Tuesday 25th July 2017
NEWS TICKER July 25th: Orezone Gold Corporation (TSXV - ORE) says the Ministry of Mines and Quarries in Burkina Faso, West Africa has issued and Sarama has paid the invoice for the transfer of the Bondi Gold Project (Djarkadougou exploration permit) from Orezone’s subsidiary company to Sarama Resources subsidiary company. This is the last step of the approval process before the official transfer that will be effective when the Ministry of Mines will deliver the new Djarkadougou Order (Arrêté) in Sarama’s name, at which point Sarama Resources shares and warrants issued to Orezone as part of the transaction will be released from escrow. The issuance of the Arrêté is a matter of process which should happen through the course of Q3 2017 - Andrey Solovyev, global head of DCM at VTB Capital reports today that “VTB Capital acted as joint global coordinator on the placement of a five-year $725m eurobond issue with an 8% coupon for Nostrum Oil & Gas PLC. Nostrum Oil & Gas is an independent multi-field oil and gas company engaging in the production, development and exploration of oil and gas in the pre-Caspian Basin. The order book was significantly oversubscribed, driven by a broad range of top quality international accounts. The order book comprised global investors from the following regions: USA - 40%, Great Britain - 39%, Continental Europe - 16%, Asia and Middle East - 4%, CIS - 1%. Investors including Global Asset Managers, Investment Funds, Banks, Pension Funds and Insurance Companies participated in the transaction. Several participants had invested in Nostrum’s previous bond issues. This deal is the third transaction arranged by VTB Capital for Nostrum Oil & Gas PLC, reflecting the depth of expertise at VTB Capital - The US dollar remains under pressure amid heightened market uncertainty over the US administration’s ability to implement key campaign promises including healthcare and tax reform. A downward reassessment in short-term Fed rate hike expectations following a more dovish than expected tone from US Fed chair Janet Yellen at last week’s semi-annual testimony, coupled with disappointing US June inflation and retail sales data, have weighed on market sentiment towards the greenback -- Turning to core government bonds, yields remain off recent multi-month highs. Thursday’s ECB monetary policy meeting decisions will be important in either buoying market sentiment over the summer months, or depressing it -- According to today’s market report from EFG Eurobank in Athens, Greece’s return to financial markets expected this week, is being postponed because the IMF has set a ceiling to the amount of debt that Greece can hold in order for the Fund to participate in Greece’s debt restructuring programme. European Commission officials have reportedly commented that a successful completion of the 3rd Economic Adjustment Programme – due to expire in August 2018 – will require more than one bond issuance by the Greek government for the country to be able to build up a buffer of €9bn which is to come from the ESM loan, the containment of public expenditure and tapping the markets. Greek government spokesperson Dimitris Tzanakopoulos has subsequently told local press that the country will tap the markets when it estimates that it is in the best possible position with the lowest possible risk -- Moody's Investors Service has today withdrawn the senior unsecured (P)Aa2 provisional rating on the Norwegian railway operator Norges Statsbaner AS (NSB)s medium-term note program and the Aa2 senior unsecured ratings on all the outstanding bonds, with the exception of the Aa2 senior unsecured rating on the CHF325m notes due 2017.The withdrawal of the ratings follows the completion of the transfer of most of NSB's debt, together with the ownership of NSB's rolling stock, to the newly-established company Norske tog As, which has been demerged from the group as part of the railway sector reform -- James Zimmerman, manager of Jupiter’s UK smaller companies fund, says today in his market note that political uncertainty in the UK is likely to create volatility for many domestic-focused companies for some time. He adds that following the UK’s decision to leave the EU in June last year, the unexpected outcome of the snap UK general election has only heightened political uncertainty in the UK. This uncertainty is likely to persist for some time. Over the past year, sterling has fallen by more than 10% against the US dollar, and inflation in the UK has overshot the Bank of England’s target rate, hitting 2.6% in June. Additionally, he says, a number of more domestically-focused UK shares fell sharply immediately after the EU referendum result and have continued to face headwinds due to sterling weakness and increasing inflation pressures. However, in contrast, many UK-listed international earners have continued to rally, benefiting from the sharp depreciation of sterling over the past year -

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Secular Reflation: The Long-Term View

Tuesday, 04 July 2017 Written by 
Secular Reflation: The Long-Term View Inflationary trends are likely to dominate markets in the months and years to come, as a range of influences that have suppressed prices over the 10 years reach inflection points. Nevertheless, two important exceptions will continue to exert downward pressures: an expanding workforce in services and increased competition as a result of technological disruption. Kathleen Hughes, European Head of Institutional Sales and Global Head of Liquidity Solutions Sales at Goldman Sachs Asset Management, explains.   http://www.ftseglobalmarkets.com/media/k2/items/cache/4276d52dad7d8031f7ee336c1cac9729_XL.jpg

Inflationary trends are likely to dominate markets in the months and years to come, as a range of influences that have suppressed prices over the 10 years reach inflection points. Nevertheless, two important exceptions will continue to exert downward pressures: an expanding workforce in services and increased competition as a result of technological disruption. Kathleen Hughes, European Head of Institutional Sales and Global Head of Liquidity Solutions Sales at Goldman Sachs Asset Management, explains.  

We believe that at least three major disinflationary trends affecting the global investment outlook over the past decade or so are either reversing or beginning to reverse: labour supply, the distribution of income between capital and labour, and globalisation.

The first waning disinflationary trend is labour oversupply, which is correcting in the US and Japan in particular as unemployment rates reach multi-year lows. The relationship between full employment and inflation is a simple one. As workers are more able to find jobs, their bargaining power improves and they can demand higher wages.  Higher wages lead to increased consumer demand, which can drive prices higher.

This relationship has been slow to emerge in this recovery—wage growth remains sluggish even in tight labour markets—but we believe the dynamic is intact and will assert itself first in the US.

The second inflection point to higher prices is related to income distribution, which is affected by wage growth over the longer term. Rising wages should help shift the balance of income distribution from the holders of capital—investors and savers—toward workers with a greater propensity to spend.

The third disinflationary force on the decline is globalisation. The global spread of supply chains in search of production cost savings may already have peaked. Companies are no longer pushing as aggressively as they did into offshore markets, in part because labour costs are rising in many emerging markets. Moreover, the potential for protectionist policies in the US could drive up prices of imported goods, and lead to more on-shoring and higher production costs.

Counterpoint

While these inflationary factors are coming into play, they are not the whole story.  One enduring disinflationary pressure is the drag on wage growth caused by the skew in job creation from manufacturing to the comparatively low-paid services sector.

The momentum behind the expansion of the services sector workforce may also be past its peak, but the disinflationary effects are likely to persist as manufacturing workers retire over the next decade. This effect will be especially pronounced in the euro area—even in tight labour markets such as Germany’s—given the ready availability of migrant labour with little bargaining power on wages.

Technology poses the second longer-term headwind to inflation. Today’s advances are putting more power in the hands of consumers, introducing unprecedented levels of price transparency, as shoppers can compare the prices of just about any goods or services in real time.

As a result more retailers are under pressure to price competitively because they know their consumers are price-aware. Also, more brands are eschewing the traditional retail model and using technology to sell directly to consumers, removing a layer of mark-ups.

The power of the online model is most evident in the retail and media industries. The emergence of small online shaving clubs, for example, forced the world’s largest consumer product company to drop some of its prices more than 10%, while the growing trend of ‘cord-cutting’ and streaming content online poses a threat to the cable giants.

The next frontier for disruption is food. Retailers are vying with internet giants to create ‘smart’ grocery stores, allowing customers to buy online or simply ‘grab and go’ in stores, bypassing the checkout. This technology could drive grocery prices down, and those who harness it well will have a major advantage in the competition for share of this huge market.

All this, of course, has an impact on investment strategies. Our approach to this challenge is two-fold, both offensive and defensive.

On the defensive side, we avoid exposure to legacy players who may be targets for emerging disruptors. Ultimately we expect the retail sector to successfully navigate this transition as business models adapt, but some measure of attrition and consolidation is likely: this year has already seen nine retail bankruptcies in the US.

On the offense, we see more dispersion of performance as business models and supply chains will have to change, increasing the range of outcomes. This is a stock picker’s environment: we look for companies that are leading in or adapting quickly to the online space, as marketing directly to consumers can enhance margins. The disruptors themselves can thrive in this deflationary habitat, as online companies with lower overheads are proving their ability to undercut more established brands and capture market share.

The Great Reflation may be a genuine phenomenon, but these deflationary factors and the specific investment challenges and opportunities they present ensure that investing in this environment is not a one-way bet on rising prices. 

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