INSIGHTS

MARKET SUMMARY: 17 TO 21 JULY

Research Team, 20 June 2017

After a quiet week on the economic data front last week, this week has been full noise for New Zealand, starting with the quarter two inflation figures early in the week. The latest Global Dairy Trade auction was also highly anticipated as the market was looking for further signs of stabilisation in dairy prices. There has been plenty of action overseas as well, with the global corporate reporting season notching up a gear. Further political tension in the US also continues to dominate news flow.

Second quarter inflation figures disappointed, coming in below expectations. For the quarter, expectations were for a 0.2% increase from quarter one, however the Consumer Price Index (ICPI) was flat for the quarter. Food prices rose 0.7% for the quarter as the price for vegetables increased while the price for housing was driven higher by the purchase of new housing. On an annualised basis, the CPI was 1.7%, slightly below expectations for a 1.9% rise. The CPI was lower than the previous quarter and although it was weaker than expected, it was still much stronger than what we have seen in recent years. This could point to inflationary pressures building slowly, which further suggests we have seen the lows in interest rates.

Following the release of lacklustre CPI numbers the New Zealand dollar fell sharply, dipping more than 0.5% against the US dollar. However, this was later reversed with the latest Global Dairy Trade auction. The auction yielded a small gain in the average price, rising 0.2% after two auctions of declines. The market cheered the stabilisation of prices that we have seen over the last few months. Whole milk powder also saw further signs of price stabilisation, rising 0.3% at the auction.

The NZX50 rose to record highs this week, buoyed by positive news flow from across the globe. However, on Thursday there was a marked pullback, driven by announcement from market heavyweight Fletcher Building of yet another earnings downgrade. Prior to the market open on Thursday Fletcher’s said they now expect earnings for the full year to be $525 million, down from a previous range of $610 – $650 million. This latest downgrade was driven by the company’s Buildings and Interiors division, with losses forecast to be worse than previously thought. In addition to this, Fletcher’s have said that an impairment charge of up to $220 million, relating to two of its Australian businesses is likely. CEO Mark Adamson looks to have been pushed out by the board with his somewhat abrupt departure being announced alongside the downgrade. He will be replaced by Francisco Irazusta effective Monday.

The Australian banks have had an interesting week, punished early on as uncertainty ramped up with the Australian Prudential Regulation Authority (APRA) hinting there would be a change to capital requirements. The four main Australian banks pulled back sharply ahead of the full announcement however, it was subsequently revealed that the new requirements were not as severe and investors breathed a sigh of relief. The big four banks, which make up more than 35% of the Australian index all gained more than 3% as investors bet that new capital requirements would be met easily.

The global reporting season ramped up this week and gave investors plenty to think about. One of the standouts for the week was Netflix, with subscriber numbers soaring in the second quarter of the year by 35%. Revenue increased sharply for the pay TV operator however, costs also increased as it faced increased competition for content. The result was taken positively by the market and the company’s share price rose almost 11% in aftermarket trading.

Next week, the reporting season will be in full flight. We will be watching results from Alphabet (Google’s parent company), Apple and 3M early in the week, with Facebook, Tesla and L’Oréal results coming in later on.