have significantly changed the outlook for a December increase in the Fed’s Funds Rate. In particular, these developments included the latest Fed meeting, the release of the US growth data for Q3 and the completion of the negotiations over the raising of the /US government’s debt ceiling.
  • What’s behind the story? Let’s start with the October Fed meeting; although the Fed as expected did not change the interest rate itself, the sentiment of its monthly statement has changed to a more hawkish tone because it explicitly outlined the conditions required for a December rate rise which will be the US economy’s ‘progress … toward its objectives of maximum employment and 2% inflation’ and removed mention of global risks such as China’s slowdown adversely affecting the US economy. On the other hand, data this week revealed that the US had grown by just 1.5% at an annualised rate for the third quarter of 2015, a drop of over 60% compared to the previous quarter’s growth rate of almost 4.0%. Although this was due to largely temporary factors such as the slowdown in inventory accumulation, it still gives reason for the Fed to delay the Fed rate rise. On a similar note, the US Congress agreed to raise the government’s debt ceiling to avoid a debt ceiling and in doing so, allowed government spending to rise by $80 billion over the next two years so by paving the way for fiscal stimulus, it also may reduce the incentive for monetary stimulus in the form a rate hike.
  • Why is this important? Speculation over the timing over the impending rate hike has been the driving factor behind many of the big stories in the past few months as firms are seeking to capitalise on the low borrowing costs through M&A deals, stock markets have adopted a bullish markets in the drive for higher returns and emerging market currencies are being battered as investors are taking their cash back to the US in preparation for the rate hike.

Austerity gone too far?

The UK's chancellor of the exchequer, George Osborne

  • What happened? In a dramatic turn of events, UK Chancellor of the Exchequer George Osborne was defeated in his plans to introduce £4.4bn worth of tax credit cuts but not by the democratically elected House of Commons, rather by the unelected House of Lords.
  • What’s behind the story? This latest chapter in Osborne’s march to austerity has been highly controversial because this measure would hit the poorest hardest with the Resolution Foundation, a think-tank, estimating that 3.3m families would lose on average £1,100 a year and it would greatly damage incentives to work, imposing an effective marginal tax rate of up to 80% on some of the poorest in societies.It is in this light it only makes sense that the Lords scuppered Osborne’s planned cuts but in doing so, the Lords has allegedly overstepped their constitutional boundaries by voting down a financial package backed by MPs in the Commons.
  • Why is this important? The incumbent governing party, the Conservatives, were elected on a mandate to cut the deficit in the form of a £10bn budget surplus by 2020 and their austerity measures have resulted in considerable progress towards that goal with public sector net borrowing for the first half of the financial year already down almost 15% compared to the year before. However, having pledged £12bn worth of welfare cuts in their manifesto, Osborne must decide where to make those cuts without upsetting the very electorate that voted the Conservatives back into power with a majority and without causing too much harm to the economy which has already a slowing rate of growth of 0.5% in Q3 compared to 0.7% in the previous quarter due to poor export performance.

Other news:

  • China released the first details of its upcoming five-year plan, by announcing the end of its infamous one-child policy by replacing it with a two-child policy and the moderation of its economic growth target rate to just 6.5%. So far, these measures reflect China’s attempt to modernise both economically and socially but the devil is truly in the details as more specific and drastic reforms will be needed to arrest China’s economic slowdown.
  • The Eurozone showed promising signs of progress as it escaped deflation in September by recording a 0.1% inflation rate whilst unemployment in the region for September was recorded at 10.8%, the lowest rate since January 2012. On the whole, whilst these statistics are indicative of an improving economic outlook, they are still far below target and make the case for monetary stimulus by the ECB strong nonetheless.
  • The World Health Organisation this week declared that processed meats were responsible for causing cancer by labelling ham, sausages and bacon as “Group 1” carcinogens, a category which includes tobacco and asbestos. It is however important to note that their report clarified that they are not as “equally dangerous” as the other carcinogens because whilst “eating processed meat causes colorectal cancer”, the risk “remains small.”

Week in review: A sinking feeling

In this section, we provide a comprehensive look at the week’s top stories, examining all the important parts of the story from the immediate details to the critical factors lying below the surface. 

IPOs losing their buzz

1961 Ferrari SpA 250 GT SWB California Spider, picnMastercard and Visa logos are pictured on credit cards in New York, Wednesday, August 31, 2005. Photographer: Daniel Acker/Bloomberg News.

  • What’s happened? Following the great success of the equities market last year which saw a bullish run, the record-breaking Alibaba flotation and a slew of lucrative bio-tech IPOs, the equity-listing market appeared to show significant signs of weakness this week. For example, First Data’s IPO of $2.65bn, which was the largest US IPO this year, performed abysmally as it was launched at the price of $16 a share that was already below the expected range of $18 to $20 and it ended up trading at a further discount on its debut. Similarly, in markets worldwide, IPOs are being put on hold as the IPOs for Digicel, a Caribbean telecoms group and Albertsons, an American grocers, were cancelled whilst  the UK-based Acacia Pharma have delayed a planned flotation.
  • What’s behind this story? The IPO market as a whole been struggling throughout the year as shares that floated in 2015 have been down by 5% on average and over half are below their issue price. It has been factors such as a slowing China, uncertainty over the timing of the Fed’s impending rate hike and pessimism about the recent Q3 earnings season that has caused investors to seek  to minimise their risk by eschewing IPOs and companies are responding in kind by delaying their IPO until more favourable conditions return. In fact, it was exactly this equity volatility that CEO of Digicel Denis O’Brien cited as his reason for abandoning plans for what would have been one of the largest IPOs this year this year at $1.7bn.
  • This is yet another sign of the major economic factors at play that have been dominating the minds of investors for months, creating a dampener on the performance of equities. Nonetheless, the Ferrari IPO also showed that even if investors have become more risk-averse, investors are still up for a good deal when presented to them; valuing the company at $9.8bn through its sale of 7.2m shares at $52 apiece, the luxury car-maker’s share price rose even further before closing at $55 at the end of its debut day.

The mystery of Chinese growth data

Chart: China key activity indicatorsRenminbi banknotes are placed on a bank staff's table in a bank in Lianyungang, east China's Jiangsu province on August 11, 2015. China's central bank on August 11 devalued its yuan currency by nearly two percent against the US dollar, as authorities seek to push market reforms and bolster the world's second-largest economy. CHINA OUT AFP PHOTO (Photo credit should read STR/AFP/Getty Images)

  • What’s happened? The Chinese statistics bureau releasing data reporting that the Chinese economy had grown at an annualised rate of 6.9% during Q3, which marked yet another fall on its growth rate in previous quarters.
  • What’s behind this story? There are suspicions arising from the release of this data as it seems too perfect. Beating expectations of 6.7% growth rate from a Bloomberg poll, it implies that China is on track to achieve its full-year growth target of 7%. This comes despite other statistics from China’s economy painting an even worse picture as industrial production grew by just 5.8% in September which was close to the 6-year low that was seen in March but it was allegedly robust consumption that prevented the headline growth rate from being any worse as retail sales rose by a better-than-forecast rate of 10.9%. To what extent is the Chinese government manipulating the data? Who knows.
  • Why is this important? Economists naturally expect China to slow down due to structural reasons such as a shrinking labour force and the end of “catch-up growth” as China completes the transition from a rural to industrial economy but the multi-million question is whether it will be hard or smooth landing. Cyclical factors at the same time are also dampening Chinese growth prospects such as weakening demand for Chinese exports and an oversupply of housing so it creates even more uncertainty about whether the Chinese government can do enough to nail this landing as it has been trying hard to stimulate the economy via cuts to the headline interest rate on top of fiscal stimulus.

To “do whatever it takes”

Mario Draghichart: Eurozone

  • What happened? This week, Mario Draghi made clear the European Central Bank’s readiness to deploy more monetary stimulus; he explicitly pointed out that the “size, composition and duration” of its QE programme was subject to review in December and it would act to further boost to the Eurozone economy should the slowing emerging markets have a severe impact. For the time being though, the ECB is set to continue its current QE programme of €60bn monthly asset purchases in mostly government bonds until at least September 2016.
  • What’s behind the story? The ECB’s significant monetary stimulus has had mixed success it seems. For one, it has helped to improve the condition of European credit markets by encouraging banks to ease credit conditions on loans to businesses as a survey of European banks by the ECB has shown. On the other hand, economic data from the Eurozone continues to be weak with sluggish growth in form of industrial production in the eurozone falling in August by 0.5% as well as anaemic inflation with consumer prices actually falling by 0.1% in September. This gives justification for why the ECB may be looking to expand their current €1.1tn bond-buying programme and reduce the deposit rate of -0.2% even further.
  • Why is this important? This whole ordeal highlights the divergence in monetary policy around the world; whilst the ECB is looking to increase its monetary accomodation, just across the channel, the Bank of England is set to tighten its monetary policy within just a few months and the central bank for the world’s largest economy, the Fed, is in a similar situation. This has big implications for capital markets with capital being so internationally mobile and will thus have a big effect on equity prices. It also highlights the effects that persistently low oil prices have had because although it may have had some limited effect in boosting consumption, it has also created the spectre of deflation that has entered the ECB’s cross-hairs.

The future of the European Investment Banking industry

Tidjane Thiam, chief executive officer for Credit Suisse Group AG, speaks during a Bloomberg Television interview at the bank's headquarters in Zurich, Switzerland, on Thursday, July 23, 2015. Credit Suisse reported second-quarter net income that beat analyst estimates even as profit from investment banking fell in the months before Thiam took over. Photographer: Chris Ratcliffe/Bloomberg *** Local Caption *** Tidjane Thiam

  • What’s happened? Having hit hard times recently, two of Europe’s major players in the global investment banking industry have announced drastic measures in order to keep afloat. Credit Suisse, with their new chief executive Tidjane Thiam, announced equity raising plans of $6.4bn and outlined a schedule to restructure their investment bank, ultimately leading to it being shrunk by 20%. Meanwhile, Deutsche Bank, who also recently appointed a new chief executive of John Cryan, made plans to dramatically turn around the business by replacing its outdated technology, shedding its labour force and revamping its asset and wealth management divisions as well as splitting its investment bank.
  • What’s behind this story? Both are struggling under the current economic climate as their main strength has traditionally been fixed income which is currently doing abysmally. For Credit Suisse, revenue from fixed income sales and trading was down 42% year-on-year which helped to drive down their net revenues by 20% whilst Deutsche Bank is expected to make its first loss in 4 year on the basis of such weak performance of the division. As long as the weakness in fixed income continues which is being driven by both structural factors such as risk aversion and cyclical factors such as greater aversion to risk, so too will the weak performance of these banks persist.
  • Why is this important? As highlighted by this FT article, over the past decade, there has been a significant reversal in the fortunes of European investment banks; from 14 of the world’s 20 largest banks being European, that number has more than halved to just 5. If the plans to shrink the European investment banks go through, Europe will have even more of a diminished presence in the global investment banking industry and that would be a great loss due to their socio-economic role in acting as an intermediary between savers and borrowers and in making markets more liquid.

In other news:

  • Mark Carney controversially entered the UK’s EU referendum debate by claiming that Britain has been the leading beneficiary of the EU’s four freedoms of capital, labour, goods and services and in his eyes, this has allowed the UK to enjoy one of the fastest per capita growth rates in the G7 over the last four decades. As the governor of the Bank of England, a politically independent central bank, some have argued that he has overstepped his remit but that emphasised that he was not offering a “comprehensive assessment of the pros and cons” of EU membership.
  • The Canadian general election concluded with Justin Trudeau, leader of the Liberal Party, being elected as the new Canadian Prime Minister, ending Stephen Harper’s decade-long reign. The son of a former Canadian Prime Minister, Trudeau has been elected on a strong mandate with 40% of the popular vote and a majority in parliament but he faces a tough challenge as the economy is gripped in a recession. Nonetheless, Trudeau believes he has the answer as he has made bold promises such as a pledge to  run three consecutive deficits in order to fund infrastructure spending.
  • Valeant had a stressful week as it was accused of accounting fraud by incorporating the financial results of Philidor, a specialty pharmacy that it bought the option to acquire in 2014, into its own financial report, leading to claims that it has been artificially raising its revenue. Although executives at Valeant have denied the allegations, the damage has been done as Valeant shares lost 25% of their values over the following 2 days and there is now growing concern over Valeant’s business model which is dependent on buying the rights to “under-priced” drugs and then quickly raising their prices due to the threat of new drug laws. There is a sinking suspicion that this whole charade has been maliciously created as it was a company called Citron that released the report making such claims and it has come to light that Citron was shorting Valeant stocks, causing them to profit massively from the debacle.