Research Team, 5 October 2018

It was a mixed week for global markets this week following a slew of stronger-than-expected US economic data, easing concerns over the Italian budget and ongoing Brexit uncertainty. The Dow Jones reached record highs, and Japanese shares touched a 27-year high on a weaker yen. Australia’s banking Royal Commission weighed on the financial sector across the ditch, while Chinese markets were closed for a week-long public holiday. Back home, the NZX 50 eased off recent highs, with little in the way of company news and economic releases.

Monday marked the beginning of the traditionally strong December quarter. Since 1950, the S&P 500 has risen 4.1% on average during the final three months of the year (well ahead of the 1.5% average for the other three quarters) and returns have been positive 79% of the time. Mid-term elections take place in the US in November, and fourth quarter returns are usually even stronger during mid-term election years.

US markets started the week off on a positive note on news of Canada joining a trade deal with the United States. The new trade deal is set to replace the current North American Free Trade Agreement (NAFTA) and is expected to be named the United States-Mexico-Canada Agreement, or ‘USMCA’ for short. US President Donald Trump heralded the agreement as "truly historic”. While NAFTA had an indefinite lifespan, USMCA will expire in 16 years. The three countries are expected to sign the deal by end of November, before outgoing Mexican President Enrique Pena Nieto leaves office. Each country must write legislation, which then must be approved by congress before USMCA comes into force. If ratified, most of the agreement’s provisions are expected to take effect in 2020.

US indices also got a boost following a slew of stronger-than-expected US economic data. The ISM non-manufacturing index, which measures activity in the US services sector, rose to 61.6 for the month, its highest level since the index was created in 2008. Economists had expected the index to reach 58. Meanwhile, the yield on the 10-year Treasury note jumped to 3.18%, its highest since 2011. On a separate note, private payrolls increased by 230,000 in September, the most since February, beating expectations of a gain of 185,000.

Crude oil prices edged higher again this week, rising to a four-year high as markets adjust to the prospect of tighter supply once the US sanctions against Iran kicks in next month. Investors fear there may not be enough spare production capacity in the short-term to meet demand. The US benchmark for crude rose to US$76.41 a barrel on Wednesday, its highest since November 2014.

Back home, the latest Global Dairy Trade (GDT) auction took place this week and saw dairy prices drop for an eleventh time out of the past 13 auctions. The headline index fell 1.9%, with butter milk powder, rennet casein and lactose the only products to see a gain at the event. Whole milk powder fell 1.2% as supply outweighed demand, while skim milk powder was down 0.3%. Butter marked the biggest decline, falling 5.9%, while anhydrous milk fat slipped 4.4%.

Across the ditch, Australia’s wealth manager AMP saw its share price decline on news that financial regulator ASIC was preparing to launch the first Royal Commission-related legal action against the company for charging clients fees for no service.

Aston Martin made its debut on the London Stock Exchange on Wednesday, however, ended the session down 4.7% on concerns the company will struggle to deliver an ambitious roll-out of new models. The company has a market cap of £4.1bn. Meanwhile, Boris Johnson was cheered at the Conservative Party's annual conference, interpreted by some observers as a potential leadership challenge to Prime Minister Theresa May. Johnson said that the country ought to "chuck" May's so-called Chequers plan, which he said was "politically humiliating."