Research Team, 22 March 2019

It was a mixed week for markets as the Federal Reserve kept interest rates unchanged, and as UK Prime Minister Theresa May formally asked the European Union for a three-month extension to Brexit. Locally, the NZX 50 hit a record on Tuesday but fell from its highs later in the week. 

Listed milk processors Synlait Milk and Fonterra both reported interim results on Wednesday. Fonterra announced a return to profitability reporting a net profit after tax of $80m, although normalised earnings of $323m were down 29% on the same period last year. Shares traded down 2.5% following the result. 
The market had anticipated a strong result from Synlait but investors were left disappointed. The company reported a half year net profit after tax of $37.3m, down 9.6% on the same period last year, with lower margins on infant sales being the major contributing factor. Synlait remains on track to deliver 41000-45000 MT of infant formula for FY19 with significantly higher volumes predicted for the second half of the year, driven by strong growth of the a2 Milk Company’s infant formula.
Off the main index, Metro Performance Glass downgraded EBIT guidance to $25m for FY19, marking the second downgrade the company has made this year. The downgrade was driven by a weaker than expected performance out of Australia. At the time of writing, shares were down more than 16% for the week. 

Global dairy commodity prices continued to tick higher, with the Global Dairy Trade price index climbing 1.9%.

The headline index is now 22% higher since the November 2018 lows and the highest since September 2017. Key product group whole milk powder continued to grind higher, up 4.0%. Rennet casein and butter posted the most dramatic moves, up 9.7% and 9.3% respectively. While at the other end of the spectrum, the price of anhydrous milk fat dropped 3.1%, skim milk powder fell 2.4% and lactose slipped by 1.0%.

The Federal Reserve announced its decision to leave interest rates unchanged following a two-day policy meeting, saying economic growth has slowed.

As widely expected, the Fed decided to maintain the target range for the federal funds rate at 2.25% – 2.5% and indicated interest rates are likely to remain unchanged for the remainder of the year. The central bank also noted overall inflation has declined due to lower energy prices but said inflation of products other than food and energy remain near 2%. The Fed reiterated that it will be patient as it determines future adjustments to interest rates to support sustained economic expansion, strong labour market conditions and inflation near 2%.
Fed Chair Jerome Powell said the US economy is in ‘good shape’ and that the outlook is ‘positive’. Still, he said there are ongoing risks, including those related to Britain’s exit from the European Union, US trade talks with China, and even the outlook for the US economy, which he said the Fed is watching closely. Benchmark US indexes moved higher after the statement and Treasury yields dropped to the lowest since early January. 

Staying in the US, President Donald Trump said on Wednesday negotiations on its trade dispute with China are coming along nicely.

However, Trump warned that he would not lift tariffs on Chinese goods until he is sure the country is abiding by the terms of the potential agreement. US Trade representative Robert Lightihzer and Treasury Secretary Steven Mnuchin will travel to China this week for more talks, with the goal of closing a deal by the end of April. 

Turning to the UK, Prime Minister Theresa May formally asked the EU for a three-month extension to Brexit.

May said that she deeply regretted her decision to seek a Brexit extension from the European Union and she urged MP’s, who have twice previously rejected her plan, to back her now. She said ‘this delay is a matter of great personal regret for me’ and that she was not prepared to delay Brexit any further than June 30.