INSIGHTS

MARKET SUMMARY: 15 TO 19 MAY

Research Team, 19 May 2017

The week started on a reasonably positive note for global markets with the FTSE 100 in the UK registering a fresh record close, as did the S&P500 and the Nasdaq Composite indices in the US. However, the good times came to an abrupt end, as US politics became front of mind for investors, as the unpredictable President Trump came under fire.

The political storm in the US began when President Donald unexpectedly fired James Comey, director of the FBI, citing that he dealt with the Hilary Clinton investigation inappropriately. Since then accusations of leaked information and interference into FBI investigations by the President have spiralled, with some parties calling for a special investigation and at worst an impeachment.

To begin with, markets had a fairly muted reaction to the developments, however when further allegations came to light, US markets all reported severe single day losses, all falling more than 1.7%. Tech stocks saw the biggest decline, as investors became more risk averse. Gold prices appreciated and the safe haven yen saw strength, particularly as the US dollar weakened. Investors now see the Trump economic agenda being put on the back burner, pushing back the highly anticipated tax reforms and deregulation that many corporates were looking forward too.

The CBOE Volatility Index, commonly known as the VIX, jumped more than 46% to 15.59, its biggest one day climb since Brexit. The VIX is widely acknowledged as a fear gauge for the market. Plenty is still to come out about this latest scandal and markets will be continuing to monitor the situation closely.

Expectations for the next US Federal Reserve Bank meeting have also now changed. Prior to these developments the market was pricing in a 100% chance that the central bank would raise rates at the June meeting. This has lessened significantly this week with only an 80% chance of the rate hike going ahead.

Closer to home, the latest Global Dairy Trade auction reported a fifth consecutive increase to the headline price. This has sent the average dairy price to its highest level since December last year. The 3.2% increase was well ahead of expectations and has sparked talks that Fonterra may increase the current season’s payout ratio from the current $6.00 per kilo of milk solids. More importantly, it has also sparked hopes that the initial forecast for the next season will be higher than previously expected.

In corporate news, Fisher & Paykel Healthcare received a boost to its share price this week after it was announced that Australian rival ResMed had withdrawn its complaint to the International Trade Commission. The share price subsequently rose 1.7%. The withdrawal of this complaint however does not impact the patent litigation proceedings that are due to be held in the US, UK, Germany and New Zealand.

The Australian labour force survey was much better than expected showing that the economy added 37,400 jobs in April. Expectations were only expecting a 5,000 increase in jobs. This comes on the back of the exceptional strong March figure of 60,000 (revised lower from 60,900). The unemployment rate fell from 5.9 to 5.7 for the month and it is now equal with January’s reading. More part time roles were created this month, while there were less full time jobs available. The Australian dollar gained following the announcement.

Next week, New Zealanders will be looking toward the 2017 Budget, the first with Bill English as the Prime Minister and Stephen Joyce as finance minister. There is an expectation that there will be something for housing in the budget in addition to the social and infrastructure spending that has already been announced.