INSIGHTS

MARKET SUMMARY: 30 JULY TO 3 AUGUST

Research Team, 3 August 2018

There has certainly been a lot of economic data and corporate news flow for investors to digest over the past week. This was a big week for central banks with the Bank of Japan, the Federal Reserve and Bank of England all holding policy meetings. Global reporting season also remains at the forefront with a slew of corporate heavyweights releasing results this week. Trade war tensions have also returned to the global market. Locally, NZ business confidence has hit a ten-year low.

NZ business confidence continued to fall in July, reaching its lowest level since May 2008 according to the latest ANZ Business Outlook Survey. Business confidence dropped to a net 45% of respondents reporting they expect general business conditions to deteriorate in the year ahead. This compared to a net of 39% last month. A key theme was that businesses are battling in the face of higher input costs and declining profitability, with the retail sector particularly downbeat. On a related note, farmer confidence fell to a six-year low amid uncertainty over government policies. A net 39% of farmers were pessimistic about the general economic outlook for the year ahead, up from a net 34% six months ago.

New Zealand’s unemployment rate rose to 4.5% for the quarter ending June, up from 4.4% at the end of March. The figure was slightly above forecasts of 4.4%. Wage inflation in the private sector rose a modest 0.6% or 2.1% for the year, largely due to the government raising the minimum wage to $16.50 an hour in April. Public sector wage inflation rose only 0.3%, or a 1.4% annual gain, however mounting pressure from strike action across the country may spur a lift.

Three of the world's biggest central banks convened this week, keeping markets on their toes. Japan’s central bank surprised the market early in the week by keeping its current monetary policy in place and saying it would make its policy framework more flexible for Japanese government bonds. The bank maintained its target for the 10-year government bond yield at around 0% and the short-term interest rate at -0.1%. The decision comes after speculation that the Japanese bank is actively discussing changes to its policies, which caused the government bond prices to fall steeply. The Bank of Japan also acknowledged that it will take more time than expected to achieve its inflation target of 2%.

In the US, the Federal Reserve kept the Fed Funds rate unchanged at 1.75% to 2% and signalled its intention to continue hiking interest rates against the backdrop of a strong US economy. Markets have pencilled in two further rate hikes this year. At the time of writing, we await the Bank of England policy meeting, with markets seeing a good chance that the Bank will raise its policy rate from the current 0.5%.

Trade war tensions between the US and China were reignited mid-week after The White House said it would consider more than doubling its proposed tariffs on US$200bn of Chinese goods from 10% to 25%. A final decision on the rate to be applied is not expected until September at the earliest, so ongoing market volatility in regards to trade wars is likely to remain.

Finally, the global reporting season has also remained a key focus this week, with Apple, Caterpillar, Tesla, Procter & Gamble, Shire, Pfizer and FMC just some of the heavyweight names to report. Of note, Apple’s strong third quarter result beat estimates, thanks to the resilient demand for its iPhone X and other high priced products. The tech giant is now on the brink of becoming the world’s first trillion dollar company. The market also cheered on the Tesla result, after the electric car company reported a better than expected result, after a string of negative news flow in recent months.

With over two thirds of the S&P 500 having now reported results, 73% have exceeded sales forecasts and 85% have beaten earnings expectations.