INSIGHTS

MARKET SUMMARY: 7 TO 11 MAY

Research Team, 11 May 2018

It has been a mixed week for investors following Trump's decision to pull out of the Iran nuclear deal and his rhetoric to impose sanctions on the oil-rich nation. The NZX 50 has steadily gained, rising to its highest level in six weeks, however volume has been light. We have seen volatility in the share price of a number of companies, namely A2 Milk and Fletcher Building, ahead of the rebalancing of the MSCI Index, as investors try and predict which companies will be included and who will get kicked out. The global reporting season saw 73% beating earnings estimates and 76% reporting positive sales surprises. However, as the global reporting season comes to an end, New Zealand and Australia’s starts to pick up.

The new Reserve Bank Governor Adrian Orr kept the official cash rate at 1.75% and said the direction of the next move is equally balanced and could be up or down. Orr commented economic growth and employment remain close to sustainable levels but inflation is still below the central bank’s target point of 2%. The monetary policy statement outlined that spending and investment by households and government, is expected to support economic growth. For the first time, the central bank must officially take employment into consideration after signing a new policy agreement to support maximum levels of sustainable growth within the economy. He noted, employment growth is expected to continue to outpace growth in the labour force, leading to further tightening in the labour market.  The Reserve Bank’s forecast now predicts the OCR to rise 1.9% in December 2019, compared to a prior forecast of June. Orr said the monetary policy may need to be adjusted as new data or information becomes available. The New Zealand dollar fell after the announcement.

Across the Taman, accounting software company Xero reported a smaller annual loss on growth on Thursday thanks to a rise in customer numbers. The company’s net loss narrowed to $27.8 million in the year ending March, down from a loss of $69.1 million, a year earlier. Total revenue for the year rose around 38% to $406.6 million. Its share price was at an all-time high this week, however dropped as much as 2.0% once the results were announced. Earlier in the week, the company benefited from a number of positive analyst research notes highlighting the company’s long-term growth potential.

The Australian financial sector continued to face headwinds with AMP seeing resignations of three of its non-executive directors. Commonwealth Bank announced it will pay A$25 million to settle legal costs with the corporate regulator over bank bill swap rates. Locally, Westpac posted a $482m profit and said it was confident in its systems and processes and will cooperate fully with regulators, in the wake of the royal commission’s investigations in Australia. Meanwhile, Australian Treasurer Scott Morrison announced Australia will return to a surplus a year earlier than forecast.

Oil prices have hit their highest level since 2014 following the announcement that the US has pulled out of the Iran nuclear deal and would impose sanctions on the oil producing nation. The reinstatement of sanctions will tighten oil supplies, pushing the price higher. The withdrawal has increased political tensions in the Middle East and Europe as it puts the US at odds with its allies. However, global markets have avoided a sell down which normally accompanies this kind of political unrest as US President Donald Trump appeared to open the door to negotiations.

Meanwhile, the US April jobs report saw weaker than expected job growth, and the unemployment rate fell to its lowest level in over 17 years. 164,000 jobs were added for the month of April but was well short of estimates of 192,000. The unemployment rate fell to 3.9% after holding at 4.1% for the past six months and is at its lowest level since December 2000. The unemployment rate drop was primarily due to the decrease in the size of the labour force, which shrank by 236,000 people. In terms of wage growth, average hourly earnings rose an annualised 2.6%, slightly down from the previous month and a little less than expected.