Business & investing: Oil tracking to hit US$100 a barrel as Russia threatens to invade Ukraine analysts, and could go higher leaving central banks powerless to respond in the face of rising inflation.
Global sharemarkets fell sharply after the US warned that a Russian invasion of Ukraine could come within a matter of days. New Zealand and other foreign embassies warned expat citizens to leave the country as a matter of urgency.
The NZX50 fell almost 2 percent after wiping out all its gains earlier in the week, mainly in response to rapidly rising domestic inflation expectations, and further falls are likely today as the local market responds to the escalating geo-political tensions between Russia and the Ukraine that emerged after the NZ market had closed on Friday.
Investors will also be paying close attention to half year results from Contact Energy and Sky City Entertainment due out today as earnings season gets underway with around a quarter of listed companies set to report their results over the next two weeks.
In the US the S&P500 index shed 1.9 percent on Friday (US time) as investors took fright at the prospect of an imminent invasion by Russia, particularly the impact such a move would have on energy prices. The technology-focused Nasdaq Composite resumed its recent slide falling 3 percent for the week pushing the volatility index (VIX), sometimes referred to Wall Street’s fear gauge, up 18 percent.
Adding to investor concerns, US inflation data released last week came in well ahead of expectations and once gain sent markets into a tailspin. With an inflation rate now at a 40-year high of 7.5 per cent in January, up from 7 percent the previous month, there is a growing sense of panic amongst investors that the US Federal Reserve is now well behind the curve and will need to move more aggressively next month when it is widely expected to announce its first increase in the Fed Funds rate since 2018.
While most economists in the US still expect the Fed to increase rates by 25bp, investment bank Citi is the latest in a growing list of financial institutions picking a 50bp point hike.
The Fed funds futures market began to price in a more likely chance of a half-point rate hike at next month’s meeting after the inflation report and hawkish comments from St. Louis Federal Reserve President James Bullard. Bullard told Bloomberg News he would like to see a full 100-basis-point hike, or a total 1 percent rate increase, by July.
Bets on an even more aggressive push back from the US Federal Reserve hit new extremes this past week in treasury markets. Selling pressure in benchmark 10-year US government bonds took the yield above 2 per cent for the first time since 2019, while at the short end, two-year debt which had been at just 0.4 percent as recently as November, leapt to a high of 1.64 per cent in the biggest sell-off since 2009.
And it’s not just the size of the rate rise concerning investors, but also the frequency. As recently as October markets were pricing in just the one rate hike, which quickly became three, by January it was five and now banking heavyweight Goldman Sachs says it will be seven. If that turns out to be the case markets could still have a lot further to fall, particularly if inflation rates remain elevated this year.
Interestingly, the US is broadly coming into line with NZ where economists here fully expect the Reserve Bank to raise rates by a quarter of a percent at every meeting this year which would see the OCR at 2.5 percent by the end of the year.
According to the RBNZ’s latest survey, inflation expectations are running at their highest level in decades. The survey showed year-ahead inflation expectations came in at 4.4 percent, up from 3.7 percent at the last survey in November suggesting that inflation expectations are becoming more embedded. At 2.2 percent, two-year NZ Government bonds are now at their highest level since January 2017.
If two year mortgage rates exceed 6 percent by the end of the year (currently 4.9 percent), which now seems likely, many of those who secured two year fixed rates in 2020 and 2021 at around 2.5 percent will be in for a shock when their rates begin to roll over in the coming months. The RBNZ have already warned previously that a significant number of mortgage holders could face financial stress as mortgage interest rates begin to climb higher, particularly as inflation and elevated oil prices pushes up the cost of living.
New Zealand’s banks are themselves also heavily exposed to the residential housing sector with RBNZ figures showing that in the five years from December 2016 to December 2021, 82 percent of new net lending went to the housing sector.
Oil now seems all but certain to hit US$100 a barrel in the coming weeks in response to current geopolitical tensions, though if Russia does end up invading Ukraine analysts warn oil could easily reach US$120 or even as much as US$130 a barrel. That would have a devastating impact on the global economy and would leave central banks powerless to respond in the face of rising inflation. Brent Crude oil futures finished higher for an eighth week closing a few cents short of US$95 a barrel, up 2.8 percent for the week.
Not surprisingly, gold had its best week since May 2021 surging 2.8 percent for the week to close at US$1859, breaking out of a tight trading range it had been stuck in since July.
Bitcoin gained 0.1 percent for the week, one of its smallest weekly moves in recent years, to US$42,500, while the NZ dollar finished the week up 0.45 percent at 66.42 US cents.
NZ sharemarket
The Financial Markets Authority (FMA) announced it had filed proceedings against two individuals for alleged insider trading in relation to the sale of Pushpay shares in 2018. Both individuals were granted interim name suppression and face civil proceedings with one facing a criminal charge.
The FMA allege the trading occurred in June 2018, when Pushpay announced co-founder and director Eliot Crowther had resigned and sold down his shareholding in the firm. It’s alleged one individual used this material inside information to advise or encourage another person to trade prior to the market announcement. The other person was also involved in the conduct.
Commenting on the length of time the investigation had taken, the FMA said the case came with “varying complexities” and said it had followed a “robust investigation process” to ensure it gathered the necessary evidence before bringing such a case before the courts, noting in particular the high threshold required for criminal proceedings.
Kathmandu Holdings said its first-half earnings slumped by as much as 81 percent as Covid-19 lockdowns kept stores closed and there was less government support for retailers. The company said pre-tax underlying earnings were between $9 million and $11m in the 26 weeks ended January 30, down from $48.2m a year earlier. Kathmandu shares closed up 2.2 percent for the week at $1.41.
Serko suffered another downgrade this time from brokers Forsyth Barr which lowered its target price on the business travel software company from $8.20 to $5.99 citing the impact of omicron and disappointing transaction volumes. Shares in the company had previously traded as high as $8.30 in September last year but have since fallen as low as $4.90 in recent weeks. Jarden analysts also lowered their target price recently from $6 to $4.75 with an ‘underweight’ rating. Serko shares closed on Friday at $5.26, up 1.1 percent for the week.
Rakon lifted its profit guidance for a fourth time saying it now expected pre-tax underlying earnings for the year ending March 31 to be between $49m and $53m. In April of last year the electronic components manufacturer provided guidance for the March 2022 financial year of $27m-to-$32m. This was increased to $39-to-$44m in September and again to $44m-to-$49m in November. The company said it had managed to overcome supply chain risks and secure enough inventory to meet customer orders for the financial year. Rakon shares closed unchanged for the week at $1.88.
Sanford shares spiked higher for the week after the seafood company announced it had cleared its frozen inventories and benefited from better pricing for its wildcatch products for the December quarter. Chief executive Peter Reidie said a 24 percent increase in pricing had served to offset a 12 percent dip in sales volumes for its range of wild-caught fish. In addition, sales volumes lifted across both greenshell mussels, by 30 percent and also for salmon which saw sales up 47 percent year-on-year.
Reidie said while things were looking up across the company’s main international markets, the group continues to face supply-side challenges related to both labour and freight costs. Sanford shares gained 6.8 percent for the week to close at $4.90.
Coming up this Week….
Monday
- Contact Energy Half Year Result
- SkyCity Half Year Result
- Food Price Index (Jan) – Stats NZ
- Rental Price Index (Jan) – Stats NZ
Wednesday
- Fletcher Building Half Year Result
- EBOS Half Year Result
- Productivity Stats (1978-2021)
Thursday
- Skellerup Half Year Result
- NZ Exchange Half Year Result
- National Population Estimates (as at Dec ’21)
Friday
- Business Price Indexes (Dec qtr)
- Household Inflation Expectations (March) – RBNZ
- Prices (Dec) – RBNZ
- Residential Mortgage Lending by debt-to-income (Dec) – RBNZ
