INSIGHTS

MARKET SUMMARY: 3 TO 7 DECEMBER

Research Team, 7 December 2018

It’s been another rollercoaster ride for markets this week, after the US and China agreed to a 90-day trade truce following the working dinner between Donald Trump and Xi Jinping at the conclusion of the G20 meeting on Saturday in Argentina.

Monday saw investors cheer the halt on tariffs but the optimism quickly faded, with Wall Street tumbling more than 3% on Tuesday. Trump said trade negotiations with China have already started and was trying to determine whether "a real deal with China is actually possible." He added that if talks fail, he will be known as a "tariff man". Trump agreed to leave the current 10% tariffs in place on more than US$200bn worth of Chinese goods. However, this could prove to be a temporary reprieve, with the tariffs to be raised to 25% if an agreement cannot be reached. US markets were closed Wednesday, as the nation mourned former President, George H W Bush.

Markets across the globe have also been rattled by the flattening of the US Treasury yield curve, with the yield on the three-year US Treasury note surpassing its five-year counterpart on Monday.

As we head into the historically strong December month, the local NZX 50 is on track for its seventh straight annual gain. The benchmark remains up 4.6% this year, but is well short of last year’s 22.0% rise.

A bidding war erupted for Trade Me this week after private US equity firm, Hellman & Friedman, made an indicative, non-binding proposal to acquire 100% of the shares in the company for $6.45 per share. The offer was slightly higher than the $6.40 offer Apax Partners announced two weeks ago. Both offers are non-binding and indicative pending completion of due diligence and other conditions.

Apple grower, Scales, said it expects operating earnings to be at the top end, or slightly exceed, the current guidance range of $58m - $65m. Meanwhile, Z Energy said it welcomed the government’s announcement that the retail fuel market has been selected as the subject of the first Commerce Commission market study.

Dairy prices got a lift at the latest Global Dairy Trade auction, following seven consecutive falls. The headline index gained 2.2%, with whole milk powder rising 2.5%. Butter milk powder saw the most dramatic move, surging 16.9%, while cheddar was the only product to mark a decline, falling 2.2%.

Fonterra lowered its forecast farmgate milk price range from $6.25 - $6.50 to $6.00-6.30 per kg of milk solids, a second downgrade for the 2019 year. Fonterra Chairman, John Monaghan, blamed the cut on strong global milk supply relative to demand, which has also driven down the GDT in recent months. The company said demand from China and Asia remains strong however noted geopolitical disruption is impacting demand from countries that traditionally buy a lot of fat products.

Across the Tasman, the Reserve Bank of Australia kept its interest rate at 1.5%, as widely expected, with Governor Philip Lowe commenting "the low level of interest rates is continuing to support the Australian economy." The economy grew more slowly than expected in the third quarter, amid broad weakness in construction, retail and the farming sector. Gross domestic product expanded 0.3% in the three months through September from the prior quarter, and 2.8% from a year earlier. Economists had expected 0.6% growth on quarter and a 3.3% year-on-year increase. Government spending on infrastructure, rising gas exports, and improving business investment are helping maintain growth. But looking into 2019, economic activity is likely to be affected by a slowdown in consumer spending and falling house prices.

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