Business & Investing: Fear returns to markets as investors turn bearish, and Kiwi dollar at three-month low against US dollar
The NZ sharemarket has some catching up to do and is likely to take a hit when it opens this morning.
Stocks in the US fell sharply on Friday, although a small technical rebound overnight helped recover some of last week’s losses, while China’s sharemarket slumped 6 percent yesterday after confirmation of further lockdowns in Beijing following the detection of new omicron cases in the city.
Investors are becoming increasingly fearful the US Federal Reserve plans to hike interest rates more aggressively than had previously been expected in response to inflation expectations climbing to their highest levels in decades.
One Fed member even suggested last week a 75pb hike (which last happened in November 1994) wasn’t out of the question when the US central bank announces its latest monetary policy decision next week, though a 50pb increase is now considered more likely.
Comments from Federal Reserve chairman Jerome Powell confirmed as much when he said such a hike was “on the table”, while Treasury secretary Janet Yellen, herself a former Fed chief, acknowledged the period of elevated inflation would probably last for a while longer, although she said the rate of price growth may have already peaked.
In his remarks to an IMF panel, Powell sent his strongest signal yet that the Fed would raise borrowing costs rapidly to fight the highest US consumer price increases for 40 years.
“It is appropriate in my view to be moving a little more quickly,” Powell said.
He also suggested the Fed may need to raise interest rates to a level that actively begins to constrain growth but he pushed back on the idea it would need to provoke a sharp recession to bring inflation back to its 2 percent target. He said a “soft landing” for the economy remained the central bank’s goal.
The comments spooked investors with US stocks experiencing their biggest one day fall since early March. The benchmark S&P500 index fell 2.8 percent on Friday, resulting in its third successive weekly fall for the first time since September 2020. The technology-heavy Nasdaq Composite declined 3.8 percent for the week as investors sold out of growth stocks in response to inflation expectations continuing to surge higher.
Meanwhile the volatility index, which measures expected swings in the S&P500 and is widely referred to as Wall Street’s “fear gauge”, recorded its biggest weekly move since January climbing to a one-month high of 28.3.
Locally, the NZX50 managed to eke out a small gain of 0.14 percent for the week, though sentiment remains fragile with stocks largely directionless and continuing to trade in a narrow range. Reinforcing the negative tone and with a third of the year almost over, the NZX50 has so far been unable to record two consecutive weeks of gains this year.
Air NZ shares managed to stage a small rebound finishing the week up 6 percent, while Tourism Holdings shares eased after its proposed acquisition of Apollo Tourism & Leisure looked increasingly unlikely to go ahead following Commerce Commission concerns it would give the group too much market power.
Weaker Kiwi dollar a silver lining for exporters
Despite the market volatility, local exporters including F&P Healthcare and Fonterra will be welcoming the continued decline in the Kiwi dollar which last week experienced its biggest weekly fall against the US dollar since January. After briefly touching 70 US cents just three weeks ago, the Kiwi fell below 66 US cents yesterday – a 10-week low.
The move comes in response to a surging greenback which has seen the US Dollar Index trade above 100 for the first time since March 2020 after the Covid-19 selloff began to accelerate.
Last week the US dollar reached a 20-year high against the Japanese yen. The Japanese currency has struggled this year amid expectations the Bank of Japan will lag its peers, such as the US Federal Reserve, in normalising monetary policy.
Bond yields climb higher
Investors are closely watching bond yields, which continue to push higher as treasuries weaken.
The NZ Government 10-year yield climbed a further 6.9bp last week to 3.6 percent compared with a yield of 2.23 percent in late December.
The US 10-year break-even – a closely watched gauge of market inflation expectations over the next decade – climbed to 3.08 percent on Friday, its highest level in at least two decades.
China’s Covid response adding to market jitters
China has significantly tightened parts of its lockdown in Shanghai, including erecting fences around apartment buildings with Covid-19 infected residents.
In addition, residents of the Chaoyang district of Beijing will have to submit to three days of testing to get on top of the omicron outbreak there, with parts of it “sealed” or “controlled,” according to Bloomberg after confirmation over the weekend that Covid had spread undetected in the city for a week. Officials expect more cases to emerge in the coming days.
Although some parts of China have been under restrictions longer than Shanghai, omicron’s arrival in Beijing would be a further ominous development and is likely to further reduce exports, negatively impact consumer confidence and add to existing global supply chain disruptions.
Big week ahead for US earnings
Wall Street is bracing for what will be the busiest week yet in the current corporate earnings season.
About 160 companies in the S&P500 are expected to report earnings this week, and all eyes will be on reports from big tech companies, including Amazon, Apple, Google-parent Alphabet, Microsoft and in particular Meta Platforms which saw its shares fall 12 percent last week to a two-year low.
Having previously warned of falling revenues, last week Netflix shocked investors announcing a decline in subscription numbers and the likelihood of further declines in the near term. Its shares fell 37 percent for the week and are now down 65 percent year-to-date.
Overnight, Twitter’s board agreed to accept an offer from Elon Musk to buy the social media company and take it private. The stock was halted for the news but was up more than 6 percent once it resumed trading.
“Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated,” Musk said in a statement included in the press release announcing the $44 billion deal.
A key measure of inflation in the US is also due out this week. The personal consumer expenditures index is set to be released this Friday. In February, the core PCE jumped 5.4 percent.
Earnings season here for companies with a March balance date will kick off next week with ANZ Banking Group set to report its half year results on May 4.
Coming Up This Week …
- Credit Card Spending & Balances (March) – RBNZ
- Summerset Group Holdings AGM
- New residential mortgage lending (March) – RBNZ
- Employment indicators (March) – Stats NZ
- Overseas Merch Trade (March) – Stats NZ
- Household living-costs price indexes (March qtr) – Stats NZ
- Property transfer stats (March qtr) – Stats NZ
- Research & development survey: 2021 – Stats NZ