INSIGHTS

MARKET SUMMARY: 23 TO 27 OCTOBER

Research Team, 27 October 2017

It was a holiday shortened week for New Zealand, and given the excitement from late last week we probably needed it! Winston Peters finally announced that he was forming a coalition with the Labour Party and that the Green Party would be on board with a confidence and supply agreement. Jacinda Ardern was sworn in as the 40th Prime Minister of New Zealand this week while Winston Peters is her deputy.

Although we have seen very little reaction from the New Zealand share market, we have certainly seen a significant decline in the New Zealand dollar. The TWI is now at an 18 month low. Initial declines came following the coalition announcement and these losses were extended following the policy announcements. Policies of note include the review and reform of the Reserve Bank Act, minimum wage rising to $20 an hour by 2020, a feasibility report on moving the Port of Auckland to Northport, and a strengthening of the Overseas Investment Act.

The NZX50 continued its exceptional run this week, narrowly breaking a 16 session winning streak mid week. There has been plenty for investors to process as the AGM season continued. Of note, Fletcher Building went into a trading halt on the day prior to their AGM, pending an announcement around its building and interiors business. The announcement was a further $160 million loss for the division, in addition to the downgrades from earlier in the year. The share price was sufficiently pummelled as the market opened, falling more than 5% although these losses were pared back later in the day.

Although locally there has been only limited economic data released this week, there has been plenty coming in from offshore. Flash PMI’s (Purchasing Managers Index) for October were released for the US, Europe and Japan. Flash PMI’s are usually the first economic indicators we get to gauge how economies are tracking. Japanese manufacturing activity slowed slightly during the month, falling to 52.5 from 52.9 in October. An index reading above 50 indicates expansion in the sector. In the US, the flash manufacturing PMI rose to 54.5, hitting a nine month high as the US economy continues to expand. It was a similar story for Europe with its PMI rising to 58.6, its highest level in over seven years.

Weak inflation data from Australia disappointed markets. The Consumer Price Index rose 0.6% for the third quarter of the year, below the 0.8% gain expected. For the year, inflation was forecast to be 2.0% however, was only 1.8%. This is also below the Reserve Bank of Australia’s target range of 2% – 3%. The Australian dollar weakened following the result and chances of an interest rate hike next year declined further.

Politics were also front of mind globally, with snap elections held in Japan during the weekend and the China Communist Party Congress finishing this week. Japanese Prime Minister Shinzo Abe was re-elected with an even stronger mandate than he previously held. This was cheered by the Nikkei which had an exceptional 16 session winning streak. Chinese President Xi Jinping has been given a second 5 year term in power and was also honoured by having his ideology indoctrinated into the constitution. This makes him the most powerful leader since Mao Tse-tung, founder of the Communist Party.

Global reporting season has also ramped up and driven indexes in the US to fresh all-time highs. Overall the reporting season so far has been positive, however as we expected, misses have been heavily punished by investors. The reporting season kicks up another gear next week, with the busiest week of the third quarter reporting season. We will be watching for results from Apple, L’Oreal, and Tesla among others.

Next week, we will be watching the US Federal Reserve meeting for further signs of Policy tightening, while third quarter employment data from NZ will be closely watched.