LIBOR Financial Volume 6, Issue 8

By December 8, 2015Newsletter
Volume 6, Issue 8
December 6, 2015

US ECONOMICS.

US stocks rose, with the Dow ending up 370 points, after the government’s jobs reportrevealed 211,000 more jobs added in the month of November and the unemployment rate still at 5 percent. The report beat initial estimates of 182,000 added jobs, signifying strength in the US labor market. This sign of economic health gives the Fed more of a reason to hike short-term interest rates when they meet in a few weeks. Many Fed officials have acknowledged that with unemployment decreasing, the economy is no longer in state where interest rates should be near zero. Although the report indicates that wages were stagnant, Janet Yellen believes that with a greater number of jobs being created, wages will soon rise. If this assumptions turns out to be true, higher wages will mean increased spending, stimulating prices as a result. Therefore, higher interest rates would prove effective in order to combat inflation. Aside from a few poor performing sectors, the job market seems to be headed in a positive direction.

As the health of the US economy remains strong relative to the rest of the world, the dollar has continued to appreciate. It is becoming cheaper to buy goods from other countries, and US exports have fallen as a result, negatively impacting the US trade deficit. According to a recent report, the US trade deficit increased by 3.4 percent in October, bringing the deficit to about $40.5 billion. This is not reassuring in a time when people are hoping for economic expansion; the country is shipping that $40.5 billion dollars overseas, which instead could have been spent here in the US to increase jobs and opportunity.

Neil Gandhi  

GLOBAL ECONOMICS.

China Joins the IMF Basket

This week the International Monetary Fund (IMF) approved the Chinese renminbi (yuan) as a world reserved currency, pushing the unit to an elite status currently designated only to the US dollar, euro, British pound and Japanese yen. According tothe New York Times, this standing signifies the “country’s rising financial and economic heft” and will enable broader use of the renminbi in global trade and finance. However, in order to be recognized as a major global currency, the Chinese government was forced to relinquish some of its influence over its currency. This included loosening its domestic interest rates, aligning the renminbi exchange rate more closely with its market value, and removing implicit government guarantees for state-owned enterprises. Following the announcement, Ms. Christine Lagarde, Managing Director of the IMF, concluded that “The Executive Board’s decision to include the RMB in the SDR basket is […] a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.” This attempt by the Beijing to lessen equity market dependence on government support, however, has resulted in market volatility within an already stagnating economy. The Shanghai Composite Index, for example, fell by 5.5% as investors responded to stricter regulations in the securities industry, deteriorating profits, and investigations into a series of security violations. These ramifications signify the future challenges for Chinese reform and shows that the transition from a communist to capitalist economy will be a bumpy process.

India Stands Out Among BRIC Partners

India’s gross domestic product expanded 7.4% in the third quarter, marking the BRIC country as the fastest growing economy among its counterparts. While India has sustained relatively stable growth, falling commodity prices have significantly impacted exporting nations, like Russia and Brazil, who experienced a 4.1% and 1.7% decline in 3Q15 GDP, respectively. The boost in India’s growth in large part came from consumer and financial service sectors as well as gains in manufacturing. Trade, hotel, transport, communication & services related to broadcasting, for example, grew by 10.6% and manufacturing 9.3%. However, robust performance by these industries may be offset by staggering growth in other sectors, like agricultural, forestry and fishing, which only grew 2.2%. In addition, reduced exports are expected to weigh down India’s economy, with exports expected to fall by $265-268 billion during FY16. Despite these concerns, strong GDP growth makes it likely that the Reserve Bank of India governor, Raghuram Rajan, will hold interest rates at 6.75% as the government attempts to stimulate economic growth through private investment demand. These efforts have had little impact on consumer confidence, however, which fell to a three year low as customers expect business conditions to worsen in the upcoming year, regardless of the 7.4% increase in GDP.

Marion Miller  

EQUITY MARKETS.

November Jobs Report Pushes Market

This week was by much market volatility, with things finishing off strong on Friday. The expectation of an increase in US interest rates contributed to the S&P 500 falling 1.4%.The hectic week was capped off with the release of the November employment report, along with positive adjustments to the September and October reports, leading to a rally in the market that lifted the S&P 500 Index 2.1%. This increase completely erasedThursday’s plunge in the market, which was the steepest decline in over two months. The jobs reports essentially removed any lingering fears that the US economy isn’t strong enough for the Fed to start rising interest rates. Many industry experts say thatThursday’s volatility was more of an overreaction in the market, if anything. One thing to note from Friday, however, is that the energy market still slumped. The Organization of the Petroleum Exporting Countries (OPEC) agreed to continue producing oil at current levels, even though crude oil is currently at a surplus. Many energy stocks continued to fall on Friday, and this is something to pay attention to in the coming weeks.

Akul Desai  

STOCK HIGHLIGHTS.

AMAZON (AMZN): BULL CASE

AMZN reported rare earnings this past week in its 3Q report, reflecting an increase in revenue by 23% year over year from $20.6 billion to $24.9 billion. A large contributor to the company’s successful quarter was the accelerated growth of its cloud-computing arm. Amazon Web Services, Inc. (AWS) has seen numbers consistently risings each quarter. This means a promising future for the already well-established tech giant who is leading in sales over Microsoft’s Azure and Google’s cloud services. The market for cloud computing is also expected to reach $127 billion by 2017, indicating a large room for growth within the industry, and a strong opportunity for AMZN to acquire an even greater market share. Additionally, AMZN has introducedseveral new products this past September that could increase company financials; among these include an upgraded Fire TV set-top box, video streaming devices, and a series of tablet computers.

AMAZON (AMZN): BEAR CASE

AMZN is one of the four companies that have been carrying the S&P 500 into the green. Amazon and its counterparts, Facebook, Netflix, and Google have performed much better than all the major market indices, and are now referred to as FANG. While the S&P has only risen by 2% in 2015,FANG stocks have risen 35%-157%. Despite these positive gains, many corporations took a hit over the summer, including FitBit and GoPro. With current macroeconomic trends, like a stronger US dollar and weakened growth in emerging markets, there is a growing concern of FANG’s overall valuation and its possible adverse effect on the market.FANG companies even have surpassed Tesla and Apple. However, many companies that have been in the same situation as these four shares have shown immunity through a correction, but are negatively affected as soon as it ends.

Matthew Lee  
Lawrence Lung  

FIXED INCOME MARKETS.

Opposite Directions for the U.S. and Europe, Slowdown in China, and Jobs Report

There were several major events that affected the fixed income market this week, including a critical European Central Bank meeting, the November jobs report, and speeches from Janet Yellen and other Fed officials. The Eurozone is facing a growth in factories along with a decline in unemployment, signaling a need for stimulus from the ECB to boost recovery. Inflation was held steady below expectations at 0.1%,encouraging ECP President, Mario Draghi, to expand the central bank’s bond buying program and to further cut interest rates. Although the ECB announced a stimulus plan, it was much weaker than what investors expected.

On Tuesday, investors and federal lawmakers focused on Puerto Rico as it was set to make a $354M debt payment that day. Skepticism for a failure to repay was due to San Juan’s efforts to preserve cash and force creditors to negotiate. However, the Government Development Bank made the $354M payment, pushing off a default on government guaranteed debt for a few more weeks. In addition, further economic slowdown in China, namely falling exports, falling producer prices, and slow industrial and manufacturing activity, indicates the need for further stimulus. Expectations that the People’s Bank of China would implement stimulus measures and cut interest rates for the sixth time this year prompted the Shanghai Composite Index to climb 2.3% on Tuesday.

Janet Yellen’s speech signified that she was looking forward to a U.S. interest rate hike despite the Eurozone’s rate move in the opposite direction, dubbed by Jim Bianco, President of Bianco Research, as “the great monetary divergence.” Yellen used recent strong economic data, including a November jobs report that exceeded expectations, as support for her decision. In response to Yellen’s hawkish comments and the weaker-than-excepted ECB stimulus measures, the U.S. 10-year note yield jumped 13 bps to 2.32%, the biggest jump since February 6, 2015.

On the jobs front, Morgan Stanley announced a plan to cut up to a quarter of its fixed income jobs within the upcoming weeks after significant declines in bond trading revenue. This decision suggests a slowdown in client activity, investor pressures to raise returns, and stringent regulations that penalize big banks from holding too many debt securities.

Krina Patel  

CURRENCIES.

With the December FOMC meeting only one week away, there are many indicators that the elusive rate hike that has been hinted at, freighted about, and delayed repeatedly throughout the year is finally at hand. While one would expect this news to strengthen the dollar, the greenback tumbled from its 12-year high and failed to hold above its 100.39 resistance level, ending the week as the second weakest major currency. This unexpected fall was due partially to exposure from gold and commodity currencies, but was mostly a result of the dollar being overpowered by the Euro. The Euro had its largest weekly gain against the dollar since May as the EUR/USD closed at $1.087Friday or up 2.6% for the week. This rise was instigated by an ECB stimulus announcement to cut key interest rates and extend the duration of its bond-buying program, policies that would normally warrant a weakened currency. Yet, the lackluster magnitude of the policies fell so short of expectations that they caused the market to fall and the Euro to surge. In order to reassure the financial markets after the resulting turmoil, the President of the ECB, Mario Draghi, made a statement on Friday that the ECB would step up its stimulus efforts if need be. While ECB officials said they do not target the exchange rate, maintaining a weak currency is crucial for stoking the region’s rock-bottom inflation, and it is likely they will keep an eye on it if the Euro continues to strengthen. With many things remaining unclear as we head into next week, there is seemingly only thing we can expect for certain: market volatility.

Sahil Bambulkar  

COMMODITIES.

OPEC Maintains Current Production Levels

Crude oil settled down 2.7% at $39.97 a barrel on the New York Mercantile Exchange. Oil, gas, and diesel futures dropped further as OPEC decided to maintain current production levels at 31.5 million barrels per day despite the international oil glut as member nations continue to compete for market share. The dollar rose against other major currencies including the Euro and the Yen as a result of the strong US jobs report, making oil more expensive for buyers using foreign currencies.

Gold Futures Rise

Gold futures rose 2.1% to $1084.50, a marked high after three weeks, based on expectations of the Fed raising interest rates slowly. If the Fed decided to take on fast interest rate increases, the price of international commodities, such as gold, would fall against a rising dollar. However, slow rate increases circumvent the problem, as they do not uplift the dollar. The Fed has announced that they prefer to raise rates modestly, as international growth remains tepid and the Federal Reserve and the European Central Bank implement divergent monetary policies (with the ECB loosening its monetary policy).

Madhav Kunal  

DEALBOOK.

The Biggest Year in M&A

This week was a quieter one compared to previous weeks in terms of large M&A deals and IPOs. One notable transaction included American Homes 4 Rent approving a dealto merge with American Residential Properties in a $1.5 billion acquisition that will give the combined company 47,000 homes in the U.S. In addition, Motorola Solutionsagreed to purchase U.K.-based communications company Airwave Solutions Ltd in a $1.2 billion deal aimed at strengthening Motorola’s services business. Mattress Firmalso negotiated a $780 million deal to take over the owner of mattress retailer Sleepy’s in order to combine the top two specialty mattress retailers in the United States. This week we also saw Nokia shareholders vote in favor of a $16.5 billion acquisition of the struggling French company, Alcatel-Lucent. Furthermore, Norfolk Southern Corprejected Canadian Pacific’s $28 billion proposal to combine and create and end-to-end North American rail network, and rumors of Yahoo’s board considering a sale of the company’s core business after almost three straight years of little growth.

Perhaps of more interest this week, however, were the records achieved in the global M&A and IPO market. According to Dealogic, a series of over a hundred deals involving little-known companies in China pushed global M&A volume up by $8.5 billion to arecord total of $4.304 trillion. At this pace, almost $4.7 trillion of mergers could be signed in 2015, which is still somehow less than 2007’s inflation-adjusted record of $4.9 trillion. Earlier this year, U.S. deal volume had already hit a record high by topping $2 trillion for the first time ever and health-care and technology-industry deals hit full-year records thanks to deals like Pfizer’s controversial $160 billion merger with Botox-makerAllergan PLC. Finally, as another incredible statistic, buyers this year have agreed to nine transactions valued at $50 billion+ and 58 valued at $10 billion or more, which are record numbers as well.

This boom in M&A has benefitted investment banks greatly, with banks taking in almost $21 billion from advising takeovers according, but IPO candidates have not been so lucky. While Asia, who was the global IPO leader in 2015 with $29.4 billion worth of deals, and India have been flourishing in this market area, U.S. companies arepreferring to get bought out due to competitive pressure to become more efficient as well as other factors like market volatility, geopolitical risks, and uncertainty over the Fed raising rates. Only 52 companies, for example, have gone public on the NYSE this year, with total equity raised at 19.6 billion, down 74% from last year. At least 18 companies have stopped pursuing IPOs due to acquisitions and large tech companies like DropBox, Snapchat, and Uber are looking to remain private.

In any case, he global M&A and IPO markets will definitely be interesting next year. Though it is unlikely that 2016 sees the same lows with IPOs as 2015, mergers and takeovers are very likely to remain in high demand (there is even a Tinder-like app for M&A now).

Saaketh Krosuri  

TECHNOLOGY.

Nasdaq Pares Weekly Losses Amid Rate-Hike Rally

Investors managed to erase losses after disappointing news from the ECB depressed markets, leaving the Nasdaq down 1.7%. This was due to the fact that investors and economists concluded that the expansion of the “ECB’s bond-purchasing program and [its] cutting [of] an already negative deposit rate to encourage lending” was insufficient. However, markets rallied on Friday following the strong November jobs report. The Nasdaq Composite Index soared on Friday, capturing 104.74 points, or 2.08%, to end the week at 5,142.27 with a weekly percentage gain of 0.29%.

In other news, Samsung Electronics Co. agreed to pay Apple Inc. $548 million this month, displaying “the first meaningful exchange of money from a nearly five-year-long [design] patent dispute between the two smartphone companies.” Also, the European Commission announced on Saturday that it will “extend [its] trade protections aimed at helping European solar power manufacturers compete against cheaper Chinese solar products”; current trade protections put import tariffs on Chinese solar products and is now expected to stay in place through the end of next year.

Andrew Yang  

LIBOR UPDATES.

As the recruiting season continues, LIBOR members have been devoting their time to mock interviews, resume critiques and other preparation activities. As a reminder, the deadline for our readers and LIBOR members to apply for the NYSSA SEMI Program isDecember 17th – this summer program is a great opportunity for undergraduates in finance-related fields to build their networks and gain industry experience.

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