INSIGHTS

MARKET SUMMARY: 28 MAY TO 1 JUNE

Research Team, 1 June 2018

On the global front geopolitical tensions have dominated markets this week, while locally we have been focussed on the reporting season as well as a number of important data points.

Italy’s political instability has been the cause of much of the volatility in markets recently. This week things intensified as the coalition between the two populist parties hit a stumbling block when President Sergio Mattarella vetoed the choice of Minister for the economy as he is a vocal Eurosceptic and would jeopardise Italy’s place in the eurozone. A care taker Prime Minister, Carlo Cottarelli who worked in the International Monetary Fund, has been appointed to ensure a budget is approved however, it is thought that the cabinet he has assembled is unlikely to be approved. Later in the week, it appears that the two populist parties have decided to try again to form a government, with the League’s leader Matteo Salvini gaining in popularity. It is certainly something to keep on our radars over the coming months and remains a threat to the Eurozone, with Italians registering the lowest satisfaction with the currency and trade union.

In yet another tale of political instability from Europe, Spanish Prime Minister Mariano Rajoy is facing a vote of no confidence at the end of the week among cries of corruption. Opposition leader Pedro Sanchez and his Socialist party are pushing for the vote and it seems to be gaining in momentum. If successful, Sanchez will take the helm of the nation and it will mean the end of six years of centre-right rule. It is another “wait and see” moment for Europe and the EU.

There has been further development on the Trump front this week, with the US confirming that they still intend to impose trade tariffs on Chinese imports over the use of US intellectual property. The move was unexpected after there appeared to be a mutual understanding between the two countries that any trade war would be put on hold while negotiations took place.

In another about face, the US North Korean Summit appears to be back on despite being called off last week. There have been plenty of meetings between the two sides to try and keep the summit alive and appears to be back on track, at this stage.

The key driver for the local market over the last couple of weeks has been reporting season. The May reporting season, although much quieter than the February one, sees results from some of our largest companies.

Mainfreight has been one of the key results from this week, reporting its full year results for 2018. The company celebrated its 50th year with another record result. The company announced a 26 cents share final dividend, in line with expectations. The New Zealand business was again the strongest performer, offsetting slightly weaker than expected contributions from Europe and Australia, while the US business had a strong second half for the year. Management didn’t give any specifics for FY19 however the overall outlook commentary was positive. The company was rewarded with share price gains, rising 1.2% the day of the result.

Fisher & Paykel Healthcare was another key result for the week. The company saw strong growth in its hospitals division however saw a continued slowdown of growth in the OSA mask division due to increasing competition. FPH has developed a new mask which is thought to hit markets late in FY19. The company’s share price slipped following the result.

The Reserve Bank of New Zealand’s Financial stability review showed that the dairy industry is one of the key areas of concern. Mycoplasma Bovis has been a talking point with the government announcing plans to eradicate the disease with a 10 year plan that would see 152,000 cows culled with a cost of over $800 million. However, this is not the only reason the industry is on watch, with high indebtedness being a cause for concern. Other concerns for New Zealand’s economy include high household debt with new home owners and developers the most at risk with interest rates on the rise.