Research Team, 23 March 2018

Investors across the globe have been on tenterhooks this week, in the lead up to the Federal Reserve meeting in the US. Recent market volatility has continued to weigh while geopolitical tensions and a continuation of trade issues have also dented investor sentiment.

The key focus for investors this week was the US Federal Reserve meeting. It was the first with Jerome Powell at the helm and the Fed chose to raise rates by 25 basis points, taking the Fed funds rate to a range of 1.50% to 1.75%. This was widely expected with the market pricing in a more than 99% chance that rates would increase.

The reason markets were on edge in the lead up to the meeting was that it included the projections and expected path for the Fed to take over the remainder of the year and into 2019. For 2018, the Fed reaffirmed its previous guidance that there would be three rate hikes this year, however they upgraded guidance for 2019. The Fed now expects to raise rates another three times in 2019, which will take the Fed Funds rate to 2.75% to 3.00%. 10-year treasury yields spiked again while markets moved lower following the announcement.

On the local front, the dairy sector has captured the attention of the market with corporate results from Synlait and Fonterra as well as the latest Global Dairy auction. The Global Dairy auction saw a 1.2% decrease in the index price, its third decline in a row. The driver behind the decline was a sharp fall in the price of skim milk powder. Whole milk powder prices held up well, managing to eke out a 0.1% gain. Most other products on offer remained flat.

On the same day as the Dairy auction, Fonterra released its half year result. It was a mixed result which saw the dairy giant record a $348 million loss. There were a number of contributing factors with the Beingmate impairment charge as well as the fine from Danone key to the loss. The company announced a cut to its dividend while CEO Theo Spierings also announced he would be stepping down. However, there were a number of positives for the company as well, with the forecast farmgate milk price being upped to $6.55 from $6.40 for the current season. The company also reaffirmed its full year guidance and had strong growth during the second quarter.

Synlait Milk’s half year result could not have been a more different story. The company produced a record half year net profit, driven by higher production levels as well as stronger sales from high margin products. The company also managed to reduce its debt significantly over the period while also expanding its supply through new site purchases. The share price rocketed to a record high following the result, with its share price closing the day up more than 14%.

In other corporate news, Kathmandu also published its result, although this was somewhat swept to the side as the company also announced that it would acquire Ozob Footwear. The acquisition was funded through a share placement which raised $40 million.

The RBNZ was also in focus this week although the outcome seemed like a foregone conclusion. The central bank kept rates on hold, with interim governor Grant Spencer reiterating rhetoric from the previous couple of decisions. Risks remain elevated and it is likely monetary policy will remain accommodative for a considerable period. Next week, Adrian Orr will take over as the new Governor of the RBNZ.

Political tensions continue to be present although have been somewhat muted this week by economic data. Concerns remain over the revolving door in the White House as well as the protectionist policies US President Donald Trump has implemented already and what he is planning on doing next.

Russian President Vladimir Putin was re-elected in a landslide victory however, the nation remains in hot water with the UK government over allegations the country poisoned a former spy and his daughter with a nerve agent and in the process harmed numerous bystanders. The nerve agent has been traced back to Russia and the country has refused to answer the please explain issued by the British Government. It will remain on our watchlists, as British allies have made a statement of solidarity with Theresa May.