Business & Investing: NZ fails to participate in a global rally in shares, but are investors overseas being tempted by a bear trap?
Markets enjoyed another week of solid gains as investors continued to ‘buy-the-dip’, confident the selloff that started in late January is over – for now. Even the closely watched volatility index (VIX) in the US, often referred to as Wall Street’s ‘fear gauge,’ is now back to the level it was in early February.
Investors might be forgiven for feeling somewhat confused right now about the abrupt change in sentiment, given all the negativity surrounding markets. Two possible explanations for the current rebound might suffice. Either this is a ‘bear trap’ where investors are drawn back into the market believing the worst is behind them just before the selling starts over again or markets are seeing beyond the current negative sentiment and believe this is all now factored into pricing. Only time will tell which of those explanations is correct.
In the US the S&P500 gained 1.8 percent for the week to 4543, its highest level since Feb 10, before the Ukraine invasion, while Australia’s ASX200 advanced 1.5 percent to 7,406.
The NZX50, however, failed to participate in the rally, falling by 1 percent for the week to 12,055 – weighed down by market leader F&P Healthcare which saw its shares plunge more than 11 percent to a two-year low after the company lowered its earnings outlook for the year to March to between $1.675 billion and $1.70b from $1.97bn previously.
The shares closed on Friday at $24.41 after trading as low as $23.86 on Friday. It means investors who brought shares on Tuesday at the opening price of $27.65 are already nursing a 12 percent loss on paper.
Analysts foresee a challenging two years ahead for F&P Healthcare. The company reported record profits during the Covid-19 pandemic when demand for its breathing respirators and related equipment soared.
The F&P experience could also be a taste of things to come as companies reconsider their outlook in the wake of the rising cost of living, falling consumer confidence and continued supply chain disruption.
Clothing retailer Hallenstein Glasson’s also announced a slide in its first-half profit, down 40 percent as the retailer was confronted by ongoing disruption from the Covid-19 pandemic, forcing it to close its doors for much of the period. Net profit fell to $11.9 million in the six months ended Feb 1 from $19.8m in the same period a year earlier.
Other retailers to report results included The Warehouse Group which saw its first-half net profit decline 8.2 percent to $50.4 million compared with $55m in the same six months a year earlier, while Kathmandu reported a net loss of $5.5 million in the six months to Jan 31, having posted a profit of $22.3m in the same period a year earlier.
Consumer confidence falls and cost of living rising
Two reports out this past week are worth noting.
Consumer confidence dropped 7 points to 92.1 in the March quarter in the latest Westpac McDermott Miller survey, well below the average of 110.4, where a reading above 100 separates optimism from pessimism.
The result is below the reading following the initial outbreak of Covid-19, but not quite as gloomy as during the depths of the Global Financial Crisis.
Westpac NZ acting chief economist Michael Gordon said NZ is being buffeted “by a range of powerful economic headwinds” and many households had reported in the survey that their financial position had deteriorated.
Of the 1,559 people surveyed, a net 12.9 percent said their current situation was worse than it was a year earlier, compared to 10.7 percent in the December period.
ASB Bank this week said inflation and rising interest rates would cost households an average $150 a week extra, according to its latest data.
Senior economist Mark Smith said cost increases are becoming increasingly widespread and affecting core items such as food, housing, and fuel, which would lift household costs by around 7 percent this year, or $15 billion.
He said wages were unlikely to keep pace with cost increases and that would mean households having to make tough choices.
Smith said households would face having to use their savings, cut discretionary spending, and if necessary cut back on essentials such as food and transport.
“Consumer spending is unlikely to be as robust or as resilient as it was in 2021. Discretionary spending could be significantly cut back” he said.
US Treasury yields continue to surge
In the US government debt continued to be sold off as hawkish comments from Federal Reserve officials prompted big Wall Street banks to forecast a faster pace of interest rate increases.
The yield on the 10-year US Treasury note rose on Friday to 2.5 percent, its highest level since May 2019, as the benchmark debt security fell in price. The Treasury market, which underpins the costs of corporate debt and consumer borrowing worldwide, is enduring its worst month since the election of Donald Trump in 2016.
For the week, the US 10 year yield rose 15 percent, while for the month it’s now up more than 35 percent, putting it on track for its biggest monthly increase since 2009.
John Williams, the New York Fed governor on Friday said that if a supersized 0.5 percentage point rate increase was warranted to combat intense inflation, the central bank should take that step. His remarks echoed recent comments made by US Fed chairman Jay Powell and added to a growing sense that America’s central bank will need to step up its tightening of monetary policy.
Citi analysts said they now expect the US central bank to raise borrowing costs by half a percentage point at every one of its monetary policy meetings from May to September, while Goldman Sachs analysts said they now expected the 10-year yield to hit 2.7 per cent by the end of 2022.
Oil price rebounds
The oil price also remains at elevated levels after rebounding almost 11 percent last week. Brent Crude futures ended the week at US$119 a barrel suggesting higher fuel prices for motorists are unlikely to ease in the short term. The price of gold also finished higher for the week gaining 1.9 percent to US$1958 an ounce.
The positive market sentiment and a return to ‘risk on’ benefited cryptocurrencies saw Bitcoin jump 8.4 percent for the week to US$44,700, while Ether gained more than 10 percent to US$3151.
The NZ dollar gained 0.7 percent for the week to 69.57 US cents.
Coming up this week…
Monday
- Employment Indicators (Feb) – Stats NZ
Wednesday
- Promisia Healthcare Special Shareholders Meeting
- Building Consents (Feb) – Stats NZ
Friday
- Synlait Milk Half Year Result
