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.

Andrei Kirilenko: From Crisis to Crisis

This Friday, the Marshall Society is inviting Andrei Kirilenko, one of the most prominent figures in financial economics, to give a talk at the Keynes Lecture Hall in King’s College Cambridge. But who is he, and what has he done?

The Frontier of Finance

Former chief economist of the U.S. Commodity Futures Trading Commission Andrei Kirilenko

In the wake of the global financial crisis where a lack of transparency was blamed for exacerbating the issues at the heart of the crisis, Kirilenko joined the US Commodities Futures and Trading Commission (CFTC) in 2008 where he built a reputation for being an expert in the field of algorithmic and high frequency trading which is fast becoming a dominant feature of the financial markets.

It was here as the Chief Economist of the CFTC that he played a key role in determining the causes of the 2010 Flash Crash, when the Dow Jones Index lost almost 1000 points (roughly 9% of the index’s value at the time) in the space of just a few minutes, implying a disappearance of $1 trillion of market value, only to recover significantly shortly afterwards. It was the Dow Jones’ biggest intraday point drop, to the extent that the CTFC described it as one of the most turbulent periods in the history of financial markets.

Suspicions abound, fingers were pointed at a trader called Navinder Singh Sarao who had used spoofing algorithms to rapidly place orders for futures in vast quantities, only to cancel them immediately afterwards.  Here, Kirilenko played a key part in deducing that although high-frequency traders did significantly contribute to the Flash Crash, they were not ultimately the cause of it.

Following this, he continued to make crucial strides in the field of financial economics by publishing a paper called “The Trading Profits of High Frequency Traders”  in 2012 in which he controversially made the claim that markets were effectively a “zero sum game”. He argued that by using the high-speed nature of computerised trading to take advantage of traditional investors in the sale and purchase of futures contracts, high-frequency traders were making profits at the expense of ordinary investors, sometimes as much as $5.05 per contract.

By shining a light onto the practice of aggressive HFT trading, the study has been praised for helping advance the implementation of regulations by “establishing their cost-benefit considerations”.

Ukraine in chaos

Andrei Kirilenko, Professor of the Practice of Finance. MIT Sloan School of Management

However, working on financial crises has always been Kirilenko’s main concern. Before joining the CFTC, Kirilenko had spent 12 years at the International Monetary Fund where he “went from crisis to crisis”  by working with countries on the fringe of the global financial system.

Ultimately, it is plain to see that his interest in financial crises stems from the Ukrainian crisis. Having grown up in Ukraine and having worked there during his time at the IMF, he is now a US citizen but returned there last summer to volunteer his skills and knowledge to the cause of helping Ukraine recover from its upheaval in recent times and even went so far as to make a call for others to join him in his effort to regenerate the country.

Even now, Ukraine is still struggling and sees constant strife. It was the 2014 revolution which ousted President Yanukovych and his pro-Russian government that ignited the fire as soon, Russia responded by annexing Crimea and war ensued in Eastern Ukraine between pro-Russian and pro-government forces. Despite the Minsk 2 ceasefire agreement bringing almost a year’s worth of fighting to an end earlier this year as well as the approval of a $17.5 billion loan program from the IMF, Ukraine’s economy is still in dire shape. The IMF expects the country to contract by a drastic 11% this year and the economy is subject to the world’s second fastest inflation rate, peaking at over 60% in April, which has pushed the Ukrainian central bank to hold the benchmark interest rate at 22%.

Remarkably, this is where his current line of work lies as the co-director of the MIT Sloan centre for finance and policy, which focuses on the analysis of the systemic risk associated with big government and how to deal with future financial crises.

So if you are interested in finding out what the future lies in store for Ukraine or for more information about his role as one of the key regulators in the field of high frequency trading, come along to the event this Friday!

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.

Week in review: With great power comes great responsiblity

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. This week was marked by events which bestowed great power into the hands of a few. With recognition for his work in econometrics, Angus Deaton should be able to influence policymakers for the better. Even though the megadeals were just agreed upon this week, it is in the hands of the executives to convince the regulators that the combined entitty would not damage consumer interests. Finally, with US banks at a turning point, it is up to their executives to decide how they should respond to such poor performance recently.

Hurray for Economics and Econometrics!

  • What happened? This week, Angus Deaton, a Cambridge economist, was awarded the Sveriges Riksbank Prize in Economic Sciences “for his analysis of consumption, poverty, and welfare”.
  • What’s behind this story? Mr Deaton has made a plethora of significant contributions to angus deaton angus deaton is the dwight d eisenhower professor of ...the field of economics. His work has helped to expand our knowledge of consumptions patterns; by creating a model called the “Almost Ideal Demand System”, he has helped to better estimate for goods using the prices of all goods and individual incomes. He has even had a concept named after him; the “Deaton paradox” argues the case for consumption smoothing in which people do not change consumption significantly even when income changes. This last point is
    particularly pertinent when we consider the austerity regimes across Europe today because even if people see their incomes falling, they are likely to take up debt to maintain their consumption patterns and this can create a debt problem that can spiral out of control.
  • Why is this important? Praised for his particular focus on econometrics, Deaton’s work underlines the importance of ‘evidence-based economics’: the idea that we should be meticulous in our theories and strive to find the empirical evidence in support of our theories.

A deal of great proportions or great necessity?

A combo of file pictures shows the Logo of EMC Corp. (T) in London, Britain, 02 March 1999 and the logo of Dell in Montpellier, France, 12 September 2013. According to news reports on 09 October 2015, US privately owned computer company Dell together with private equity firm Silver Lake Partners are in advanced talks to buy or merge with US multinational EMC Corporation. EPA/STR/GUILLAUME HORCAJUELO

  • What happened? The major PC maker Dell has come to a deal to acquire the data storage giant EMC for roughly $63 billion in a part-share part-cash deal which if successful, would be the third largest tech deal of all time.
  • What’s behind this story? The main driver behind this deal is strategic; Dell currently relies on its original core business of selling PCs but this is on the decline (i.e. global PC shipments fell by nearly 8% in the third quarter, compared with the same period a year ago)  due to the rise of smartphones whilst EMC’s main sales come from the sale of digital storage devices that is under threat from cloud computing as storage sales rose by an annual rate of just 2% last year compared to double digit increases several years ago. The hope is that by joining together, they will be able to take advantage of synergies such as “converged hardware”; by offering servers, storage devices and networking equipment in one package, they will hope to try and increase their sales. Another driving factors has been the cheap sources of financing as Dell with raise $4bn of new common equity as well as $40bn in new debt.
  • Why is this important? This deal is of particular interest because it emphasises the importance of technological innovation and creative disruption; as two stalwarts of the tech industry, both are coming under pressure from the emergence of cloud computing and trying to combine to remain afloat in a fiercely competitive and fast-changing industry.


The hard work finally pays off… or has it?

  • What happened? This week also saw another major deal being agreed upon; after weeks of negotiations and rejected offers, AB InBev was finally able to secure a deal to acquire SABMiller for a cool £67 billion in what will be the third largest M&A transaction in history by value.
  • What’s behind this story? There is no doubt that there are significant benefits to this deal; the combined entity would have roughly 1/3 of their entire global market share for beer production and would have a truly global presence, allowing them to reap almost half of the global beer market profits. Desperate to get this deal to go through, AB InBev is most definitely paying through as its accepted offer price of £44 in cash per share is a 50% premium on SABMiller’s undisturbed stock price.
  • Why is this important? A common element that underpins almost all of the megadeals that have been agreed to this year is the potential for the deal to collapse or for the widely anticipated benefits to fall flat. With the creation of a mega beermaker that has been fittingly dubbed ‘Megabrew in anticipation’, there are cultural and regulatory issues abound. For example, in two of the most lucrative markets for beer, China and the USA where they have over 40% and over 70% of the market share respectively, the combined company would have to sell off their stakes in local joint ventures.


It’s not all sunshine and rainbows for the US banks

A U.S. flag hangs above the door of the New York Stock Exchange August 26, 2015. Wall Street racked up its biggest one-day gain in four years on Wednesday as fears about China's economy gave way to bargain hunters emboldened by expectations the U.S. Federal Reserve might not raise interest rates next month. REUTERS/Lucas Jackson

  • What happened? With the release of the third quarter earnings reports this week, it was revealed that the top US banks had performed particularly poorly with Bank of America Merrill Lynch seeing a 2% fall in Q3 revenues compared to the year before and JPMorgan seeing an even more severe 7% fall in Q3 revenues. Worst of all, Goldman Sachs reported that their third-quarter profits was down by almost 40 per cent, causing them to miss their profit estiamtes for the first time in four years.
  • What’s behind the story? One reason for such poor results has been the low interest rate environment. With such low rates, according to Allen Tischler, an analyst at Moody’s, assets are being “put on balance sheets at lower yields than things rolling off”. On top of this, regulation is another big factor as the authorities are requiring banks to be less leveraged and the regulation is particularly affecting the fixed income, commodities and currencies (FICC) business by restricting the sale of derivatives. Finally, cyclical factors are at hand as in the FICC trading division, demand has shifted away from exotic and profitable fixed-income products and towards regular government and corporate bonds. This was especialy true in the case of Goldman who reported a shocking one-third drop in FICC revenues in the third quarter.
  • Why is this important? The best response of any firm to bad news is to adapt; the question is whether Goldman Sachs and the other big US banks will do this. Whereas the European Banks as well as Morgan Stanley have significantly trimmed their FICC trading businesses by allocating them less capital, the remaining big US banks have defiantly not done so and have been punished in recent times with the drop in earnings. At present however, Goldman Sachs seems to stand undeterred with Harvey Schwartz, Goldman’s finance chief, claiming that they “don’t view [FICC] as a capital drag”.


Week in review: Hints of hope and dashs of despair

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. This week saw some good news in the form of a promising major trade deal as well as progress on a major megadeal but bad news as the European banks appear to be struggling and global growth looks similarly distressing.

European banks hit hard times 

  • What happened? This week, two of the biggest European investment banks showed signs of distress. Deutsche Bank suffered a €6.2bn loss in the third quarter this year due to exceptional costs of €7.6bn in support of its restructuring plans, most likely leading to its dividends being withheld this year. Similarly, Credit Suisse is trying to raise more capital to support its own restructuring efforts.
  • What’s going on behind the scenes? Both banks have seen the arrival of new chief executives in the past few months and are subsequently trying to restructure their business in order to make them more capable of handling the current economic conditions. Tidjane Thiam, Credit Suisse CEO, is attempting to shift the focus from volatile investment banking operations and towards private banking and Asian markets which are both becoming highly lucrative. Meanwhile, John Cryan, Deutsche Bank CEO, has yet to outline his full strategy for the bank but is set to do so this month under his strategic review, Strategy 2020.
  • Why is this important? What unites both firms is their desire become better capitalised in case of downturn or mishap. At present, both banks have a common equity tier one capital ratio of close to 10% which is above the required minimum (at least currently) but still notably below their peers.


Beer megadeal on the horizon

  • What happened? A proposal for a megadeal between two of the world’s largest brewers fell through this week as SABMiller rebuffed AB inBev’s £65bn public offer, having already made two private offers already.
  • What’s going on behind the scenes? AB inBev is eager to acquire SABMiller as a way to enter the African markets, where SABMiller has a dominant presence. In this light, it makes sense that AB inBev has been so insistent on trying to secure a deal; it is valuing SABMiller at nearly 28 times its forecast 2016 earnings which makes it a difficult task for AB inBev to get value out of the deal if it goes ahead. At the same time, SABMiller’s shareholders are playing hard to get and wisely so. At the latest offer for £42.15 per share, it is a 44% premium on the price at which SABMiller shares were trading at before AB inBev made its intentions public but there is still more room to negotiate; the 15 EV/ebitda multiple that the latest offer represents is far below that of recent deals in the sector and no other firm in the sector provides to AB inBev what SABMiller offers.
  • Why is this important? If this deal eventually goes through, it would be the third largest M&A transaction in history according to Dealogic and would round off a year that is on track to be busiest year for M&A activity on record. Indeed, something also to consider is that a successful acquisition by AB inBev would mark the creation of a brewing giant, responsible for the production of one-third of all beers in the world.


Global economy heading for the doldrums

  • What happened? The IMF this week announced that it expected the global economy to grow at its slowest pace since the financial crisis this year at just 3.1%, a significant step-down from the 3.5% growth rate that was forecast back in April.
  • What’s been going on behind the scenes? It is the poor performance of the emerging markets that is the root cause behind this ominous prediction. Whereas the fund predicted advanced economies to grow at their strongest rate since 2010 at around 2%, it also forecasted that developing economies would on average grow more slowly for a fifth consecutive year in a row at roughly 4%.
  • Why is it important? In some ways, it is but in some ways, it isn’t. The IMF’s managing director Christine Lagarde tried to downplay the bad news by stating that it was still a ‘continued recovery’ but that it is just ‘decelerating a bit’. Nonetheless, the downward revision to the growth rates reflects the short-term effects of a slowing China on exporters of oil and metal as well as long-term forces such as slowing productivity growth, ageing populations and a debt hangover in many countries.


A new age for trade?

  • What happened? On Monday, America along with 11 other Pacific Rim countries agreed to the first major multilateral deal in over 20 years, the much-discussed Trans-Pacific Partnership.
  • What’s been going on behind the scenes? Given the ambitious nature of the pact, it is no surprise that the negotiations for the deal have been ongoing for several years. All that wait should be worth it though as the trade deal breaks unprecedented ground; it introduces new labour provisions to ensure that all members abide by the standards of the International Labour Organisation, it curtails certain forms of protectionism such as the preferential treatment of state-owned enterprises and it is set to lower tariffs in oft-protected sectors like agriculture. Nonetheless, the pact is still politically controversial and still needs to be ratified in each country.
  • Why is this important? Affecting 40% of the global economy, this is a major deal that should help to stimulate more world trade, which is especially important given that cross-border trade has been declining in recent times, with a 13% fall in dollar terms in the first half of 2015 compared to the same period in 2014. In fact, the Peterson Institute for International Economics estimates that the deal should boost the world economy’s GDP by $223b by 2025, with most of the benefit accruing to developing countries such as Vietnam that should see an additional 10% growth in GDP over the period.

Trans Pacific Trade Agreement