INSIGHTS

MARKET SUMMARY: 22 TO 26 JANUARY

Research Team, 26 January 2018

It has been a busy week for markets. A mass of economic data releases, a strong start to the US corporate reporting season and a number of central bank meetings have kept investors on their toes.

The local NZX 50 benchmark has seen mixed trading for the week, and is currently down around 0.9% year to date. It’s been a similar story in Australia, with the ASX 200 also in negative territory year-to-date. This has been in contrast to the strong gains we’ve seen out of the US and also Europe so far in 2018.

US shares have continued to hit fresh record highs on the back of solid economic data, a good start to reporting season, and tax cut optimism. The S&P 500 has been very strong this year, having posted the best start to a year since 2003.

The week started with US senators striking a deal to lift a three-day government shutdown, to try to end the fighting between the Democrats and the Republicans over immigration and border security. President Donald Trump imposed new tariffs on imported solar-energy components and washing machines, in a bid to help manufacturers in the US. The President also attended the two-day World Economic Forum in Davos, Switzerland this week, where global leaders meet to try to improve the state of the world.

The US fourth quarter 2017 reporting season has ramped up this week and so far it has been another strong quarter. Of the 20% of companies within the S&P 500 that have reported so far, 90% have exceeded revenue estimates while 83% have exceeded earnings per share estimates. Earnings growth for the fourth quarter is currently sitting at 8.6%. This is comfortably ahead of market expectations of 6.1%. Although this represents a slowdown from the strong growth we saw in the first and second quarters (up 14% and 11% respectively), 2017 is on track to producing the strongest earnings growth since 2011. This has been driven by a combination of solid revenue growth and margin expansion. Aside from a general pickup in global economic growth, the depreciation of the US dollar and a recovery in oil prices both provided tailwinds to revenue growth during the quarter.

Domestically the week’s key event on the economic calendar was the release of the Consumer Price Index (CPI) data for the December quarter from the Department of Statistics. The December reading showed a quarterly increase of +0.1% and an annual increase of +1.6%. This surprised the market as well as the Reserve Bank which had been guiding for a quarterly rise of +0.3% and a +1.8% annual increase. According to the Department of Statistics, higher petrol prices, air fares as well as housing-related costs were offset by lower prices for vegetables, new cars, and a range of household goods. The lighter inflation reading saw the NZ dollar weaken.

In local corporate news-flow, Z Energy announced that its FY18 earnings guidance has been revised lower due to the recent pipeline outages and rising crude oil prices. Mercury Energy upgraded its 2018 earnings guidance from $515m to $530m, due to expected increases in hydro generation. Also retailer, Kathmandu Holdings, gave an improved trading update for its first half net profit and sales forecasts.

In Australia, ResMed reported a strong second quarter result, which came in ahead of market expectations. The result was driven by another quarter of strong mask sales following recent product launches, together with good cost control.

There are a number of central bank events coming up over the next month or so, and this week we saw the Bank of Japan maintain its current aggressive monetary policy stance by a majority vote of 8-1, as expected. At the time of writing we are awaiting the European Central Bank policy meeting outcome. Looking ahead, the first Fed meeting of the year takes place on January 30/31. Locally, the next Reserve Bank of New Zealand meeting is scheduled for February 8 and with inflation being slow low there is no expectation of a rate hike.