THE WEEK AHEAD: PRE-ELECTION ECONOMIC & FISCAL UPDATE
Mark Lister, 17 August 2020
Global shares were higher last week, with markets in the US, UK and Europe all posting weekly gains of between 0.6% and 1.2%. The S&P 500 in the US came within 0.2% of February’s record high last Wednesday, before slipping later in the week. The index is still up 8.8% since the end of June, and 4.4% higher than where it began the year.
Australian shares were strong, rising 2.0% last week as the reporting season began, while the local NZX 50 bucked the trend and fell 1.7%. COVID-19 re-emerged and restrictions were reinstated across the country. The top NZX 50 movers last week were NZX Limited (+3.4%), Vital Healthcare (+2.3%) and a2 Milk (+2.1%), while Tourism Holdings (-8.6%), Heartland Group (-7.9%) and Meridian Energy (-7.8%) lagged.
The global earnings season is winding down, although a few results are still to come. Some of the major retailers are reporting this week, including Walmart, Home Depot and Target, while NVIDIA and Alibaba are also due to announce earnings.
As the earnings season draws to a close, volatility could return as markets focus on the lack of agreement on a US support package from Congress. Democrats initially sought a $3 trillion support package, but Senate Republicans have only been willing to offer $1 trillion. Congress is now in recess, with the Senate likely gone until September 8 and the House planning no votes until September 14. The Democratic National Convention will be held in Milwaukee, Wisconsin this week. Kamala Harris, Joe Biden’s running mate, will give her acceptance speech on Wednesday and Biden will officially accept the nomination on Thursday.
President Trump has issued executive orders to provide extra benefits to unemployed Americans, and he has also deferred the collection of payroll taxes for many income groups. However, these measures won't offset the $600 weekly payment which expired at the end of July.
The focus for investors and market watchers across New Zealand and Australia this week will be the corporate reporting season. This began across last week, but it really hits its peak over the coming five days, especially here in New Zealand. Some of the domestic highlights will be earnings releases from Summerset, Mercury NZ, a2 Milk, Fletcher Building, Auckland Airport and EBOS Group. In addition, index heavyweight (and one of the year’s top performers) Fisher & Paykel Healthcare holds an annual meeting. Across the Tasman, results will be forthcoming from the likes of Lendlease, BHP Billiton, Brambles, CSL and Wesfarmers.
Another key local event will be the latest dairy auction results early on Wednesday. The results of another global dairy trade (GDT) auction will be released early on Wednesday morning, and the farming sector will be hoping to see a better outcome than a fortnight ago. At the last auction the headline GDT index fell 5.1%, which was the biggest decline since 2019. Prices are down 7.1% since the beginning of 2020 and are 5.5% lower than 12 months ago. The fall in whole milk powder (a key export product for New Zealand) was also much larger than anticipated, with prices declining 7.5% at the last auction.
The Pre-election Economic and Fiscal Update from The Treasury on Thursday will also be of note. A highlight of the local economic week will be the Pre-Election Economic and Fiscal Update (PREFU), which is due on Thursday at 1:00pm. The Treasury publishes forecasts for the Government’s finances and the economy twice a year, and in an election year a PREFU must be released between 20 and 30 working days before the election. The Crown Accounts for the 11 months to the end of May were better than expected, with a higher GST take suggesting annual tax revenue will be stronger than forecast. However, recent developments will have thrown significant uncertainty into the outlook and will likely make some of these numbers look dated already.