Mark Lister, 1 April 2019

The first three months of the year have ended on a high note for global sharemarkets, especially here in New Zealand where the NZX 50 just posted its largest weekly gain since November. That sees it finish the quarter up 11.7 per cent, the strongest rise since the end of 2015.

The US market has been stronger still. After suffering the worst quarterly performance in seven years at the end of 2018, the S&P 500 rebounded 13.1 per cent. That’s the biggest quarterly gain since September 2009, and the best March quarter since 1998!

Sharemarkets have been buoyed by central banks that seem more than willing to maintain loose monetary policy in the face of slowing economic growth. However, the interest rate and bond markets are where the real action has occurred in response to this.

The US 10-year Treasury yield ended last month at 2.41 per cent, the lowest since late 2017 and well below the 3.24 per cent it reached in November. The five-year swap rate here in New Zealand (which many mortgage rates and fixed income yields are based on) is now just 1.77 per cent, the lowest on record and well below the 2.50 per cent average of last year.

Given these growth concerns and recession fears that have gripped financial markets, upcoming economic releases will be important. We will get the latest on US retail sales, the manufacturing sector and the labour market over the next week. 

Investors have had the luxury of blaming the 35-day government shutdown, which was the longest in history, for some of the poor economic readings out of the US this year. Any disruption from that should have worn off by now, so we’ll find out how much there really is to worry about.

Across the Tasman, Tuesday’s interest rate decision from the Reserve Bank of Australia (RBA) takes on added significance, given what we heard from our own central bank last week. 

Adrian Orr delivered a major surprise, unexpectedly shifting to an easing bias (which means the Reserve Bank is leaning toward cutting interest rates). That’s a big shift from six weeks ago, especially given there’s been nothing untoward happen on the local economic front since then.

Many suspect the Reserve Bank is falling into line with international peers, in order to keep monetary policy differentials unchanged and ensure the NZ dollar behaves. If that’s the case, these same issues will be playing on the mind of the RBA. Australia is our second largest trading partner, only just behind China, and any similar moves from Sydney will affect us too.

The concerns of late last year seem to have faded, and investors are in better spirits today. However, much of this change in sentiment is probably due to the abrupt U-turn from multiple central banks. 

While that does genuinely improve the outlook, it’s hard to believe financial markets are out of the woods yet. Until we see global growth pick up again, or get a resolution to some of the lingering geopolitical issues, it’s unlikely we have seen the end of last year’s volatility.