INSIGHTS

MARKET SUMMARY: 17 TO 21 APRIL

Research Team, 17 April 2017

The holiday shortened week has been one of surprises, with a snap election announced in the UK, mixed global earnings reports, a sliding oil price and rising geopolitical tensions. Also we have only a few days to go until Sunday’s first round in the French presidential election, which has the potential to create turmoil in European markets next week.

In local corporate news, the Government announced it will pay employees within the aged care sector more. This initially saw a sell-off in Summerset and Ryman Healthcare, as higher wages could potentially add cost pressures on private sector companies within this sector. However, after initial concerns, the impact of the lift in wages have somewhat abated. Restaurant Brands, the operator of the KFC franchises in New Zealand, reported a solid result on Wednesday, boosted by a recent acquisition in Australia. The company’s overall net profit was up 7.8%. Electricity company, Mercury Energy, upgraded its full year earnings guidance due to recent strong inflows into its Waikato hydro catchments. Fletcher Building felt some pressure as its share price fell to the lowest it has been in nearly a year, with recent press speculation on corporate activity weighing on the company. Shares in embattled technology company, Orion Health, rebounded at the beginning of the week following the announcement of a new five-year contract win with Dorset County Council in England.

New Zealand’s latest inflation figures reported were higher than expected, with annual CPI rising to 2.2% in the March quarter. This is the first time it’s been above 2.0%, the mid-point of the Reserve Bank’s target band, since 2011. The strong inflation print was driven by higher food prices, the impact of the tobacco excise tax and a 12% rise in petrol prices. The stronger-than expected reading saw the NZ dollar jump in response.

Also dairy prices have risen for the third time in a row at Fonterra’s fortnightly Global Dairy Trade auction. The GDT price index gained 3.1% from the last auction and the important whole milk powder price rose by 3.5% to $US2,998 per tonne.

Further afield, in the UK, Prime Minister Theresa May unexpectedly called a snap general election for the 8th of June. The election will give Mrs May an opportunity to win a direct mandate for the first time to be Prime Minister. The pound soared 2.22% against the US dollar on the back of the news, to its highest point this year. Shares on the other hand slumped, with the FTSE 100 down 2.46% and the European Stoxx Europe 600 index down 1.11%, marking its biggest one-day percentage drop since November.  Mrs May took power last July without a public vote after David Cameron resigned. A successful election will give Mrs May a stronger mandate to negotiate through the Brexit process.

On Sunday the first round of the French 2017 presidential election is set to be held. Numerous candidates will contest the first round, and if none win a majority (which is very likely), a second-round run-off election between the two candidates who win the most votes will be held a fortnight later, on 7 May. Centrist candidate Emmanuel Macron and National Front leader, Marine Le Pen, (who is anti-Euro and the higher risk candidate for financial markets) are the frontrunners. Usually a French general election doesn’t present a make-it or break-it moment for the entire Eurozone, but this time the result could produce more volatility and angst in financial markets than what was seen by the Brexit.

Finally, global reporting season has ramped up this week with more than 60 S&P500 companies releasing results for the first quarter of 2017. Thus far, many of the big names have disappointed the market, with Goldman Sachs, Johnson & Johnson and IBM all providing results below expectations. On the other hand, Bank of America, L’Oreal, Yahoo and Morgan Stanley reported stand out results. As at the time of writing, 43% of companies have beaten revenue expectations, while 53% have outperformed earnings.