Market Update - Monday 17 August

Most equity markets were down sharply last week, apart from the S&P500 which bucked the trend with a 0.7% rise. European shares were down 2.7%, the UK market was 2.5% lower and Australian shares were down 2.0% for the week. The local NZX50 was 2.9% lower.

The resources-heavy Australian market seems to have felt the brunt of the recent volatility more so than other markets, with the ASX200 10.5% below the 2015 peak from late April. In contrast, the NZX50 is down just 3.6% from its peak and the S&P500 in the US is only 1.9% lower.

The NZ dollar fell further against all currencies, falling 1.3% against the US dollar, 2.3% against the British pound and 2.0% against the euro. The Australian dollar was also weak so the NZ dollar held up slightly better against it, with just a 0.7% fall.

Bond yields were little changed, with the 10-year US Treasury yield rising slightly from 2.16% to 2.20% and 10-year German bunds unchanged at 0.66%.

Locally, the two-year swap rate was down two basis points to 2.88% and the five-year swap rate was lower by the same amount at 3.17%.

Oil prices didn't change much during the week, but with WTI at US$42.50 and Brent at US$49.19, prices are down 29% and 24% since the end of June.

In the US, energy (+3.4%), utilities (+1.5%) and telcos (+0.7%) were the best performing sectors, while financials (-0.4%) were the weakest.

In Australia, utilities (+0.4%) and consumer discretionary (+0.1%) were the only two sectors to rise, while tech (-11.9%), energy (-4.2%) and consumer staples (-3.1%) were the poorest performers.

In New Zealand, Vital Healthcare (+0.9%), Coats (+0.8%) and Genesis Energy (+0.6%) were the best share price performers on the NZX50. Metro Performance Glass (-12.3%), Spark (-7.6%) and Xero (-6.4%) were the worst.

Key events last week:

  • China devalues the Yuan. The big news of the week (and probably the year) was China's surprise move to devalue the Chinese Yuan (CNY). Further depreciation is likely, and concerns over a global currency war have reignited. Key implications of this development (and further incremental moves) look to be a stronger US dollar, further weakness in commodity prices, and a global deflationary effect that will put downward pressure on global bond yields. We expect it to be a little more difficult for the Fed and the Bank of England to hike interest rates and see a greater chance of the RBNZ and the RBA reducing interest rates. This latter point will keep the NZ dollar and the Australian dollar on a weak footing. In terms of equities, the winners from this backdrop will be high yielders, US dollar earners and companies with a significant Chinese cost base. The losers will include companies selling products into China, such as automotive companies, industrials, luxury goods and consumer staples. Companies that have Chinese competitors, such as industrials, hardware and some technology companies will also do it tough as their Chinese counterparts become more competitive. Commodity producers are also likely to remain under pressure.

  • China activity data slows further. China's currency devaluation stole all the headlines on Wednesday, so monthly activity data released the same day went largely unnoticed. Industrial production, fixed asset investment and exports were all weak in July. Industrial production growth slipped further, declining to 6.0% from 6.8% in June and 6.1% in May) much lower than the consensus of 6.6%. This was consistent with the trend seen in power generation, which saw a 2.0% year-on-year drop. Investment also remained weak, with year-to-date Fixed Asset Investment growth falling to 11.2% (compared with 11.4% in June and May, and 12% in April). Exports were weaker than expectations with an 8.3% year-on-year decline and retail sales growth slowed from 10.6% to 10.4%.

  • Eurozone GDP growth disappoints in the second quarter. Flash Eurozone GDP data for the June quarter came in at 0.3%, below expectations for 0.4%. Germany and France were both disappointing, with German growth of 0.4% below expectations of 0.5% and flat GDP growth for France below forecasts for 0.2%. Greece surprisingly posted very strong real GDP growth of 0.8%. However, nominal GDP actually fell 0.7%, so it was purely the impact of subtracting Greece's negative inflation rate from that which pushed real (inflation adjusted) GDP into positive territory.

  • US retail sales revisions look solid. US headline retail sales for July met market expectations with a gain of 0.6% month-on-month. However, it was the revisions to previous months that were particularly encouraging. Retail sales growth for May was revised up to 1.2% (from 1.0% previously) while June figures were upgraded to flat (from a decline of 0.3%). The part of the report that flows into the national accounts, control group retail sales, was up 0.3% in July and the aggregate contribution from May and June was revised up by 0.4%. For the three months ending July the annualised rate of retail sales growth (relative to the previous three months) was 5.2%, which points to stronger consumer spending in the June quarter than previously estimated, and also a robust start to the third quarter on this front. This could ultimately see second quarter GDP growth in the US revised higher than the initial 2.3% rate that was reported.

  • US reporting season almost wrapped up. The US reporting season is almost over, with 460 S&P500 companies having now reported. Aggregate Q2 S&P500 earnings growth was 0.02% year-on-year, compared with expectations of a 4.3% fall in early July. This would have been the first quarterly decline since the third quarter of 2009. Excluding the energy sector, S&P500 EPS growth for Q2 improves substantially to +7.7%. Of the 460 companies that have reported, 47.6% have beaten estimates at the revenue level and 73.7% at the EPS level. Next week, 19 companies are expected to report with retail companies like Walmart, Home Depot and Gap making up the majority.

  • New Zealand retail sales point to a slowdown. The volume of total retail sales rose 0.1% in the June 2015 quarter, a sharp slowdown from the 2.3% gain in the March quarter and the 2.1% rise in the December 2014 quarter. The previous two quarters were boosted by much lower petrol prices, which boosted disposable incomes and saw increased spending in other areas. While oil prices have remained weak, the NZ dollar fell sharply in the June quarter, which saw pump prices rebound and diverted household spending away from other areas and back towards petrol. Eight of the 15 retail industries had higher sales volumes, with the "non-store and commission-based industry" experiencing the largest rise (+8.1%). Other industries that saw big gains were motor vehicle and parts retailing (+0.6%), supermarket and grocery stores (+0.3%) and pharmaceutical (+0.7%). The weakest areas were fuel retailing (-0.9%) and accommodation (-1.7%), the latter probably reflecting a slowdown from the Cricket World Cup in the March quarter. Overall, this data adds to signs that the economy has been losing momentum over recent months.

What to watch for this week:

  • Fed minutes the key US release this week. With just over a month to go until the September 17 FOMC meeting statement, the minutes from the July meeting will be watched closely this Wednesday. Market pricing is currently suggesting a 48% chance of a rate hike in September. This is down slightly from 54% a fortnight ago, but despite all of the recent volatility and the CNY devaluation, it is still a close call. Inflation (or lack thereof) remains a problem for the Fed. The core PCE (the Fed's preferred inflation measure) is still running at just 1.3% compared with 1.8% for core CPI (for which the July reading is also due Wednesday). However, we saw some positive news on Friday with the producer price index beating expectations and industrial production for July also surprising on the upside.

  • NZ reporting season due for its busiest week. While this week is relatively quiet on the economic front, the next two weeks will be exceptionally busy in terms of corporate reporting in New Zealand and Australia. A number of market heavyweights will report results this week, including Contact, Meridian, Fletcher Building, Auckland Airport, Sky TV and Spark in New Zealand. From Australia, Sydney Airport, QBE, AMP and Wesfarmers are some of the companies scheduled to report. Wednesday, Thursday and Friday are shaping up as particularly interesting days.

  • We could see a rebound in this week's GDT auction. Early Wednesday morning we will see the release of the latest global dairy trade (GDT) auction results, and after ten consecutive auctions that have seen a fall in the headline GDT index, we might be due for a bounce. NZX whole milk powder futures from August through to June 2016 have all gained over recent days, with the April contract up 12% to $2500. This coincides with an announcement last week that Fonterra will cut milk powder auction volumes in response to lower prices. At the next four auctions Fonterra will sell 72,000 metric tons of whole milk powder, down from a previous projection of 108,700 metric tons.

  • Aside from GDT, it is a light economic calendar this week. Consumer confidence is out on Thursday, which will provide an insight into whether recent Official Cash Rate cuts have offset other negative news and had any impact on optimism. Migration data for July is out on Friday, which will be of interest given the strong tourism sector this year. Statistics NZ said on Friday that the population grew by 86,900 people (1.9%) in the year to 30 June 2015. This came from net migration (arrivals minus departures) of 58,300, and natural increase (births minus deaths) of 28,700 and was the strongest growth rate in more than a decade (in 2003 the population grew by 2.0%). In Australia, the only release of note is Tuesday's release of the minutes for the RBA's August board meeting. However, with the RBA Statement of Monetary Policy released a few days after the meeting, there is unlikely to be anything new in the minutes.