Global equity markets continued their strong rebound for a second week buoyed by comments from US Federal Reserve chair Jay Powell that the world’s most powerful central bank may consider pulling back from its aggressive monetary policy stance in the face of weakening economic data.
That was music to the ears of Wall Street and investors around the world with stocks jumping sharply in the wake of Powell’s softening stance, which saw shares in beaten-down retail stocks such as Amazon climb by as much as 10 percent last week.
Local investors will be hoping RBNZ governor Adrian Orr may be set to follow suit in two weeks when the Reserve Bank announces its latest monetary policy review.
July ended up being the best monthly performance for the S&P500 since November 2020, notching up a gain of 9.1 percent, and more than wiping out the losses the index sustained in June. It was a similar story for the NZX50 and Australia’s ASX200, which recorded gains of 5.7 percent for the month, making it the best month of the year to date.
Better-than-expected earnings showing many companies are weathering the inflation headwinds effectively, along with a helpful smattering of gloomy economic data potentially paring back the likelihood of more outsized rate hikes, convinced investors the Federal Reserve may have to slow its aggressive pace of monetary tightening sooner than had been expected as recently as a month ago.
Data showing the US economy contracted for a second consecutive quarter sparked hopes the worst inflationary cycle for four decades would moderate and the Fed may slow its policy tightening stance as a result.
The tech-heavy Nasdaq Composite index, which is particularly sensitive to interest rates, fared even better than the S&P500 with a monthly gain of 12.3 percent – its best performance since April 2020 when the Fed stepped in to stabilise markets after the meltdown sparked by Covid-19.
The strong performance in July is in stark contrast to the first six months of the year, when the S&P500 fell 21 percent and the Nasdaq slumped 29 percent, marking the worst first-half performance for the $44tn US equity market in more than 50 years.
The rally, and the sudden change in sentiment, caught many market experts by surprise, including those who had positioned their portfolios for further downside causing short sellers in particular to be caught wrong footed in what is often termed a ‘short squeeze’ requiring traders to buy shares back to close out short positions, which in turn pushes prices higher.
Technical traders will also be paying close attention to the S&P500 having reached its weekly 100-day moving average – a level that markets in a long-term downtrend will often rally up to before resuming their earlier decline.
Shares in Amazon ended Friday 10.4 percent higher — leaving them up 27.1 percent in July — after it beat analysts’ quarterly revenue forecasts and gave an upbeat outlook for the rest of the year because of the strong performance of its cloud computing business, which continues to deliver consistently strong results.
Microsoft, Apple and Google parent Alphabet also all issued more confident outlooks than investors had expected, lifting a US tech sector that has an outsized weighting in global markets. On Friday in the energy sector, US oil supermajors ExxonMobil and Chevron reported record quarterly profits thanks to surging oil and gas prices.
Analysts noted, however, the primary driver of stocks this month has been falling interest rate expectations. Futures pricing on Friday implied the Fed’s main funds rate would peak at 3.3 percent next February from a range of 2.25 to 2.5 percent at present. In mid-June, such predictions ran as high as 3.9 percent.
In a sign of how investor sentiment is brightening, US equity funds recorded their largest inflow in six weeks picking up US$9.5b of net new investments, according to Bank of America. The gains have not been limited to the United States. The FTSE All-World index of developed and emerging market shares rose 6.9 percent this month.
But to date, there has been little evidence to show that inflation, which continues to run at four-decade highs, is slowing. And Fed chair Jay Powell at the conclusion of the bank’s two-day meeting last Wednesday, at which interest rates were raised 0.75 percentage points for the second consecutive month, reiterated his commitment to a 2 percent inflation target.
Seasoned market watchers are already warning investors to tread with caution pointing out that July’s strong performance for stocks and bonds could be brought back down to earth just as quickly by inflation remaining elevated as a result of Russia’s invasion of Ukraine.
The question sharemarket investors have to consider is whether the bottom is in and this is the start of a sustained recovery or simply a rally within a larger bear market. Right now the jury seems to be split down the middle on that score.
Once again crypto investors were taking full advantage of the change in sentiment with Bitcoin gaining 5.3 percent for the month, while the value of Ether jumped 6.6 percent.
Oil prices were unchanged for the week though remain stubbornly above US$100 a barrel, a level unlikely to be breached while the war in Ukraine continues unabated. Gold gained 2 percent for the week to US$1765 an ounce after rebounding strongly from a low of US$1680 earlier in the month suggesting the precious metal may be preparing for another move higher in the wake of inflation rates becoming increasingly entrenched.
The NZ dollar finished the week relatively flat at 62.9 US cents after threatening to fall below 60 US cents at one point earlier in the month. The US dollar index on the other hand, which measures the greenback against a basket of international currencies, finished the month at 105.83, well off its highs for the month at 109.29.
Mainfreight provides a boost to the local market
Mainfreight managing director Don Braid gave an upbeat assessment of the company’s performance at last week’s AGM pointing out to shareholders that in the past 16 weeks group revenue was up by more than 30 percent to $1.4b and profit up more than 80 percent to $178.83m, an outcome he described in his characteristically understated terms as “doing okay”. Braid said the better-than-expected figures were driven by an increase in US revenue by 41 percent to US$257.5m (NZ$410.6m) and a resulting profit of US$37.2m.
The US is the logistics firm’s biggest division regionally with revenue of $1.56b and profit before tax of $145m. Mainfreight was barely scratching the surface in the US with a market share of less than one percent, Braid said.
Pacific Edge mulls implications of new report
Trading in Pacific Edge shares remain in a trading halt while its legal team considers a draft proposal that could change whether its cancer test is eligible for health insurance funding.
The company requested the trading halt after it became aware its Cxbladder product was mentioned in a draft proposal from Swiss healthcare giant Novitas which provides government-sponsored healthcare in 11 US states and Washington DC, under the Medicare programme.
Cxbladder is currently eligible for reimbursement, meaning Novitas covers the cost of the test for patients covered by Medicare in those states.
Pacific Edge shares last traded at 77c and are down more than 40 percent year to date.
Laybuy announces big job cuts
At a time when many businesses are struggling to find staff, the Auckland-based, buy now, pay later provider Laybuy announced last week it is cutting a third of its staff, mostly in its head office, rather than raising capital in a bid to turn profitable early next year.
The ASX-listed provider said “significant restructuring” will see roughly 45 employees laid off as part of the company’s efforts to cut costs and reverse its flagging fortunes after its annual loss widened by almost a quarter to $51.5 million in the year to March.
Managing director Gary Rohloff said while its Australian and New Zealand businesses remain profitable, the focus on cutting costs and laying off staff underpins its goal of hitting group profitability in the first three months of 2023 without having to source additional new funds from shareholders and outside investors.
In a statement, Rohloff described the decision to cut its workforce by a third as “incredibly difficult” but said it was “the right decision for the company”.
Laybuy shares, which peaked in September 2020 at A$2.30 after listing, recently slumped to a low of just 4c on the ASX but surged to a high of 15c last week after the announcement of the layoffs.
Former Reserve Bank Governor offers rare criticism of central banks’ monetary policy stance
Former central bankers are universally known for maintaining their silence when it comes to passing judgment on the performance of their successors, which makes former Reserve Bank governor Graeme Wheeler’s recent criticism of central bank monetary policy during Covid-19 all the more surprising.
Central banks around the world need to acknowledge they made “major mistakes” that had resulted in today’s rampant inflation, Wheeler said in a recent podcast produced by the business think-tank the New Zealand Initiative.
“Central banks have made some serious errors of judgment in conducting monetary policy over the last two years,” Wheeler said pointing to inflation rates at 40-year highs in the US and Britain.
NZ’s inflation rate in the June quarter hit 7.3 percent, a 32-year high, while Britain’s was at 9.4 percent and in US it is sitting at 9.1 percent, both at 40-year highs.
Wheeler blamed the surge in inflation on extraordinary monetary and fiscal stimulus that had been applied following the spread of Covid-19.
Coming up this week …
Monday
- Building Consents (June) – Stats NZ
Wednesday
- Labour Market Stats (June qtr) – Stats NZ
Friday
- AFT Pharma AGM
- Kingfish Ltd AGM
