Research Team, 6 April 2018

Volatility continues to be the constant at the moment with markets again buffeted by the ongoing threat of trade wars. A cautious tone has gripped markets and resulted in wild swings in either direction across the globe.

Trade wars have dominated headlines over the last few weeks, stemming from comments from US President Donald Trump. Targeted tariffs on imports from China to the US have been reciprocated with China proposing tariffs on goods imported from the US. Investors are playing this cautiously at this stage, but are weighing up the impact these could have on businesses. There is also concern that other nations might jump on the band wagon and begin implementing protectionist policies.

Last week marked the end of the first quarter of 2018 and it was a negative one for global markets. The return of volatility was a key theme for the quarter as global interest rates began to rise and inflation fears escalated. The S&P 500 in the US finished the quarter down 1.2%, a relatively small decline when we consider the movements during this time. The broad US index hit an all time high in January, however was down more than 10% at its lowest point during the quarter. This was the first negative quarter for the index since the third quarter of 2015, ending a 15 month winning streak. Despite the late sell down of the tech sector, it was the top performer for the quarter while telecoms was the weakest.

The FTSE 100 fell 8.3% over the March quarter, its biggest quarterly decline since 2011. A stronger British pound has weighed on the index which is dominated by multinationals that have high earnings from offshore. Brexit uncertainty continues to weigh on the index as well. The Stoxx 600 in Europe fell 4.7% over the quarter, which has been dominated by political uncertainty. The European Central Bank has also started to talk about monetary tightening as economic growth for the region continues to gain momentum. The Australian ASX 200 fell 5.0% for the quarter as it was impacted by global movements, while the Nikkei in Japan declined 5.8%.

The NZ index held up comparatively well, although still logged a decline for the quarter of 0.9%. Positive newsflow from the February reporting season boosted the local bourse and insulated it from the sharp movements seen by global markets. Market darling a2 Milk was the top performer over the quarter rising more than 50% after an exceptional result. There has been some selling of late following news that Nestle has released an A2 protein infant formula product in China, however this has been shrugged off and the share price has again rallied. Peer Synlait Milk also had an incredible quarter following a solid result and further positive news, while retirement village operator Summerset rose more than 26% following on from a positive result.

Metro Performance Glass was the weakest over the quarter down 26.0% and was closely followed by Fletcher building, down 20.7%. Fletcher Building saw sharp declines following the realisation of losses from its Buildings and Interiors business and the subsequent cut of its interim dividend. Sky TV was another laggard of the quarter, dropping 18.5% after a poor result. The company continues to face increasing competition from digital subscription services for content and customers.

The big event on local calendars was the latest Global Dairy Trade auction. The headline GDT price index fell 0.6% this week, its fourth consecutive decline. However, whole milk powder prices increased 1.6% and this is a key product group for determining the forecast payout from Fonterra. The overall decline was attributed to a small decline in skim milk powder and a steep decline of 7.0% for anhydrous milk fat, the third largest product group by volume. The forecast farmgate milk price was upgraded to $6.55 from $6.40 by Fonterra in March.

The global reporting season is on the horizon and we will be watching results closely. Expectations are for another solid quarter with expectations for overall earnings growth to be over 17%. If this comes to fruition, it will be the strongest quarter since 2011. The US jobs report will be released this weekend and will be of interest as the labour market continues to tighten. The January report sparked inflationary fears after wage growth was stronger than expected, although this moderated somewhat in February.