I NTERV I EW B R I EFING

1.4.14 Issue 31

WHAT YOU NEED TO KNOW RIGHT NOW!

Call 0207 290 1271 www.instructusmarkets.com

The information, news and data provided below highlight the key macro economic and corporate events currently affecting global markets. You should ensure that you are familiar with these issues in order to demonstrate your market knowledge and interest.

MACRO ECONOMIC NEWS

MARKETS REGAIN COMPOSURE AS TENSION IN UKRAINE SUBSIDES AND TALK OF A CHINESE STIMULUS PACKAGE
A  fter a volatile start to March with markets focusing on events in the Ukraine and weak Chinese data the last two weeks have been fairly calm, with the major stock market indices slightly higher over the period. The biggest beneciary of the relative calm in the Russia/Ukraine situation has been the German Dax. Because of Germanys proximity to the Ukraine and its reliance on European trade the Dax index was hit the hardest during the turmoil and in the last two weeks the German index has rallied over 5%. Even with the talk of sanctions, companies are still keen to continue doing business with Russia, the FT reported that Total (the French oil major) is in negotiations with Lukoil (the largest private energy company in Russia) to develop shale gas elds in the giant Bazhenoz formation that holds most the countries shale oil reserves. Russian companies need the expertise of their European and US counterparts in exploiting difcult oil. Total already has a signicant presence in Russia through its 16% stake in Novatek, the countries second largest gas producer. Total is not alone in wanting links with Russia, last week the chairman of Europes largest chemical company, BASF, said that he was interested in expanding co-operation with Lukoil, highlighting the close commercial ties that European companies have with the country. As the situation in the Ukraine hasnt deteriorated further the Russian equity market, the MICEX, has recovered from a near 20% loss this year to now stand down 10%. Emerging markets in general have performed well in the last two weeks with the Indian stock market reaching new highs and the Bovespa index in Brazil rallying to a two month high. T  he crisis in the Ukraine has highlighted Eastern Europes reliance on Russian gas, supplied by Gazprom. There is intense lobbying to allow the US to export LNG to Europe. Long term contracts to supply gas are due for renewal in the next year, the prospect of US gas exports has given East European countries greater negotiating power with Gazprom. Lithuania, for example, buys all of its gas from Russia, Europe as a whole gets about a third of its gas from Russia.   Q:  Why does the US not already supply LNG to Europe, given its discovery of huge shale gas reserves? A:  The US has effectively an export ban on LNG, except with countries it has a free trade agreement, such as Canada. Although there is pressure in the US for granting export licenses, that is not the only obstacle to supplying Eastern Europe with gas. The US has yet to build the infrastructure to export LNG (up until the shale gas revolution the US was an importer of gas) and it will take time and billions of dollars to build the equipment needed to super cool the gas to enable it to be exported. Other issues include: Ukraine does not have an import facility for LNG: Currently Turkey, does not allow LNG tankers through the Bosphorus straits to the Black Sea. It could still be a long time until we see US gas in Europe.

C  hinese economic data has continued to disappoint with private PMI data released by Markit/HSBC showing a reading of 48.1, a number below 50 indicates a contraction in manufacturing. Chinese PMI has been below 50 since the start of 2014. This weak economic data raised market expectations that Chinese authorities would instigate a stimulus package to try and arrest the loss of momentum in the worlds second largest economy, offsetting potential weakness in markets. The Australian dollar weakened against a basket of currencies, the AUD is seen by investors as a proxy for Chinese risk due to China being Australias largest trading partner and the counties heavy reliance on mining. I n last weeks round-up we mentioned that China has seen its rst corporate bond default, it worth noting that this did not lead to a signicant move in the pricing of Chinese corporate debt in the bond markets.   Q:  What could the possible Chinese stimulus package include? A:  The Chinese authorities could cut the lenders reserve requirement, which is the amount of money banks must hold as reserves, allowing them to lend more. Other measures include lowering barriers to private investment and speeding up spending on large infrastructure projects such as building subways. You could argue that we have already seen a sort of stimulus package with the People Bank of China allowing the Yuan (renminbi) to weaken in currency markets. Any evidence that the Chinese economy is not hitting the growth target of 7.5% for 2014 will lead to speculation of further stimulus.

JANET YELLEN STRIKES A MORE HAWKISH TONE IN HER FIRST FEDERAL OPEN MARKET COMMITTEE MEETING
N  ew chairman of the Federal Reserve, Janet Yellen, hosted her rst FOMC meeting and struck a more hawkish stance than markets expected, moving expectations for higher interest rates forward. Fed ofcials now forecast that rates will be at 1% by the end of 2015 and the median forecast for the end of 2016 moved from 1.75% to 2.25%. This more aggressive stance saw a temporary sell off in the S&P 500. The US dollar strengthened on her comments, which in turn saw gold retreat sharply, the precious metal fell $24 on the day and has now fallen nearly $100 from its 2014 peak of $1382 to trade at $1287. Yellen also announced a further tapering of the US quantitative program, cutting $10bn from the stimulus package, which now stands at $55bn per month.

CHANCELLOR OF THE EXCHEQUER GEORGE OSBOURNE ANNOUNCES MAJOR UK PENSION REFORM

T  he Chancellor announced radical pension reform in the budget, pension holders will no longer be required to buy an annuity and will now be able to withdraw funds from their pension pot, with some tax implications. The surprise move was widely welcomed but saw some signicant share price weakness in the large pension providers, Legal and General, the UKs largest pension fund manager, fell over 8%. Shares in specialist annuity providers faired even worse with Partnership Assurance, oated last year, falling 55%. Some companies will benet from the reforms such as Hargreaves Lansdown, one of the UKs biggest private client stockbrokers, saw its shares rally 15%. There was some support for the UK house building industry as investors speculated that some of the money that is taken out of pension funds could be used to buy second homes for income, causing some commentators to raise concerns about the impact on an already overheated housing sector, particularly in the South East. Annual house price ination in London is running at 13% and over 7% in the South East.

 I t wasnt all bad news for Legal and General, a few days after the Chancellors statement they announced that they had won a bulk annuity deal with the ICI pension fund worth 3bn. ICI, the British paints manufacturer, was bought by Dutch chemical company, Akzo Nobel in 2007. The deal will increase L&Gs stock annuity assets by about 10%.

EUROPEAN PERIPHERAL SOVERIEGN STATES SEIZE ON CHEAP DEBT

T  he yields on peripheral sovereign bonds have fallen sharply in the past year, allowing governments to make the most of lower borrowing costs (the yield represents the cost of borrowing). The Portuguese 10 year bond yield was over 7% last year but has fallen to just above 4%, it is estimated that the government has already raised half its required funding for 2014 in bond markets. Across the Eurozone it is estimated that debt agencies have raised close to 30% of their funding for 2014, which would be more than any year since 2010. Spanish and Italian yields are now 3.3% from 5% in 2013.

CORPORATE NEWS
THE UK GOVERNMENT REDUCES ITS STAKE FURTHER IN LLOYDS BANK
U  K Financial Investments, the Westminster-based body that manages the governments holdings, sold a 7.8% stake in Lloyds Bank to institutional investors last week at a price of 75.5p, taking its holding down to 25%. This was a 5% discount to the previous closing price of 79p, the shares closed just below the offer price. The shares were placed via an accelerated book build. It is expected that UKFI will launch a much larger offering to retail investors later in the year. The government bail-out price was 73.6p and once the stake has been divested it is expected that Lloyds will commence paying dividends. Q: What is an accelerated book build? A: A  n accelerated book build, known as an ABB is the process whereby institutional investors are offered a large amount of stock, usually at a discount to the prevailing market price and some times a range, that is 100m shares offered with a price indication of 74-75p, but will be given a relatively short period of time to decide if they would like to participate in the placing, usually between 12 to 24 hours. If the investor wants to buy shares they will give the bank handling the issue a price at which they would like to buy and the number of shares they require. The bank will then collate all this information and decide the price of the sale and how much stock each investor will receive, this process is knows as allocation.

ALIBABA LOOK SET TO JOIN THE LEGION OF COMPANIES LOOKING TO LIST

A  libaba, the Chinese e-commerce giant looks set to list in the US later in 2014, shunning a Hong Kong oat. The IPO could be the largest ever, possibly larger than the previous record set by the $18bn listing of Visa. If Alibaba does go ahead with its IPO it will prove very lucrative for its bankers. Fees are expected to be about 2% of the proceeds of the sale, assuming $20bn, would net the banks involved $400m. The IPO market remains strong although Candy Crush parent company King Digital had a poor debut, falling 15% on the rst day of dealing, highlighting that a premium to the issue is not certain.

CITIGROUP SHARES 5% AFTER THEY FAIL THE FEDERAL RESERVE STRESS TEST
F  ive banks including Citigroup had their plans to raise dividend payments and increase stock buy backs rejected. The Fed said that their management practices or capital cushions were not robust enough to withstand a severe economic downturn. Twenty ve other banks received the green light to increase payouts including Bank of America and Goldman Sachs, who initially had their plans rejected until they agreed to reduce the size of their dividends and share buybacks.

INSURANCE SECTOR SUFFERS BIG SEE-OFF AS FCA ANNOUNCES WIDE-RANGING PROBE

L  ast Friday the insurance sector fell nearly 10% after the FCA announced a far-reaching probe but waited six hours after the stock market opened before clarifying its scope. The regulator said that it planned to scrutinize customer service levels, information transparency and whether investments are appropriate going back decades. However, contrary to earlier press reports, it said that it was not considering banning insurers from charging their customers fees to switch and would not apply current standards retrospectively. After the FCA gave more details the sector rallied to nish down about 3%. Traded volume in some stocks was ve times the normal level. The FCA was heavily criticized for causing turmoil in markets.

INTERVIEW QUESTION: What is the Federal Open Market Committee (FOMC)? And what is its purpose?
A: T  he FOMC is the US monetary policymaking body, it has 12 members and meets 8 times a year. Usually the FOMC conducts policy by adjusting the level of short-term interest rates. The FOMC also manages the quantitative easing program.
EUROPEAN MARKETS (01/04) Price 14 day change 52-wk High FTSE: 6615 0.9% 6875 DAX: 9585 5.1% 9789 CAC: 4413 3.5% 4356 US MARKETS (01/04) S&P 500: 1872 0.75% 1884 NASDAQ: 4198 -1.9% 4371 COMMODITIES (01/04) BRENT: $107.4 1% $119 GOLD: $1287 -5.5% $1796 BOND YIELDS (10yr on 01/04) US TREASURIES: 2.74% 3% GERMAN BUND: 1.57% unch UK GILTS: 2.76% 3% SPANISH: 3.23% -3% CURRENCIES (01/04) GBP/USD: 1.666 EUR/USD: 1.379 JPY/USD: 103.25 VIX Index: 13.88

Job Opportunities (email for details)

Instructus Markets: Student Ambassador

is proud to be partnered with the leading Global Hedge Fund: Trafalgar Capital And to be associated with Olive Tree Securities INSTRUCTUS MARKETS: CALL: 0207 290 1271 ADDRESS:  49 St Jamess Street, London SW1 1JT Follow us on Like us on @Instruct us Instructus Markets

DISCLAIMER All information contained on this website (and in any forums, blogs, round-ups and news updates provided through this website) is given without any warranty, promise or representation of any kind whatsover. Whilst we provide our courses and all our other services with reasonable care and skill (and in booking any course you agree to accept our terms and conditions (www.instructusmarkets.com/legal), we do not promise, warrant, guarantee any particular results from your trading. In booking or attending any Course you accept and acknowledge that: (i) we will not advise you what or when to buy, sell, invest or otherwise deal; (ii) the advice we will give you is only aimed at encouraging a good understanding of the practicalities of how to trade; (iii) by its nature, trading is very risky, requiring sophisticated levels of understanding, knowledge, information and a variety of strategies for it to be protable; and (iv) you may lose all monies you place at risk and, in relation to spread-betting and other forms of trading or gambling, you may incur liabilities to pay further monies or provide capital in addition to losing such monies. We are not regulated by or registered with the Financial Services Authority or authorised or otherwise permitted to carry out any investment business or other regulated activity. Instructus Markets is a Trading name of Instructus Trading.