INSIGHTS

MARKET SUMMARY: 4 TO 8 DECEMBER

Libby Sharp, 8 December 2017

December is traditionally a positive time of year for markets, with analysts classifying it as the Santa Claus Rally. Since 1950, the S&P 500 has returned a positive performance in December 75% of the time and has averaged a 1.62% gain. It is the top performing month on average for the US, with November the second best with an average return of 1.55% and April the third with an average return of 1.45%. With numerous economic indicators pointing to a continuation of growth and corporate earnings continuing to show growth, there is every chance that 2017 could continue with this Christmas tradition.

However, markets have had a rocky start to the month. Global markets have been under pressure from a tech sector sell off to start the month. The tech sector has been the top performer for the year to date, driven by strong earnings and increasing technologies. So unsurprisingly we are seeing investors take profits.

New Zealand is no exception to either phenomenon. Traditionally December is a strong month for the NZX50, logging a monthly decline only four times since 2001. However, the start of December has been lacklustre, with investors looking to take profits after eleven months of gains.

The latest Global Dairy Trade auction held this week broke the four auction losing streak by eking out a 0.4% gain. Dairy prices have been under significant pressure over the last couple of months, pulling back some 11% since the highs in June. However, there has been a significant rebound from the lows of last year, and the dairy sector is far more upbeat.

The recent weakness in the Global dairy price has seen analysts questioning Fonterra’s farmgate forecast payout, and this week Fonterra announced that they were trimming this from $6.75 to $6.40 for the 2017/18 season. Although this sounds like a significant drop, it is important to put it into context. This is the highest the farmgate milk price has been since the exceptional 2013/14 year. It is also above what DairyNZ says is the breakeven price for farmers, which is just above $5.00.

Also capturing our attention has been the last trickle of the results from the November reporting season. This is a quiet reporting season, however it has not been without its surprises. Overall, the reporting season has been reasonably upbeat, however, there have been some shocks that have stolen headlines and taken investor attention.

Tegel has been the shocker for the week, reporting yet another disappointing result with earnings decreasing from the prior comparable period. Although the company maintained guidance, the market is sceptical that it will be able to meet these after such a weak first half. The share price fell more than 14% following the result.

Across the Tasman, there has been plenty of economic data to process. Firstly, the Reserve Bank of Australia confirmed that they will be keeping rates on hold again. This was not at all a surprise and expectations are that this is likely to remain the norm for another 12 months at least. The Central Bank acknowledged that the economy was continuing to grow, but weak inflation and low wages remain a headwind.

Later in the week, the Australian third quarter GDP figure was released and this missed expectations on both a quarterly and a yearly basis. For the September quarter, economic growth was 0.6%, just below the 0.7% expected and below the June quarter reading. For the year, GDP grew 2.8%, a marked increase on the second quarter reading but still below expectations. The Australian dollar fell sharply following this announcement.

Next week the big piece of data will be the result of the Federal Reserve meeting. The market is pricing in a more than 98% chance that there will be a rate hike, so this is almost a foregone conclusion. However, what will be watched is the path for future rate hikes. September’s commentary hinted that there could be as many as three more next year, and we will be looking for confirmation of this.