A damning report into tech problems with the NZ sharemarket last year, plus Apple booms on iPhone 12 sales.

US markets rebound overnight after yesterday’s jitters
Small businesses still hiring despite limited revenue growth
Federal Reserve warns the US economy is still a long way from recovery
Apple, Tesla and Facebook report strong earnings results

The NZX has been left red-faced after a damning report from the Financial Markets Authority raised serious questions about the market operator’s management capabilities and systems, particularly over the integrity of its IT infrastructure.

Multiple technology failures last year saw the exchange unable to cope with excessive trading volumes during the peak of the market sell-off in March as well as a DDoS (Distributed Denial of Service) attack in August that left its website, used for market announcements, offline from almost a week.

The FMA review found NZX did not have adequate technology capabilities across its people, processes and platform to comply with market operator obligations, its systems did not meet regulatory requirements for the proper functioning of markets and its management exhibited a culture of resistance to act on systemic issues.

FMA Chief Executive Rob Everett said a range of market participants provided feedback to the review that the NZX had repeatedly failed to accept responsibility for the issues addressed in the report and were slow to act.

“The feedback from market participants mirrors our own observations and is a major concern that needs to be addressed by the NZX board and its executive. The failure to properly consider the broader ecosystem in which the exchange operates, and to fully engage with industry feedback and concerns, were contributing factors to the volume-related issues” Everett said.

Specifically, the FMA noted in its report multiple stakeholders provided feedback that the NZX rarely accepts fault and is not upfront and open when things go wrong, has a lack of awareness of (and lack of concern about) downstream operational impacts and resulting cost implications for market participants as a result of its systems failures and lacks a sense of urgency.

“A situation where participants feel NZX is not responsive to their concerns creates the real risk of distrustful and tense relationships at a time when growing trust and confidence in our capital markets is crucial.”

Perhaps the most damning aspect of the report is the FMA’s revelation that in 2019 the NZX knew its systems capacity was not keeping pace with the increase in on-market trading volumes resulting from the growing popularity of online trading sites such as Sharesies, yet nothing was done to address the issue.

On the DDoS attacks, the FMA review found the NZX’s crisis management planning was basic and largely inadequate. It said such an attack was foreseeable given their increasing frequency globally, but there was little evidence the NZX had prepared or planned for such an occurrence.

One broker spoken to by Newsroom, who didn’t wish to be named, said he wasn’t surprised by the report.

“The NZX has a weak culture and it has consistently employed under-skilled people right across its organisation for years.”

In a brief statement NZX Chief Executive Mark Peterson said it accepted it did not meet the high standards it sets for itself in key areas of technology resources.

“We also agree that improvements are required, and we are committed to delivering these improvements via an action plan that will be agreed with the FMA.”

Peterson last year had his contract extended to 2024.

US markets rebound overnight after yesterday’s jitters

There was nowhere for investors to hide yesterday as the New Zealand sharemarket followed Wall Street’s lead, suffering its biggest one day fall since October.

Comments from Fed chair Jerome Powell that the US economy was still a long way from recovery unnerved investors, while earnings results from several market heavyweights in some cases fell short of expectations (more below).

The S&P500 closed down 2.6 percent at 3751.

The NZX50 followed, falling 287 points (2.2 percent) to 13,086 all but wiping out the market’s gains in January.

Shares falling more than 4 percent yesterday included Pushpay down 6 percent, THL and NZX both fell 4 percent to $2.32 and $2.04 respectively, while Meridian Energy, which earlier in the month had been the subject of huge buying interest from global fund Blackrock, was among the day’s biggest decliners falling 7 percent to $7.21.

The company also confirmed the CEO of Meridian Energy Australia and Powershop Australia, Jason Stein, would step down. Meridian said that due to the ongoing impacts of Covid on travel and personal arrangements, Stein has been unable to relocate with his family from New Zealand to Australia, and so would leave next month.

Overnight, US equity markets have rebounded strongly as investors decided yesterday’s selling may have been overdone. The S&P500 was up more than 2 percent at 3828 (at 7am NZ) after better-than-forecast weekly jobless claims and data that showed a fairly robust economic expansion in the fourth quarter. All 11 industry groups in the benchmark stock index were trading higher.

Small businesses still hiring despite limited revenue growth

A new report has found that while the country’s small businesses continue to grow, in some cases exceeding their pre-pandemic levels, the post-lockdown surge in revenue appears to be in decline.

Figures supplied by online accounting company Xero showed jobs provided by its customers were up 2.8 percent in December and are up 3.2 percent on a year earlier.

Job numbers were also 6.4 percent above their pre-pandemic level in March last year.

Across the regions, jobs were up 14.8 percent in Hawkes Bay compared with March 2020, up 13.3 percent in Northland and up 11.3 percent in Wellington but down 8.1 percent in tourism-dependent Queenstown.

However, of concern, revenue growth slowed to 1.4 percent in December from the 2.7 percent annual pace in November and 9.1 percent in September.

Revenue through small construction businesses was up 19 percent on a year earlier, up 16 percent in professional services, and up 11 percent in real estate but down 14 percent in hospitality. Retail revenue was down 2 percent, below that of Christmas the previous year.

NZ small businesses are faring significantly better than those in Australia, where revenue was down 2.7 percent on a year earlier, and the United Kingdom, down 10.3 percent.

Ironically, the report caused Xero’s share price to weaken on the ASX, ending yesterday down 6.3 percent at A$132.01.

Federal Reserve warns the US economy is still a long way from recovery

Despite the US Federal Reserve leaving interest rates unchanged yesterday, investors headed for the exits after a downbeat assessment of the US economy unnerved sentiment – resulting in the market’s biggest one-day fall since October.

The Fed maintained its accommodative stance, with interest rates expected to stay at current record lows for the foreseeable future, to facilitate the recovery. The central bank said it wasn’t concerned about inflationary pressures building.

While US inflation has been stubbornly low for many years, Fed chairman Jerome Powell said there could be a burst of spending activity when the economy reopens, which might push up consumer prices, but the Fed expects these effects to be transient.

But it was Powell’s assessment of the US economy that created something of a reality check for investors.

Powell said the US economy was a “a long way” from recovery and would require ongoing support for some time yet – which appeared to catch investors by surprise.

Key to the recovery would be the vaccine rollout which he emphasised was critical for allowing the economy to return to normal.

Meanwhile, the multi-month improvements in the US labour market have turned sour: In December, the economy lost 140,000 jobs, concentrated in the hardest-hit sectors.

Apple, Tesla and Facebook report strong earnings results

Strong iPhone sales pushed Apple’s total quarterly revenue to a record US$111.4 billion — well above the $103.3 billion Wall Street analysts had predicted.

iPhone sales grew more than 17 percent year-over-year to nearly US$65.6 billion, compared with the US$59.8 billion analysts had expected. Apple executives last quarter had said they expected single-digit percentage growth in iPhone sales during the December quarter.

Morgan Stanley analysts told investors ahead of the report that in its view, the iPhone 12 has been Apple’s most successful product launch in the past five years.

Tesla capped its breakout year with a record profit that still fell short of analysts’ forecasts, sending its shares 6 percent lower in after-hours trading.

The electric car maker reported fourth quarter adjusted income of US$903 million more than double its earnings from a year ago but still short of the US$1.1 billion forecast by analysts. While revenues were up 31 percent for the year, its net income of US$270 million came in well short of the US$780 million estimated by Wall Street.

Still, the results capped a year of strong growth for the company, despite the problems associated with Covid-19 pandemic:

Facebook enjoyed another strong quarter even as the company faces growing scrutiny from regulators over its acquisitions and from critics for the role its platform may have played in spreading lies about the US presidential election.

The company posted a profit of $11.2 billion in the final three months of last year, an increase of more than 50 percent from the year prior. Facebook’s revenue rose 33 percent to roughly $28 billion during the quarter, showing the durability of its core advertising business despite the pandemic.

When combining Facebook’s various apps, including Instagram, Messenger and WhatsApp, the company reported 3.3 billion monthly active users, an increase of 14 percent year-over-year.

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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