Market Update - Monday 12 October

Last was a very strong one for global equity markets, with the US S&P500 gaining 3.3%, its best weekly performance since December last year.  Markets took heart from Federal Reserve meeting minutes that suggested the central bank was more united in its view to leave interest rates on hold than previously thought. This saw the US dollar weaken, equity markets rise and commodity prices rebound strongly after a long period of weakness.

European shares were 4.3% higher, Australian shares were up 4.5% and the domestic market was up 0.8%.

The NZ dollar was up stronger against most major trading partners, rising 3.8% against the US dollar to almost US$0.67 c, the higher level since July. The currency was flat against the Australian dollar that rose more strongly in line with a sharp rebound in commodity prices.

The 10-year US Treasury yield increased from 1.99% to 2.09% during the week, while the 10-year German bund yield rose from 0.51% to 0.62%.

Locally, the NZ two-year swap rate was two basis points higher at 2.72%, while the five-year rate was up by a similar degree at 3.06%.

Oil was sharply higher during the week, with Brent crude oil finishing 9.1% higher at US$52 and WTI over US$50.

In the US, energy (+7.8%) and materials (+6.8%) were the strongest sectors.  The weakest performances came from healthcare (+0.3%), utilities (+1.1%) and consumer discretionary (+2.4%). In Australia, energy (+14.6%), materials (+10.3%) and utilities (+4.4%) were the best performers. Telcos (+0.5%), tech (+0.6%) and real estate (+0.7%) were weakest. A2 Milk (+9.9%), Air New Zealand (+9.4%) and Xero (+6.7%) were the best share price performers on the NZX50. Tower (-4.8%), Mighty River Power (-3.4%) and Auckland Airport (-2.7%) were the worst (the last two went ex-dividend during the week).

Key events last week:

- The TPP trade deal looks like a net positive at first glance. Last week the Trans-Pacific Partnership (TPP) was settled, after a long negotiation period. The twelve countries involved in the TPP represent around 40% of world GDP, so this is an important agreement. In short, we will see tariffs removed for everything but dairy exports products (which will see just a partial liberalisation) and beef exports to Japan (where the tariff will be reduced substantially, but not completely). It has been estimated that tariff removal will save more than $250m annually once implemented. As an export nation, New Zealand has a lot to gain from increasing trade opportunities. In this regard, the TPP is a clear net positive for the economy and therefore the financial markets. However, it might be 2-3 years before it is fully implemented, with government approvals required in various countries. We will watch this space for further detail.

- Headline QSBO unsurprisingly softens in Q3. The Quarterly Survey of Business Opinion (QSBO) for the September quarter reflected an unsurprisingly fall in confidence. Net optimism regarding the general business situation fell 15 points from +6% to -9%, with a net 9% of respondents held a pessimistic view in the third quarter, compared with a net 6% being optimistic in the June quarter. The September reading is the lowest since the March quarter of 2011 (which was in the wake of the Christchurch earthquake). However, while many businesses appear somewhat concerned about the general economy, there is much more optimism with regard to their own businesses. A net 12% of firms reported stronger trading activity in the September quarter, up from net 10% in the June quarter.

- However, there were positive indicators in other parts of the survey. Looking forward, a net 17% of firms were expecting trading activity to strengthen over the coming three months, up from 13% in the June quarter. This part of the survey is now back above the historical average. A net 13% of respondents reported an increase in employment levels over the past three months, up from 11% the previous quarter. This is a high reading for this part of the survey and bodes well for the strength in the labour market. We saw a similar rising in the forward looking employment intentions aspect, with this series also rising to a net positive 13%, up two points from 11% previously.

- Dairy price continue their rebound. We saw global dairy prices rebound further at last weeks global dairy trade (GDT) auction, with the headline index up another 9.9% and whole milk powder (WMP) prices up 12.9%. Since the lows reached in August, prices have now bounded 63.0% and 81.7% respectively over the last four auctions. However, if we compare current prices to the average price for the first half of 2014, we are still approximately 35% below those levels. Lower milk production has definitely had an impact, with Fonterra’s latest update suggesting production is currently running 8-10% behind last year. Nonetheless, the recent price moves, if sustained, could put some upward pressure on the current $4.60 payout forecast, and could it push above $5.00. 

What to watch for this week:

- September CPI and final 2014/15 governments accounts due in NZ. Third-quarter inflation figures are out this Friday, and they are likely to remain very subdued. The RBNZ is forecasting quarterly CPI of 0.3%, and an annual rate of 0.2%, down from 0.4% and 0.3% in the June quarter. However, some economists expect the September quarter CPI to be even weaker than this, primarily due to July's reduced ACC component of car registrations, lower airfares (Jetstar-driven competition) and lower healthcare costs (more generous subsidies post-Budget). A weak CPI might not be enough to prompt the RBNZ into cutting the OCR again at its October 29 meeting, especially given the rebound we've seen in dairy prices (whole milk powder prices are 36% higher than where they were at the time of the last RBNZ meeting). The other interesting piece of news comes on Wednesday, when the Government releases its final accounts for the 2014/2015 year. These could unveil a smaller deficit than May Budget estimates, and there is even a possibility of a small surplus.

- Labour force data, FSR and confidence surveys due in Australia. The key event in Australia this week will be Thursday’s September labour force numbers. In August the Australian economy added 17,400 jobs and the unemployment rate was 6.2%. These are expected to improve slightly this month. On Tuesday the NAB business survey for September is released, while the Westpac-Melbourne Institute consumer sentiment survey for October is out on Wednesday. Finally, the Reserve Bank of Australia (RBA) releases the latest Financial Stability Review (FSR) on Friday, and the commentary on the housing market will be of most interest in this.

- CPI in China, the US and Europe due this week. In addition to New Zealand, the latest CPI figures will also be out this week for China, Europe and the US. On Wednesday, Chinese inflation data will give further clues regarding the state of the economy, ahead of third quarter GDP data later this month. In August, the annual China CPI was up 2.0%. Thursdays US CPI will be of interest given questions around the likelihood of the Fed rate hikes. In the year to August, the CPI was up just 0.2% in the US, and the Fed has lowered its inflation forecasts for the coming year further. On Friday, Eurozone CPI is released and according a Eurostat flash estimate, prices fell 0.1% in September. The falls in energy prices are likely to be the culprit, although this would still reflect the first fall into deflationary territory since March.

- Third quarter earnings season ramps up in the US. The third quarter earnings season continues, with many of the big financial names reporting results in the week ahead. The JP Morgan result comes after the close on Tuesday, with a number of other financials to follow. Bank of America and Wells Fargo are on Wednesday, followed by Goldman Sachs and Citigroup on Thursday. Other than earnings and the aforementioned CPI, key data from the US next week includes retail sales on Wednesday and industrial production on Friday.


Mark Lister
Head of Private Wealth Research
DDI +64 7 927 7995 / F +64 7 577 8625

158 Cameron Road
PO Box 13155, Tauranga 3141, New Zealand