Mark Lister, 6 July 2020

The third quarter of the year has started in an upbeat manner, with most markets finishing June in a buoyant mood and that strength continuing during the first few days of July. The US led the charge, with equities responding positively to a better than expected monthly jobs report on Thursday, ahead of the Independence Day holiday. The S&P 500 was up 4.0% for the week, while the Nasdaq was stronger still with a weekly gain of 4.6%. The tech-heavy index is sitting at record highs and is up 13.8% so far in 2020.

Other markets were also very solid, with solid economic indicators out of China helping fuel the rally. The local NZX 50 was up 3.9%, while Australian shares were 2.7% higher. As has been the case all year, UK and European equities lagged. The top NZX 50 movers last week were Air New Zealand (+13.2%), Stride Property Group (+10.0%) and a2 Milk (+8.7%), while Vista Group (-9.0%), Tourism Holdings (-5.0%) and Napier Port (-3.5%) lagged. The strongest US sectors were communication services (+5.6%), real estate (+5.6%) and materials (+5.5%), while financials (+1.6%), energy (+2.2%) and consumer staples (+3.2%) were the weakest.

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With the monthly jobs report behind us, there isn’t much on the US calendar until the quarterly reporting season begins next week. Investors are eagerly awaiting evidence of just how much corporate earnings have been hit by the virus outbreak and associated lockdowns, with forecasts suggesting aggregate S&P 500 earnings have fallen 43.8% during the June quarter (compared with the same period a year ago).

Markets will focus on news of the COVID-19 outbreak, as well as weekly jobless claims to gauge whether the worsening situation in places like Texas and Florida has hit the labour market yet. Outside of the US, the easing of restrictions will continue with the UK set to reopen pubs, restaurants and hotels this week.

Closer to home, economic highlights will include the June quarter QSBO and flash ANZ Business Outlook for July. The New Zealand Institute of Economic Research (NZIER) will release its Quarterly Survey of Business Opinion (QSBO) on Tuesday at 10:00am. While the QSBO is always useful and interesting, Thursday’s release of the preliminary July ANZ Business Outlook could prove a little more timely. Headline business confidence has increased steadily over the past two months (May and June) and is now well above the dire levels from April, which were the worst in more than 30 years. At the same time, current confidence measures are still a long way below historic averages and reflective of a severe recession.

The local market will also look towards latest dairy auction results. The latest global dairy trade (GDT) auction results will be released early on Wednesday morning. At the last auction, these were better than expected with the headline GDT index increasing 1.9% and whole milk powder prices up 2.2%. That put the GDT index 9.1% below where it began the year in US dollar terms, but more modestly down when currency movements were accounted for. This resilience has seen some banks revise milk price forecasts for the 2020/21 season higher, with Westpac last month lifting its estimate from $6.30 to $6.50. Fonterra has an opening forecast range of $5.40 to $6.90, which is below the $7.10 to $7.30 range (the highest in six years) that is expected to prevail during the 2019/20 season.

The Reserve Bank of Australia meets on Tuesday afternoon and while no policy changes are expected, an updated commentary on how the central bank views the economy will be of interest. The RBA has a cash rate of 0.25%, and a three-year yield target of the same level. These are not expected to change on Tuesday, with the RBA having slowed the pace of its bond buying programme as financial markets have been more stable.