Craigs Investment Partners Research Team, 6 September 2019

The local NZX 50 index reached another all-time high this week, despite little on the domestic calendar with the reporting season now behind us, and ongoing concerns for the global growth outlook. At the time of writing, the benchmark index is up 4.8% for the quarter, and up 25.0% year-to-date. Elsewhere, geopolitical issues remained in focus, namely Hong Kong, Britain and Italy, while the US and China agreed to meet in October for another round of trade negotiations.

Dairy prices have continued to decline at the latest Global Dairy Trade auction. The headline index fell 0.4%, easing for the seventh time in the past eight auctions. Whole milk powder slippped 0.8%, anhydrous milk fat declined 1.5% and the price of cheddar slipped 0.8%. Rennet Casein marked the biggest gain, up 4.6%, butter milk powder rose 3.4% while the price of butter was unchanged.

The same day, Fonterra affirmed its current forecast payout for the 2020 season. The dairy co-op maintained the current forecast range of $6.25 to $7.25 per kg of milk solids, and the Advanced Rate schedule, which is set off $6.75 per kg of milk solids. The company said it is keeping an eye on international trade tensions, geopolitical risks and the continuing volatility in the price of dairy fat. Fonterra is scheduled to announce its final 2018/19 Farmgate Milk Price as part of its annual result on September 12.

Across the Tasman, the Reserve Bank of Australia (RBA) kept its cash rate unchanged at 1.0%, following two 25 basis point cuts in June and July. At its September meeting, the bank maintained a wait-and-see approach, however, markets are pricing in another two rate cuts by the end of the year. RBA Governor Philip Lowe said Australia’s economic growth over the first half of 2019 had been “lower than earlier expected” with household consumption affected by a long period of low income growth and declining housing prices and turnover. Separately, the Australian dollar dipped to a ten-year low on weak retail sales figures. Australia also recorded a current account surplus of $5.9bn, its first surplus in 44 years, thanks to its iron ore and coal exports.

Investor sentiment was lifted on news that Hong Kong leader Carrie Lam was withdrawing an extradition bill that has triggered months of protests in the city. The proposed bill, introduced in April, would have allowed criminal suspects to be extradited to mainland China. Opposition was widespread, claiming it would expose Hong Kongers to unfair trials and violent treatment. They also argued that the bill would give China greater influence over Hong Kong and could be used to target activists and journalists. She said the protests had "shocked and saddened the Hong Kong people" and the violence was "pushing Hong Kong towards a highly dangerous situation." On Monday, Ms Lam was heard on leaked audio tapes blaming herself for starting the political crisis, saying it was unforgivable of her to cause such havoc.

Politics dominated the headlines in Europe this week. The British pound rose on Wednesday after the British parliament voted to prevent Prime Minister Boris Johnson taking Britain out of the EU without a deal. In Italy, Prime Minister Giuseppe Conte unveiled a new cabinet that united the anti-establishment 5-Star Movement and the centre-left Democratic part, an unlikely coalition that is expected to improve ties with the European Union. Meanwhile, Christine Lagarde, who will likely be the European Central Bank’s (ECB) next president, sparked some doubt over the scale of an ECB stimulus package expected this week. Lagarde said highly accommodative monetary policy for a prolonged period was necessary but she added that the bank needed to be mindful of negative side-effects of such tools.