INSIGHTS

MARKET SUMMARY: 18 TO 22 DECEMBER

Libby Sharp, 22 December 2017

We are now within reach of the end of the year, and only a handful of trading days left in 2017. Trading has slowed down in the week prior to Christmas with trading volumes lower than usual, with plenty of investors taking an early Christmas break. However, there has been plenty for investors to ponder during this time as a number of large economic data points have been released.

One release that we watched closely was the ANZ business confidence survey. The November release saw the headline figure fall 39.3% net pessimism, while the own activity index fell to +6.5, both at the lowest levels we have seen since the global financial crisis and well below long term averages. The December survey saw a small uptick in confidence levels, although the figures remain well below long term averages. The headline confidence index saw a net 37.8% of business pessimistic about the coming 12 months, while the own activity index, generally considered to have a stronger correlation with GDP, rose to + 15.6.

Third quarter GDP for New Zealand was better than many economists had expected although was slightly below the Reserve Bank of New Zealand’s forecast. Third quarter economic growth was 0.6%, while for the year ended 30 September growth was 2.7%. The annualised growth rate was above expectations after quarter two growth was revised higher to 1.0% from 0.8%. The positive result saw the NZ dollar climb higher for the day.

The latest Global Dairy Trade auction surprised the market on the downside, falling a further 3.9%. This was the final auction of the year and saw price declines across the board, with all product groups on offer seeing price falls. The 3.9% decline was the steepest we have seen since early March, and indicated that the small increase at the previous auction was more a breather than a sign of a changing trend. The key product of whole milk powder saw a 2.5% fall, dropping to $2,755 per tonne, and is now at a new low for the year.

At the beginning of the month, Fonterra updated its forecast milk payout for the 2017/18 season, downgrading it from $6.75 per kilo of milk solids to $6.40. Although this is a substantial drop it is still 28 cents per kilo higher than last year and is the highest the payout has been since the record 2013/14 season.

The New Zealand NZX50 looks set to lock in its twelfth month in a row of gains for the year, making 2017 the strongest year of returns since 2012. With the three trading days to come between Christmas and New Year, the index is up more than 20%. Despite some weakness over the couple of months, a2 Milk remains the top performer for the year, up over 278% for the year. Newcomer Pushpay is up 195% for the year to date while Synlait milk has had gains moderated significantly but still remains more than 130% higher for the year.

Metro Performance Glass remains the weakest performer for the year as the company has seen significant declines for the year, after numerous downgrades were punished by investors. MPG is down more than 48% for the year to date. Sky TV has had a similar path this year, as increasing competition for both content and subscribers has seen the company’s share price fall more than 35%, while embattled Fletcher Building has fallen 27% as downgrades from its building and interiors business pushed the share price down.

Globally, the US has been boosted by the proposed tax plan, which passed through the house this week. The three main indexes have seen exceptional gains and hit multiple record highs during the course of the year. The Dow Jones recorded its 70th record close of the year early this week, which is a record in itself.

The tax legislation changes in the US have given way to gains in other regions across the world as well. In Europe, geo political tensions have seen a rocky ride for investors, however the Pan-European Stoxx 600 has still logged an 8% gain for the year to date. In the UK, Brexit issues have kept investors on their toes and meant a rollercoaster ride for investors as well. Brexit worries will continue to be a feature for the UK as negotiations continue. However, the FTSE 100 index has still managed to rise more than 6% for the year to date.

In 2018, looks set to be as exciting as 2017 has been. Global central banks are embarking on an unprecedented unwinding of the huge monetary stimulus packages enacted in the wake of the Global Financial Crisis. Further political uncertainty for Europe as Italian elections draw near while eyes will be firmly on the developments in North Korea.

The US will also remain front of mind in terms of politics, with Donald Trump entering his second year in office after his big win at the end of the year getting his tax reform plan over the line. In addition to this, the Federal Reserve gets a new Chair in February, and although Jerome Powell is seen as being sympathetic to the current regime, it is still a change from the last five years under Janet Yellen.