THE WEEK AHEAD: OFFICIAL CASH RATE REVIEW LOCAL HIGHLIGHT
Mark Lister, 22 June 2020
Global equity markets rebounded last week, winning back some (but not all) of the losses from the previous week. Investors continue to grapple with positive impacts of economies reopening, as well as the increased risk of a virus flare up that goes with it. Reports of Apple temporarily shutting stores in four US states as case numbers spiked saw investors return to the safety of ‘stay at home’ stocks late in the week.
While China closes parts of Beijing amid a virus resurgence, other parts of the world will continue to ease lockdowns in the days ahead. Spain will lift restrictions this week, France will reopen schools and the Eiffel Tower, while JP Morgan will begin bringing traders back to its Manhattan trading floor.
Apple holds its annual Worldwide Developers Conference, where it might announce a shift away from Intel chips to its own processors. Another closely watched corporate event will be the latest quarterly earnings report from retail heavyweight Nike. The Federal Reserve releases the results of its annual stress test on US banks, while flash PMIs for June will be one of the first indicators to show how this month is tracking. The Japan flash PMI will be released first, at 12:30pm NZ time, before the corresponding measures for Europe and the US are out that evening. May flash PMIs improved from April’s disastrous levels, but still pointed to an ongoing contraction in economic activity across most parts of the world. Markets are expecting further improvements in June, although these are still expected to remain in contractionary territory. Australia will also release its flash PMI for June on Tuesday at 11:00 NZ time.
Wednesday’s Official Cash Rate review will be the local highlight. While no policy changes are expected from the Reserve Bank of New Zealand (RBNZ), the commentary will be interesting. The RBNZ isn’t likely to adjust the OCR, and it will remain unchanged at its record low of 0.25%. There is potential for the RBNZ to announce an increase in its large-scale asset purchase (LSAP) program, which it is likely to have to do at some point. However, this is more likely to occur in August to coincide with the release of the next Monetary Policy Statement. If policy settings do remain unchanged, the focus will be on the RBNZ commentary and any updated view of the economic outlook. The country has moved to level one much more quickly than the RBNZ baseline scenario had suggested, which is a major positive. Dairy prices have also been resilient, while global risk sentiment has been solid and financial markets are somewhere between stable and buoyant (depending on what you’re following). We have also seen significant falls in borrowing costs for homeowners, which has eased monetary conditions for many households. However, the NZ dollar has been stronger than expected, making exporters less competitive, which is something the RBNZ is unlikely to be happy about.
The local sharemarket had a positive week last week, with the NZX 50 up 3.2%. The top movers on the index last week were Pushpay (+14.1%), Port of Tauranga (+13.0%) and Kathmandu (+11.7%). The laggards were Tourism Holdings (-14.3%), Heartland Group (-6.9%) and Air New Zealand (-6.8%). The strongest S&P 500 sectors were Healthcare (+3.1%), technology (+2.8%) and consumer staples (+2.4%), while utilities (-2.4%), energy (-1.0%) and real estate (-0.8%) lagged.
As we approach the halfway point of the year, the top returning NZX 50 company has been Pushpay, with a stunning gain of 105.0%. a2 Milk and Fisher & Paykel Healthcare are the next best performers with returns of 35.4% and 29.3% respectively. Chorus is the only other company to deliver a double-digit increase, having gained 23.4%. In the US, the best performing S&P 500 sector in 2020 has been technology with a gain of 11.3%. Consumer discretionary is next with a 5.4% rise (largely driven by Amazon), while communication services (+1.1%) is the only other sector in positive territory. At the other end of the spectrum, the energy sector has been hammered 35.1%, financials are down 22.4% and the industrials sector has fallen 15.2%.