INSIGHTS

MARKET SUMMARY: 15 TO 19 OCTOBER

Research Team, 19 October 2018

Last week we saw the return of volatility, something that has been missing from the market for some time. The back end of last week was a bit of a rollercoaster ride, with the local NZX 50 benchmark down 3.6 per cent on Thursday, but rebounding 1.4 per cent on Friday (likely taking a lead from the US futures, which were pointing to a rebound on the US market). Friday’s rebound broke a nine-day losing streak for the NZX 50, although only Thursday saw a fall of more than 1 per cent throughout that nine-day stretch.

This week so far the local market has been slightly more stable and, despite the falls our local bourse has seen of late, it is still currently up over 6 per cent for the year to date (as at the time of writing).

The week’s key event on the local economic calendar was the release of the Consumer Price Index (CPI) data for the September 2018 quarter. The third quarter inflation data was stronger than expected, with the headline CPI rising 0.9 per cent quarter on quarter. This saw annual inflation pick up to 1.9 per cent, up from 1.5 per cent in the second quarter. The non-tradables inflation data was as expected with tradables inflation being slightly higher. The New Zealand dollar rose to a two-week high on the back of the data release, as the stronger than expected inflation data lowered traders' expectations for a rate cut.

Other economic data of note included the Global Dairy Trade auction with an overall drop in prices of 0.3 per cent, marking five consecutive periods of declines.

In company news, Restaurant Brands, the operator of well-known brands including KFC and Pizza Hut, announced first half results that were broadly in line with expectations together with a partial takeover offer by Finaccess Capital at a 24 per cent premium to the share price.

Port of Tauranga also held its AGM releasing its first quarter trading update, which was modestly below market expectations. Of some concern was soft container volumes, which are currently being offset by strong log volumes.

Australian shares rebounded this week, with the benchmark ASX 200 rising throughout the week after Monday’s performance saw the benchmark sit at six-month lows.

In Australian economic data, the Reserve Bank of Australia’s latest six-monthly Financial Stability Review saw the central bank warn that the risks of international shocks hitting Australia’s otherwise resilient financial system were growing. The nation’s overall financial strength has improved, with the major banks’ capital positions up approximately 50 per cent from a decade earlier and tighter mortgage lending standards reducing risk. International risks that the RBA expressed concern about included the potential impact of global shocks, citing an escalation of the trade war, slower Chinese growth, contagion risks from emerging market economies and the escalation of banking and sovereign debt problems in Italy.

Seen as a major driver for global markets, third-quarter earnings season is now well under way with 56 of the S&P 500’s constituents having reported thus far. Very impressive earnings growth has been a key theme for equity markets in 2018, and this looks set to continue as 70 per cent of companies that have reported have beaten revenue estimates while 90 per cent have beaten earnings expectations.

Starting the long list of corporates reporting were financial heavyweights, Citigroup, JP Morgan, Wells Fargo, Morgan Stanley and Goldman Sachs which all produced strong third quarter results. Healthcare companies, UnitedHealth and Johnson & Johnson posted better-than-expected earnings. Johnson & Johnson also raised its full year guidance for the third consecutive quarter, as demand for its cancer drugs and immune disorder treatments rose strongly. Of note, streaming giant, Netflix also reported a strong result, beating earnings estimates and revealing a strong pick up in subscriber numbers. IBM however, disappointed the market by missing its third quarter revenue estimates. Prior to this, IBM had sustained three consecutive quarters of revenue growth.

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