INSIGHTS

MARKET SUMMARY: 16 TO 20 JANUARY

Research Team, 20 January 2017

It has been a mixed week for markets with investor sentiment waning in the lead up to several key political events. There has also been plenty of economic data to digest for markets including the latest global dairy trade auction in NZ.

The first of the major political events that came into focus for investors was the much anticipated speech from the UK Prime Minister Theresa May. The speech outlined her approach for “Brexit” when the UK leaves the European Union. As was expected May called for a hard Brexit, giving the UK a clean break from the single market. Britain is determined to regain control of migration, and this was a key reason the vote to leave was successful.

The nation will seek new trade deals with countries including New Zealand and Europe, however the final deal, which is not expected until 2019 would need to be voted on by both houses of Parliament in the UK. Immediately following the speech the pound strengthened against its major trading partners, causing the UK share market to decline sharply.

The other major political event scheduled for this week is the inauguration of the 45th President of the United States, Donald Trump. There has been plenty of caution attributed to this event which is to be held Friday night in the US and Saturday NZ time. Since the election, markets have rallied making large gains on the back of election promises from Trump to increase fiscal spending, cut taxes and roll back regulations. Commentators have dubbed this the Trump Bump but are wondering whether the recent weakness could be described as the Trump Slump.

Investors have also been subdued on the global scene as they await the start of the corporate earnings season. Following the Trump Bump, investors are looking for a solid earnings season and will be hoping for a positive outlook to support the high share prices. So far a handful of companies have reported, one of which was Netflix. The company’s result was outstanding with a 25% increase in subscriber numbers in 2016. This in turn saw revenues rise 30% and profits jump an extraordinary 50%. Aftermarket trading saw the share price rise by more than 8%.

The latest Global Dairy trade auction, and the second of the year to date, saw a marginal rise in the average price of dairy of 0.6%. Expectations were for a bigger increase than this as dairy futures were well higher prior to the auction. The last two auctions have yielded pricing declines. Disappointingly, whole milk powder prices decreased by 0.1% and volumes trended lower again. Commentators remain upbeat on the outlook for the dairy sector for 2017 with many believing that there will be further upside to the current forecast payout from Fonterra.

The latest Quarterly Survey of Business Opinion has shown that business confidence remained high at the end of 2016 with a net 26% of businesses expecting an improvement in economic conditions over the coming months. The survey indicated that the New Zealand economy will likely continue to gain momentum. Confidence was high across all sectors however confidence in the building sector remained highest, reflecting the construction boom.

The latest REINZ housing report was also released this week and showed a drop in the median house price of $4,000 for December. While Auckland house prices are still rising, they were doing so at a slower pace. Of the 12 regions in the report, five showed new record median sales prices while median house prices in Tauranga gained $130,000 over the year. The number of house sales were slightly lower than the previous year but the time took to sell a house was also slightly less.