INSIGHTS

MARKET SUMMARY: 21 TO 25 MAY

Research Team, 25 May 2018

It was another busy week on the corporate front in both New Zealand and Australia, as the local reporting season ramped up. After reaching a record high last week, the NZX 50 met weakness at the start of the week after a number of results dragged on the index.

Comvita advised the market that its discussions with an unknown third party are now at an end after they couldn't agree on a price. Comvita’s Director’s unanimously agreed to withdraw from the process. The share price is at a nine-month low and has retreated 30% this year.

A2 Milk’s full year 2018 revenue and margin guidance fell short of the market’s high expectations. The company saw selling pressure in subsequent days, however, started to see some respite of late as value begins to emerge following the recent period of weakness.

Fonterra announced it has increased its 2017/18 forecast Farmgate Milk Price by 20 cents to $6.75, thanks to improved farming conditions in March and April after a challenging spring and summer. The company also announced its opening forecast for the 2018/19 season at $7.00. However, the company downgraded its earnings guidance for the full year on the back of lower than expected volumes and higher input costs. The company has cut its dividend guidance for the full year to 15 – 20 cents per share down from 25 – 30 cents. The share price tumbled 6.79%.

On Wednesday, Steel and Tube downgraded their earnings guidance for the full year and announced that it had breached a debt covenant. A decision on the payment of a final dividend for FY18 will be made in line with the company’s dividend policy, however the dividend is at risk. The share price dropped 18.18%.

Meanwhile, the month of April saw annual net migration down from its high point a year ago, mainly because more non-New Zealand citizens are leaving the country. New Zealand saw 67,000 net migrants for the April year, lower than the net migration of 71,900 a year early. The gain for April was made up of 130,500 migrant arrivals and 63,400 departures. The number of arrivals increased, therefore it was a larger increase in departures that drove the migration level down.

On Tuesday, President Donald Trump told reporters he wasn’t happy with the progress of US China trade talks and hinted that his summit with North Korea leader Kim Jong Un may not go ahead as planned. The Federal Reserve’s minutes from its May monetary-policy meeting showed that officials were planning to raise interest rates for a second time this year in June, confirming market expectations. However the increase in rates could bring more pain for emerging markets. The Fed is moving closer to ending its ‘accommodative’ strategy of helping the US economy with low interest rates and after six increases in interest rates since 2016, and at least two more expected this year, the central bank could reach what is considered a neutral level.

In Italy, political turmoil is adding to the euro’s plight after Giuseppe Conte, 53, was named as Italy’s new Prime Minister. However, plans of a coalition between the anti-establishment 5-Star and the far-right League to form a government seemed to stall, after President Sergio Mattrella sought further consultations over their proposed Prime Minister. Conte is a political novice and is relatively unknown in Italian politics. Investors cast doubt over the coalition, after announcing big spending plans, which have spooked markets, as Italian bond yields are at their highest in more than a year.