Mark Lister, 11 May 2020

It was a strong week for equity markets across the board. Sentiment improved as investor focus turned to the partial reopening of many countries and economies, which should see activity improve substantially over the coming weeks. The S&P 500 in the US was up 3.5%, the FTSE 100 in the UK gained 3.0% and the European Stoxx 600 increased by a more modest 1.0%. Antipodean markets were similarly buoyant, with the ASX 200 in Australia rising 2.8% and the NZX 50 gaining 2.4%. The top NZX 50 mover last week was Pushpay with a stunning 53.1% gain which sees it move into top spot (by some margin) on a year-to-date performance basis. Tourism Holdings (+25.0%) and Kathmandu (+18.0%) were the next best performers, while Refining NZ (-5.4%), Fletcher Building (-5.0%) and Auckland Airport (-4.7%) were the weakest.

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The S&P 500 is still 13.5% below its all-time high, while the NZX 50 is 11.4% down from its peak. However, it is somewhat baffling to many investors why we have seen such a strong rebound over the last seven weeks, given that in late March most indices were down 30-35% from the levels reached in February.

We would put much of this down to an exceptionally swift and strong response to this crisis from both central banks and governments. This has exceeded anything we’ve seen in the past, and it has happened much more quickly and with more force than many had expected. The aggressive loosening of monetary policy (via interest rate cuts as well as QE) has also increased the relative appeal of equities, which continue to offer a more attractive return profile than bonds.

Nonetheless, after this strong bounce markets are now pricing a faster return to normality than many believe is likely. Time will tell whether this proves optimistic. The global earnings season is largely behind us now, although there are a handful of results still to come this week. Beyond that, Federal Reserve Fed Chair Jerome Powell speaks via webcast on Wednesday, and markets will be looking for any fresh insights on the economy or Fed policy. Numerous economic reports are also due, including inflation and retail sales in the US, and monthly activity indicators in China.

It’s a very big week locally, with the RBNZ releasing its OCR review and MPS on Wednesday. The Reserve Bank of New Zealand (RBNZ) will announce the outcome of its Official Cash Rate (OCR) decision, as well as release its latest Monetary Policy Statement (MPS) on Wednesday at 2:00pm. Some economists are expecting an expansion of the QE programme, a target interest rate on Government Bonds, or more specific forward guidance. It will also be interesting to see if the RBNZ mentions the prospect of a negative OCR as a future tool. This has been discussed in some quarters during recent weeks, and the Governor hasn’t ruled it out when questioned on the matter.

The 2020 Budget is also scheduled for Thursday. The forecasts will undoubtedly reflect significantly wider fiscal deficits over the next few years, with much higher debt levels and increasing bond issuance as a result. The exact path of such things will be a function of the economic outlook presented in the Budget. We might also see a healthy dose of new spending, with local economists suggesting we might see $10-15bn of new fiscal initiatives.

This week we should also see monthly migration figures, the latest REINZ housing market report, and the flash estimate of the May ANZ Business Outlook survey. The Real Estate Institute of New Zealand (REINZ) will release its April housing market report this week, probably on Thursday morning. The March report showed a good start to the month, then a sudden drop when COVID-19 lockdowns kicked in and stopped it dead in its tracks. The number of properties sold across New Zealand decreased 4.8% compared to the same month in 2019, making for the lowest March volumes in nine years.