Craigs Investment Partners Research Team, 5 July 2019

The NZX 50 advanced 3.8% for the month of June and 6.7% during the second quarter. The local market is now 19.2% higher for the year, as record low interest rates and falling bond yields drive investors to equities paying reliable dividends.

The Global Dairy Trade (GDT) slump continued this week, with the headline index falling 0.4%. This marks the fourth consecutive drop for the GDT index, following on from 11 consecutive rises earlier in the year. The price of butter fell 4.8% and butter milk powder tumbled 11.9%. Anhydrous milk fat and cheddar fell by 1.9% and 1.5%, respectively. Skim milk powder was up 3.2% while the price of whole milk powder was unchanged. Dairy stocks were mixed following the auction. The a2 Milk Company ended up 2.5% at $15.07, but Synlait Milk logged one of the steepest declines with a 2.7% drop to $9.05, while Fonterra closed at an all-time low at $3.75.

Across the Tasman, the Reserve Bank of Australia (RBA) cut its Official Cash Rate to 1.0%, the lowest level on record, as it tries to boost the economy enough to drive down unemployment and lift wages. RBA Governor Philip Lowe cut rates 25 basis points for a second consecutive month, its first back-to-back cut in interest rates since 2012. Shares in all of the major banks fell following the announcement, however, ANZ was the only bank to pass on the cut in full to its customers. National Australia Bank, Commonwealth Bank of Australia and Westpac did not pass on the full amount.

Staying in Australia, the price of iron ore (Australia’s biggest export) surged above US$123 a ton this week in response to supply concerns and increasing Chinese steel production. Iron ore has soared 60% this year after a dam disaster in Brazil and bad weather in Australia hurt mine production and underpinned forecasts for a global shortfall. The value of monthly iron ore shipments surged to A$8.8bn, the highest on record. That was up almost 17% from April and 65% from a year earlier. It has also helped company profits and government coffers, allowing Prime Minister Scott Morrison’s administration to forecast the first budget surplus in over a decade in 2020.

Global sharemarkets were lifted at the start of the week after the United States and China agreed to restart talks at the G20 summit, leading investors to bet that a breakthrough between the world’s two largest economies would jumpstart global economic growth. Some investors, however, questioned the lack of detail in the agreement. The S&P 500 closed at an all-time high for a third straight day on Wednesday. The Dow Jones also closed at a record.

In economic releases, private payrolls in the US increased by 102,000 in June, weaker than expectations for 135,000. The disappointing data strengthens the Federal Reserve’s case for lowering rates at its monetary policy meeting at the end of the month. Last month, the central bank opened the door to easier monetary policy by stating it will “act as appropriate” to maintain the current economic expansion.

Trade tensions turned to Europe this week after the US proposed tariffs on US$4bn worth of European Union (EU) goods, amidst an ongoing dispute over aircraft subsidies. The US Trade Representative’s office released a list of products, including olives, Italian cheese and Scotch whiskey, that could be hit with new levies - in addition to those introduced in April.

Meanwhile, EU leaders agreed to nominate International Monetary Fund Chief Christine Lagarde as the new head of the European Central Bank. Eurozone bond yields tumbled on the news, and defensive stocks rallied as investors placed bets that Lagarde will be a fan of low interest rates.