Business & Investing: Investors’ nerves over inflation risks hold many markets flat, Plus NZ GDP figures out this week
Global equity markets were little changed last week as nervous investors continued to weigh growing fears about inflation risks with central bank commitments to look through inflationary spikes. So far it seems the latter has the upper hand for now, though the former seems to have tempered investors’ enthusiasm to push stock prices higher in the short term.
However, volatility remains surprisingly low with the closely watched volatility index in the US falling to a two year low last week of 15.15, despite inflation spiking above 5 percent in May, its highest level since August 2008.
On the local market, the NZX50 eked out a small gain of 0.4 percent to close at 12,550, seemingly unable to maintain the momentum of last week’s 2.6 percent advance as it continues to remain largely in a holding pattern. In fact, the NZX50’s close on Friday was just 30 points above where it was on April 12.
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Mercury Energy fell almost 8 percent following an earnings downgrade, Infratil shares eased 1.7 percent for the week, while SkyCity shares initially fell on news of regulatory breaches in Australia that are now subject to investigation and then bounced back following an earnings upgrade (see below).
Investors will be closely watching this week’s first quarter GDP figure due out on Thursday for an updated reading on the economy’s recent performance.
On commodity markets, Brent Crude oil futures added a further 1.4 percent for the week to close at a 2-year high of US$72.60 a barrel, while gold eased for a second week declining 0.6 percent to US$1879 an ounce as investors opted to lock in recent gains.
Bitcoin continues to languish falling 0.5 percent for the week to US$35,600.
US Treasuries recorded their best week in a year, as investors largely shrugged off a 13-year high in the inflation rate and raised government debt. The benchmark yield on the 10-year US Treasury note fell by 0.103 percentage points to 1.45 percent, its largest weekly decline since June last year.
The NZ dollar ended the week lower, falling 1.2 percent against the greenback to 71.27 US cents.
WEEK IN REVIEW
SkyCity Entertainment shares came under pressure last week after accusations surfaced that its Adelaide operations may have breached Australia’s counter-terrorism and anti-money laundering legislation. The company said the Australian Transaction Reports and Analysis Centre Regulatory Operations Team (AUSTRAC) had identified “potential serious non-compliance” by SkyCity Adelaide with the Australian Anti-Money Laundering (AML) and Counter-Terrorism Financing Act 2006 and Anti-Money Laundering and Counter-Terrorism Financing (CTF) Rules Instrument 2007.
AUSTRAC is responsible for preventing, detecting and responding to criminal abuse of the financial system. The potential serious non-compliance included concerns relating to ongoing customer due diligence, adopting and maintaining an AML/CTF programme and related compliance issues. SkyCity shares fell as much as 8 percent on the news.
However, later in the week the company upgraded its earnings outlook by more than 30 percent pushing its shares higher and recovering most of their earlier losses. SkyCity Entertainment shares ended the week down 1.2 percent at $3.60.
Mercury Energy reported the failure of its Kawerau geothermal power station had resulted in the loss of 100 megawatts of baseload generation for several months. Notification of the breakdown accompanied a profit downgrade reducing expected pre-tax earnings to $460 million, an 11 percent reduction on its previously announced guidance of $520m for the year ending June. The company said the downgrade was due to an expected reduction in full-year hydro generation of 200 gigawatt hours because of low rainfall into its Taupō catchment, the unplanned outage at its Kawerau geothermal plant on Monday, wholesale electricity market spot prices averaging about $285 per megawatt hour in Auckland and higher associated earnings from Tilt Renewables. Mercury shares fell almost 8 percent last week to close at $6.30
The iconic Tasman Paper Mill in Kawerau announced it would cease operations at the end of the month following a decision by Norwegian owners Norske Skog to close the mill, resulting in the loss of around 160 jobs. All workers will be paid their full redundancy entitlements bringing to an end 66 years of newsprint production. The company blamed falling newsprint sales globally for the mill’s closure while pointing out that following reduced production volumes in recent weeks it had been more profitable to trade electricity supplied at a low fixed price on the wholesale electricity market, where prices have been consistently over $200 per megawatt hour for months. At the time of the mill’s establishment in 1955 the existing plant was capable of churning out 150,000 tonnes of newsprint a year. The company said that output had since fallen to a fraction of that amount.
Sanford announced the resignation of CFO Katherine Turner who will leave the company on September 30 after three years in the role and two months after the commencement of new CEO Peter Reidie. The seafood exporter last month reported a net profit for the six months to March 31 of $16.2 million, largely comprised of a $13.3m gain on the sale of two non-core properties. The result was 15 percent below the $19m it reported in the previous financial year. Revenue fell 5 percent to $233.5m. Sanford said challenging conditions continued during the latest six months due to the impact of the Covid-19 pandemic on the demand for seafood and on international supply chains.
Precinct Properties revealed a revaluation gain of $284 million across its 15-building portfolio, a 9.4 percent increase in book value. The valuation increase coincided with the one year anniversary of the opening of its flagship Commercial Bay complex in downtown Auckland. The valuation, which included a $148.5m gain during the six months ended December 31, saw Precinct’s overall portfolio across the Auckland and Wellington CBDs, increase to about $3.3 billion at June 30. Chief executive Scott Pritchard said the valuations were a significant improvement on the same time last year when the adverse impacts of the Covid-19 pandemic had largely offset the positive movements of the financial year.
The Retirement Village Residents Association of New Zealand (RVRANZ) welcomed the retirement commissioner Jane Wrightson’s recommendation that a review of legislation governing the sector be undertaken. RVRANZ president Peter Carr said it was a sensible and professional approach on the need for a level playing field. The Retirement Villages Association, which represents the operators, had opposed such a review, arguing Wrightson has placed undue weight on the dissatisfaction of a small number of residents. The two listed heavyweights in the sector Ryman Healthcare and Summerset have both seen their share prices under pressure recently. Ryman shares are currently down 16 percent year to date while Summerset shares were also down 4 percent at the end of last month.
Catalist, a new exchange designed for small and medium-sized businesses, will open to the public later this month, providing a new platform for companies to trade shares and raise capital. The online investment marketplace will allow investors to buy and sell financial products in regular auctions rather than with continuous trading. Chief executive Colin Magee said the platform would provide a stepping stone for businesses that want to raise capital or provide liquidity for shareholders but are too small to list on the NZX. The stock exchange operator however, unsuccessfully attempted a similar offering with its NZAX platform which has since been folded into its main board, though Magee said the fees were not significantly less than a listing on the main board which is why he believes the venture wasn’t successful.
The Climate Change Commission said pricing farm animals’ emissions will be critical to reducing the agriculture sector’s greenhouse gas profile. The Commission’s final advice on carbon budgets and policy suggestions to achieve them has been revised after admitting that some of its original assumptions that generally improving practices would drive emissions reductions were overly optimistic. It said it now assumed that it would be harder to achieve agricultural emissions reductions. The commission originally said farm management changes could slightly increase productivity with a 10-15 percent reduction in herd sizes. Now, it said those same management practices would reduce the herd size by 13 percent with a 4 percent drop in production.
US inflation jumped to its highest level in 13 years as the world’s largest economy rebounded strongly from the coronavirus crisis. The consumer prices index (CPI) rose at an annual rate of 5 percent in May, up from 4.2 percent in April and the highest since August 2008, according to the US Bureau of Labour Statistics. Inflation has steadily climbed since January, when it was just 1.4 percent. Fears over rising prices in the US have gripped markets, with investors fearing that pent-up demand and supply chain bottlenecks would create inflationary pressures, forcing central bankers at the Federal Reserve to slow their stimulus programme. But investors are increasingly betting that the inflationary surge will be temporary, allowing the Fed to put off tapering a bond-buying policy that has pumped trillions of dollars into global financial markets.
Tues: Food Price Index & Rental Price Index (Stats NZ)
Wed: Pushpay AGM (online); NZ King Salmon Investments AGM (online); Balance of Payments (March quarter)
Thur: Z Energy AGM (Auckland); Gross Domestic Product (March quarter); March Housing data (RBNZ); May Vehicle registrations