Research Team, 2 February 2018

It has been a mixed week for investors, with a heap of data to sort through and plenty to keep us on the edge of our seats. The global reporting season ramped up this week and the local reporting season got underway, giving us plenty of corporate news flow to process.

This week also marked the end of January 2018, and what mixed month that has been. The NZX50 ended its 12 month winning streak and logged a 1.18% decline for the month. The Australian index also logged a loss however, it was not as steep as that seen by the kiwi bourse, down just 0.45%.

In the UK, the FTSE 100 ended down 2.02% while the broader European index, the Stoxx 600 logged its biggest monthly gain since October, rising 1.6%. In the US, January was particularly strong. The Dow Jones powered through two key thresholds and, along with the S&P 500, gained more than 5% for its best month since March 2016. The Nasdaq had an even stronger month, up 7.36% for its best monthly performance since October 2015.

Markets started the week on shaky ground as the US led a global sell down. The US 10 year treasuries yield spiked to a multi year high early in the week as concerns mounted over inflation expectations. However, fears abated following the Federal Reserve meeting held mid-week and markets again rallied.

President Donald Trump’s State of the Union address also had markets on edge. However, the rhetoric remained presidential, much like his inauguration speech, and markets breathed a collective sigh of relief. Trump mentioned increased infrastructure spending, tightening immigration policies, healthcare pricing regulation and trade policies during his address.

Australian CPI data was released, missing expectations, but allaying fears of a rate hike from the Reserve Bank of Australia occurring too soon. On a quarterly basis, prices increased 0.6% while on an annualised basis there was a 1.9% increase. Both were 10 basis points below expectations. The rise in inflation was largely driven by increasing fuel prices, up 10.4% for the year. The Australian dollar eased a bit following the data release.

The US reporting season has been one of the key drivers behind the US markets strength over the past year with expectations continuing to be high. It was a busy week for investors with 125 companies from the S&P 500 reporting. So far, the reporting season has been very positive with more than 80% of companies beating expectations for earnings.

One of the key reports was Microsoft. The company has had a solid run up to its result, with the share price up around 11% for January. Expectations were high from investors and the company delivered, beating expectations across all business segments on both earnings and sales. However, there was some price weakness following the result as the old adage, “Buy the rumour, sell the news” came to fruition.

The Australasian reporting season is now underway, albeit slowly. Over the course of the next few weeks we will be watching for earnings from companies to justify current valuations, as despite a fall in January, share prices remain elevated. Expectations are high with seven out of 10 top 50 companies expected to see profits rise, while four of every 10 are expected to show double digit earnings growth. We will also be looking for evidence that the economic landscape is changing. The current rhetoric suggests that the NZ economy may be heading for a soft patch and this could be reflected in the outlook statements for local companies.

Other events coming up to keep an eye on include, the US non farm payrolls, due out Saturday morning NZ time. We will be watching to see if the US job market continues to show signs of strength. Over in Europe, the release of the PMI’s will give a clear picture on how the European economy is tracking. The Reserve Bank of Australia’s meeting next week is very unlikely to see a change to the interest rate with the market predicting a 99.1% chance of it holding. However, as usual the accompanying commentary will be of interest for how the RBA sees the economy.