INSIGHTS

MARKET SUMMARY: 14 TO 18 MAY

Research Team, 18 May 2018

There was plenty of economic data and corporate news flow to digest this week, both locally and offshore. The NZX 50 reached record highs while the reshuffle of the MSCI index also grabbed headlines. The government announced the 2018 Budget on Thursday, the first for Grant Robertson as Minister of Finance. Geopolitical tensions and violence continued to erupt in the Middle East, and the second round of US-China trade negotiations resumed. Interest rates surged in the US and uncertainty over Italy’s next government was the focus in Europe.

The NZX 50 pulled back on Wednesday after a nine day winning streak and four straight record breaking highs, with a number of companies in the index trading at all-time highs. The highly anticipated reshuffle of the MSCI Main Global Index saw the addition of a2 Milk while Mercury was removed.  Mercury is now in the MSCI Global Small Cap Index where Restaurant Brands, Synlait Milk and Tourism Holdings were also included.

On Wednesday, a2 Milk released a trading update and FY18 outlook. The company is anticipating revenue in the range of $900 - $920 million for the 12 months ended June 2018. It expects a gross margin flat on the prior year and a lift in marketing spend. The guidance missed expectations and saw a sell-off as the share price tumbled as much as 21% in intraday trading, however recovered from its lowest levels. Production partner Synlait Milk, which has seen a stellar run recently, was pulled down with a2 Milk after the update. ATM and SML remain the best performing companies on the NZX 50 this year, up 40% and 43% respectively.  

Meanwhile, the New Zealand dollar fell to US$0.685 as the US 10-year Treasury yield inched higher boosting the strength of the greenback. Fears of the Mycoplasma bovis disease and its potential to wreak havoc on the dairy industry dented the NZ dollar.

Dairy product prices rose 1.9% at the latest Global Dairy Trade auction. This contrasted with the auction two weeks ago when prices dropped 1.1%. Key product group whole milk powder slightly underperformed, up 0.2%, while anhydrous milk fat surged 5.8%, marking the biggest gains. The biggest fall was seen by Rennet Casein which dropped by 6.1%. The recent fall in the NZD will also be good news for dairy farmers.

The 10-year Treasury yield pushed toward 3.1% as retail results and solid economic data boosted confidence in the American economy, as investors weighed the prospect for higher Federal Reserve rates. The 10-year Treasury yield is important given its role as a benchmark for global borrowing costs and acts as a barometer for mortgage rates and other financial instruments. Gold fell below US$1,300 an ounce for the first time since December.

US and China were back in the spotlight as they underwent the second round of negotiations. Trump tweeted he was working with Chinese President Xi Jinping to give Chinese telecommunications equipment maker ZTE 'a way to get back into business, fast', after the Chinese company was found to have illegally shipped equipment to Iran. However, US lawmakers hit back rejecting any plan made by Trump to ease restrictions on ZTE, calling the company a security threat and vowed not to abandon legislation clamping down on the company.

It is unclear if the summit between President Trump and Kim Jong Un on the denuclearisation of North Korea will go ahead after Pyongyang threatened to pull out of the unprecedented meeting. The cancellation of the summit, the first between the US and North Korean leaders, would be a major blow to what would be the biggest diplomatic achievement of Trump’s presidency.

Meanwhile, over in Europe, the focus remains on the political situation in Italy. Italy is now headed towards a coalition government between the ‘Five Star Movement’ and the ‘League’ parties after two months of paralysis since the inconclusive general election. This coalition would be a huge blow for the European Union as these parties are both prominent Eurosceptic parties and would be seen a win for the populist movement.