Reseach Team, 10 February 2017

Although it was a shortened week here in New Zealand, there was still plenty of information for investors to digest. The Australian and New Zealand reporting season is now underway, and has already caused some large market movements. Central bank decisions from both NZ and Australia have also been talking points for the market, as has the latest Global Dairy Trade auction result.

Rising geopolitical tensions continue to be a theme for the year and have caused further uncertainty for markets globally. US President Donald Trump continues to be a wild card for investors; however, European politics have come under the spot light this week. In France, far right leader, and Presidential candidate, Marine Le Pen has sparked talks of a Frexit, where France would leave the Eurozone. In Germany, Angela Merkel’s governing party is currently behind in some polls. In the UK, Article 50, which will trigger Brexit talks to get underway, passed its final reading in the House of Commons and will now move to the House of Lords. All of these events collectively are creating a mixed environment for financial markets and we have seen muted movements from markets as they seemingly lack direction.

The Reserve Bank of New Zealand met this week and as was expected, kept the official cash rate steady at 1.75%. Markets were more focussed on the Monetary Policy Statement that accompanied the rate announcement in which Governor Graeme Wheeler acknowledged that economic data has beaten expectations recently and the economy looks to be in good shape with headline inflation now within the targeted band. However, he also talked about the geopolitical uncertainties continuing to pose a risk and that the exchange rate remains higher than is appropriate and as such monetary policy will remain accommodative for a considerable time.

During the week, Governor Wheeler also announced that he would not be seeking another term and will finish in his role as RBNZ Governor on 23 September. As this is close to the General Election, Deputy Governor Grant Spencer will be acting Governor for six months or until such time as the board appoints a new Governor.

The Reserve Bank of Australia also met this week and, like its Kiwi counterpart, chose to keep rates on hold. The RBA was upbeat about the Australian economy and stuck with previous forecasts for 3% growth. Following the announcement the Australian dollar gained strength against its major trading partners.

The latest Global Dairy Trade auction saw a 1.3% rise in the average price of dairy. This took the market by surprise as in the lead up to the auction futures markets were predicting a small decline. Dairy prices are now significantly higher than they were at the same time last year and are well about the lows of August 2015. Whole milk powder, a key product group for New Zealand farmers, has more than doubled since these lows. Fonterra’s current payout forecast is $6.00 per kilo of milk solids, and for the first time in three years is above the average breakeven point for farmers. In addition to this, some analysts still believe that there is potential for further upside to the payout.

Reporting season in New Zealand and Australia is now underway, although has had a slow start. This week, just a handful of companies have reported with mining heavyweight Rio Tinto among them. Rio returned to profit for the 2016 year and announced that it will be doing a capital return to shareholders. The better than expected result was driven by rising commodity prices as well as strict cost controls and improved efficiency.

Next week, reporting season ramps up with a large number of companies both here and across the Tasman due to report. In terms of economic data, the New Zealand calendar takes a break after a busy couple of weeks. However, inflation data from a number of regions including China and the US, GDP figures from Europe and the Australian Labour Force data will certainly keep markets busy.