INSIGHTS

MARKET SUMMARY: 16 TO 20 OCTOBER

Research Team, 20 October 2007

The global quarterly reporting season has given investors plenty to cheer about this week, with positive results providing justification for current lofty valuations. The gains have pushed US markets to record high closes this week with the Dow Jones Industrial Average past 23,000 points for the first time ever. Both the Nasdaq and S&P 500 have hit record high closes during the week as well.

Expectations for the reporting season are for another quarter of earnings growth, although not to the same magnitude we have seen over the previous two. It is still early days, and only a small percentage of companies have reported to date, however things are certainly on track for a solid reporting season. Of the companies that have reported so far, 77% have reported earnings growth, with an average growth rate of more than 11%.

Not to be outdone, the New Zealand index also hit all time highs this week, as investors continue to ignore the political furore, and focus on the more important things. AGM season is well underway and investors will be watching for further colour around earnings expectations for the year. During the August reporting season a number of companies refrained from giving quantitative forecasts, choosing instead to wait until their AGM’s which could include a quarter of business activity.

There has been a number of economic events during the week both here and abroad, with the highlight being the third quarter Consumer Price Index. Expectations were for a quarterly increase of 0.4%, and an annualised increase of 1.8%. However, inflation came in above expectations with a 0.5% increase for the quarter and a 1.9% increase for the year. The biggest driver of the stronger than expected reading was a sharp increase in the price of food, particularly vegetables. Housing and household utilities also saw a strong rise for the year.

The latest Global Dairy Trade auction this week saw another decline in the headline index. The GDT index fell 1.0%, adding to the decline from the previous auction when prices fell 2.4%. All but one product group saw declines at the auction with anhydrous milk fat the only product to see a rise. Key product group, whole milk powder, saw a 0.5% price decline however remains narrowly above $3,000 a tonne. Fonterra’s farmgate milk payout forecast remains at $6.75 per kilo of milk solids, and this was last updated in September. Of the institutions that provide milk price forecasts, one has downgraded their expectations on the back of this result, saying the payout is more likely to be between $6.25 and $6.50.

Looking elsewhere around the globe, it has been a busy week for China, as the 19th Communist Party congress gets underway. It is expected that President Xi Jingping will be elected for second five year term and investors will be watching for clues on how the economy is progressing. Many analysts are hoping the president will embark on transformational reforms as well.

Also from China, third quarter GDP came in above expectations and saw the world’s second largest economy grow at 6.8% for the year. This was slightly lower than the previous quarter, however, was above the government’s full year target of around 6.5%. Earlier in the week, the Consumer Price Index rose 1.6% matching forecast while the Producer Price Index (PPI) rose 6.9%, smashing expectations. The PPI was driven higher by a year-long drive in construction spending that includes government led infrastructure.

This week marks the 30th anniversary of the 1987 share market crash. On 19 October 1987, a number of events conspired and sent markets tumbling. Black Monday as it is now referred started in Hong Kong and triggered a worldwide share market crash, spreading to Black Tuesday in NZ and Australia. The Dow Jones in the US fell more than 20% in a single trading day, the largest recorded single day decline for the index. From its 1987 peak until the end of October the NZ market fell about 60%. The event sparked changes to regulations and new rules to prevent it from happening again.