Libby Sharp, 24 November 2017

Markets this week have moved higher, with the NZX50 seemingly ending its November losing streak, while Global markets shrugged off political uncertainty in Europe. The reporting and AGM season has continued in New Zealand and Australia, with a number of companies releasing updated guidance. The latest global dairy auction disappointed while migration trends were cemented when October figures were released.

Up until this week, November has been a bit weak for the New Zealand market and we looked to be on track to break our ten-month winning streak. However, positive news flow from the reporting season coupled with renewed interest in some of the growth stocks of the index has seen the index rebounded strongly. Although remaining below where it started the month, it is certainly within cooee.

On the local economic calendar, there were two highlights for investors to look towards. The first was the Global Dairy Trade auction. The previous three auctions had logged declines, and also marked the end of the stability that the index had seen for a number of months. The dairy futures market was expecting a gain at the auction, however, the market was disappointed when the headline index finished down 3.4%. There was another decline the price of whole milk powder, a key product group for New Zealand. Skim milk powder also registered a decline.

This latest decline has a number of analysts wondering whether Fonterra will maintain the current farmgate milk price of $6.75 per kilo. A large number of market commentators have pulled their season estimates back on this recent weakness, however all estimates are above last season’s price. The weaker New Zealand dollar may mitigate some of the dairy price declines, as it is in US dollars. However, it will not be enough to entirely offset the weakness.

Migration was the other big talking point of the week, with net migration for the year to October reaching 70,700. This is high by historical standards however it is below the recent highs and certainly cementing our thoughts that we have seen the peaks in migration. For the first time in a few months, the number of kiwi’s leaving has outnumbered those returning. The biggest change from last month was an increase in departures of non-New Zealand citizens and this was the main contributor to the falling net migration figure.

Looking globally, political uncertainty has reared its head in Europe, with Germany still not forming a coalition. The German election was held on the same weekend as our own, now two months ago, and coalition talks have broken down this week between Angela Merkel’s Christian Democratic union party, the Greens and the far right. As talks broke down there were talks of Merkel’s party forming a minority government. Merkel’s response was that she would rather send Germany back to the polls than do this, prompting talks that there would be another election.

The euro was under significant pressure following these revelations, however markets have shrugged off the news, and rallied. A weaker euro is beneficial for many areas in the Eurozone as they have a high proportion of listed exporters.

In the US, the release of the Fed minutes captured some attention as did Janet Yellen’s remarks. The market is all but certain there will be another rate hike in December however, the path they will follow after this is now very uncertain. The uncertainty was exacerbated by Janet Yellen’s commentary around low inflation and suggesting that this is more than a passing trend and could indeed be the new normal. Yellen’s stint as Fed Chair is almost over, with Jerome Powell announced to be taking her place in February. When Powell takes over Yellen will resign from the Fed however, he is seen as being sympathetic to her views and we are likely to see a continuation of the current policy path.