INSIGHTS

MARKET SUMMARY: 8 TO 12 MAY

Research Team, 12 May 2017

The week started off with a hiss and a roar from markets as they processed the second round of the French Presidential election as well as an incredibly upbeat jobs report from the US. The positivity saw indexes across the world rally and the US pushed to fresh record highs, while European markets hit multi year highs.

The non-farm payroll jobs report from the US is one piece of data that we know the Fed pays particular attention too. April’s report showed that 211,000 jobs were created during the month beating expectations for 190,000 and were much better than March’s revised downward 79,000. The unemployment rate fell to 4.4% from 4.5% however average hourly earnings had a more muted increase of only 0.3% for the month. Following this report and the upbeat commentary from the US Federal Reserve’s meeting last week, the markets expectations for a rate hike coming at the June meeting rose to 100%.

The second round of the French election ended as was expected with Emmanuel Macron coasting to victory ahead of Marine Le Pen. This was certainly the market friendly outcome and represented a risk off event in Europe. However, the market reaction following the event was fairly muted, with much of the benefit already priced in as polling in the lead up had been so one sided. There are still a number of politically charged events to come in the region, however having this one out of the way has certainly seen the market breathe a sigh of relief.

The local reporting season also continued this week, and included some of the biggest names on the Australian and New Zealand markets. Of note were the big Australian Banks, which all had fairly lacklustre results with margin pressure notable. The four big banks have all had a strong run over recent months, riding the increasing interest rates wave, however softer earnings have seen a major pullback in the sector.

Adding to the Australian Banks woes was the release of the 2017 Australian Federal Budget. Among the policies announced was a levy on the big four banks and Macquarie that will generate A$6.2 billion over the next four years. The plan is to impose a tax on the aggregate liabilities of major banks, in similar system to what is seen in the UK. Despite this, the overall sentiment from the budget was that it was targeted towards economic growth, and the market reacted very positively to the proposal.

The most important event for New Zealand this week saw the Reserve Bank of New Zealand holding the Official Cash Rate again at the historically low level of 1.75% for the third time in a row. This was expected, however, the market was watching for forecasts to be updated in the Monetary Policy Statement, in particular the forecast path for the Official Cash Rate. With positive data points from the first quarter painting a bright picture for the New Zealand economy there were expectations that the RBNZ would bring forward its next expected move for the OCR from mid-2019 to the end of 2018. This was not the case with Governor Wheeler saying that the developments since the previous meeting were on balance neutral. Monetary policy is expected to remain accommodative for a considerable period which saw market expectations for a rate hike pushed back further. The New Zealand dollar weakened following the announcement.

Next week, reporting season continues in New Zealand and Australia, including Trustpower, Infratil, Ryman Healthcare and James Hardie. Fonterra also has a quarterly update. Later in the week the ANZ consumer confidence survey will be released for May and on the same day in Australia we will be watching out for labour force data.