Business & Investing: The sharemarket bounces back after initial lockdown news and the Reserve Bank declining to raise interest rates

There was little sign of a lockdown on the NZ sharemarket yesterday as investors ‘bought the dip’, a strategy that has paid off in the past, supported by a Reserve Bank decision that left rates on hold as a result of the latest Covid outbreak.

After falling more than 50 points at the open, the NZX50 ended the day up 0.67 percent at 12,719, regaining all of Tuesday’s 85-point fall and closing pretty much where it finished on Monday before the Level 4 lockdown was announced.

Investors took comfort from the Reserve Bank’s decision to leave the OCR unchanged, though it’s statement was more hawkish in its outlook than some economists had been expecting.

The central bank said capacity pressures are now evident in the economy, particularly in the labour market where job vacancies remain high, despite the recent decline in unemployment and underemployment. It also noted wages are rising consistent with the tight labour market conditions.

“Near-term consumer price inflation is expected to rise above the committee’s target range before returning towards the 2 percent midpoint around mid-2022.”

The RBNZ said it remained confident of meeting its inflation and employment remit with less need for the existing level of monetary stimulus, while also noting house prices are above their sustainable level, heightening the risk of a price correction as supply increases.

Kiwibank Chief Economist Jarrod Kerr said there was no doubt the RBNZ would have delivered a 25bp rate hike today had the country not been forced into a swift lockdown.

“If the restrictions are kept brief, then the lockdown will hardly derail the economy. Activity will bounce back once they are relaxed. But if the outbreak escalates and the lockdown is prolonged, the RBNZ might need to tweak its forecast for the next two quarters.”

Kerr said he is still expecting the OCR to be at 0.75 percent by the end of the year, either as a result of two 25bp moves in October and November or one 50bp hike before Christmas and is likely to be at 1.5 percent by the end of next year.

The NZ dollar fell almost 1 percent against the US dollar to 68.69 US cents following the RBNZ announcement before initially rebounding to trade back above 69 US cents, only to weaken again last night falling to 68.87 US cents.

On the sharemarket, several stocks recovered from sharp falls yesterday including F&P Healthcare which jumped 2.4 percent, a2 Milk gained 1.5 percent to $6.82, and Summerset Holdings finished up 1.7 percent at $4.75

Shares in Fletcher Building, which reported its year end result, closed down 1.5 percent at $7.63, while Spark, which also reported earnings for the year that were broadly in line with forecasts, gained 0.5 percent to $4.75.

Pie Funds Managing Director Mike Taylor said Tuesday’s sell off and yesterday’s rebound follows a pattern that has been seen in previous lockdowns.

He believes the next big inflection point for markets could be the annual gathering of the world’s central bankers next week in Jackson Hole, Wyoming where US Federal Reserve Chairman Jerome Powell will speak.

“If Powell remains dovish in his outlook, particularly in regard to maintaining the Fed’s existing bond buying programme, markets will continue to grind higher but any hint at tapering – then expect to see a sharp selloff in stocks.”

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.

Leave a comment