Spring came early to global equity markets last week as investors increasingly took comfort from economic data that showed inflationary headwinds – while taking their toll on businesses and consumers – continued to demonstrate a high level of resilience, as shown by Friday’s US jobs data.
The New Zealand market recorded its best five-day trading period of the year with the NZX50 gaining 3.9 percent for the week, making it one of the best performing markets in the Asia/Pacific region. Australia’s ASX200 gained 2.1 percent to finish at 6678, while in the US the benchmark S&P500 ended the week with a more modest gain of 1.9 percent.
However, investors should exercise caution as analysts warn that markets could fall a further 20 percent if a global recession happens.
This week, the Reserve Bank is widely expected to hike the OCR by a further 50 basis points, taking it to 2.5 percent, before the release of next week’s highly anticipated consumer price index. Last week, the kiwi dollar fell to a two-year low of 61.59 US cents, as a resurgent US dollar hit a 20-year high.
The weaker kiwi is welcome news for exporters including Fisher & Paykel Healthcare and beaten down fleet management company Eroad which both saw its shares push higher in the wake of the softer currency.
The Reserve Bank of Australia continues to make up for lost time hiking its cash rate by a further 50 basis points last week and warning further hikes should be expected over the rest of this year as it attempts to dampen down inflation.
Better than expected US jobs shows economy remains resilient
US government debt came under pressure after a stronger than expected jobs report fuelled expectations of more aggressive interest rate rises by the Federal Reserve. The yield on the benchmark 10-year Treasury note, which moves inversely to the price of the debt security, rose to 3.08 percent, around its highest level this month, while the two-year yield, which closely tracks interest rate expectations, finished at 3.1 percent.
The US non-farm payrolls report for June showed employers in the world’s largest economy hired 372,000 new workers last month, compared with average forecasts of 265,000. The unemployment rate stayed at 3.6 percent while average hourly earnings rose 5.1 percent on a year-over-year basis.
The result is likely to mean the US Federal Reserve will hike by a further 75 basis points later this month but may consider more moderate increases in the future. Futures markets are now pricing in a benchmark rate of almost 3.6 percent by next March, according to Refinitiv data, up from about 3.4 percent before the payrolls data was announced.
In contrast to their expectations for the Fed, many traders believe the European Central Bank will remain relatively dovish after the economic outlook for the eurozone darkened in recent weeks. Goldman Sachs warned on Thursday the eurozone was “on the edge of recession” as Russia’s move to cut supplies of natural gas sent prices of the fuel surging, dealing a blow to businesses across the region.
This week is also likely to be a big test of market sentiment in the US with consumer inflation data and the start of the second-quarter earnings season potentially providing two catalysts that could make for a bumpy ride for investors, particularly if forward earnings guidance is downgraded.
PepsiCo and Delta Air Lines will provide an early read on consumer sentiment, while quarterly earnings results from banking giants JP Morgan Chase, Morgan Stanley, Wells Fargo and Citigroup will indicate the impact higher interest rates and a more bearish investor sentiment are having on the sector.
The June consumer price index looms large on Wednesday, and economists expect it could be hotter than May’s 8.6 percent year-over-year pace and is likely to be the report that could move markets the most.
Putin ramps up the energy threat level
On commodity markets, Brent Crude oil futures briefly fell below US$100 for the first time since April but closed out the week at US$107 a barrel after Russian President Vladimir Putin threatened “catastrophic consequences” for world energy markets if Western powers imposed further sanctions on Moscow, as G7 members discuss plans to try to cap Russia’s oil revenues following its invasion of Ukraine.
While admitting that sanctions were undoubtedly hurting Russia’s economy, Putin said Western powers risked inflicting more harm on themselves as they wrestle with rising inflation and a growing cost-of-living crisis.
“All this reveals, once again, that sanctions on Russia end up causing much more harm to those countries that impose them,” Putin told members of the government in a televised address on Friday.
Meanwhile, a rampant US dollar continued to push the price of gold lower with the precious metal falling almost 4 percent for the week to US$1742 an ounce, a 10-month low. Since peaking at US$2070 an ounce in March, gold has fallen almost 15 percent in value despite heightened inflation indicators, which would traditionally see gold benefit as a safe haven.
Crypto markets enjoyed their best week in months in response to the improving investor sentiment with Bitcoin and Ether gaining more than 10 percent.
NZ trading volumes ease in the wake of ‘risk off’ sentiment
Locally, the NZX released its trading metrics for June, which showed heightened market volatility had led to softer trading in equities in wholesale and retail markets.
Total value traded across the NZX was $3.07 billion, a decrease of 21 percent from May. This was across wholesale and retail markets, with wholesale down 21.4 percent, and retail down 15.2 percent. However, an MSCI Standard Index rebalance, which saw Ryman Healthcare removed from the index in May, affected the result somewhat.
By contrast, June was a record month for debt market trades on the stock exchange as investors sought safer assets and higher yields. There were 5,322 trades on the New Zealand Debt Market in June – the most recorded – worth $228 million, the highest dollar value since 2008.
Latest Australian probe sends SkyCity shares tumbling
SkyCity Entertainment shares experienced their worst week since the Covid-19 selloff in March 2020 after South Australia’s gaming regulator announced plans to conduct an independent review of SkyCity Adelaide as part of a broader inquiry in Australia into what have been described as ‘systemic’ failings within the casino industry.
South Australia’s Consumer and Business Services has appointed retired supreme court judge Brian Martin to head the review into casino operations in South Australia. The state’s only licensed operation, Adelaide Casino, which is owned and operated by SkyCity Entertainment, reopened in December 2020 after a $330m expansion.
SkyCity shares ended the week down 11 percent at $2.58.
Elon Musk and Twitter set to face off in court
Legal experts are already warning Tesla founder Elon Musk he faces an uphill battle if Twitter seeks legal redress after Musk’s attempt to pull out of an agreed US$44b takeover of the out-of-favour social media platform.
Last week, Musk said Twitter had been in “material breach of multiple provisions” of the deal contract, which gave him the right to walk away, putting an end to weeks of speculation over the billionaire’s desire to buy the company. Twitter hit back, announcing plans to sue Musk in the Delaware Court of Chancery, where the company is incorporated, to force him to honour the deal at the agreed price of $54.20 a share versus Twitter’s closing price of US$36.81 on Friday.
The action and counteraction sets the stage for a costly legal battle that could plunge the company into further turmoil. Experts say Twitter could opt to accept a settlement or negotiate with Musk for a lower price to avoid what would be hefty legal fees and further uncertainty amid lay-offs and what has been described as ‘rock-bottom’ morale inside the company.
But if the deal is contested to the end in the courts, Musk and his legal team face an uphill challenge, according to legal experts, who suggest that Twitter may have an edge in what has become an increasingly bitter tussle between the two sides.
‘You were warned’, European regulator tells crypto investors
Europe’s top securities regulator has told crypto investors they should treat the market crash as a “cautionary lesson” about putting money into risky unregulated assets and that they shouldn’t count on any kind of a bailout.
Verena Ross, chair of the European Securities and Markets Authority, said investors were given plenty of warning about the risks they were taking by investing in crypto assets.
The global crypto market has fallen by more than 70 percent in the past year and Ross told the Financial Times she was worried about the implications for small investors: “I think there is a real question about whether many of these [crypto assets] will survive … I hope that some of these investors will see this and will take a cautionary lesson at least to think about how much of their money they invest in these kinds of assets.”
Ross added there was no prospect of a European bailout for out-of-pocket investors because warnings about the dangers had been so widespread with consumers being told by Europe’s leading financial regulators there was a “very real possibility they would end up losing most if not all their invested money”.
Coming up this week …
- Electronic Card Transactions (June) – Stats NZ
- RBNZ Monetary Policy Review
- Food Price Index (June) – Stats NZ
- Rental Price Index (June) – Stats NZ