Stocks in Asia rebound as relaxations to China’s zero-Covid policy boost investors’ hopes the world’s second-biggest economy will reopen early next year
After six weeks of gains the NZ sharemarket ran out of steam last week as the annual Christmas hiatus began to kick in.
With just two trading weeks left in the year it appears some investors have already begun ruling a line under 2022, a year in which interest rate hikes and tighter central bank monetary policy have punished equity markets.
The NZX50 ended the week down 0.4 percent at 11,596 having gained almost 5 percent in the last month.
Across the Tasman, Australia’s ASX200 index fell 1.2 percent for the week, though it remains just 5 percent below its high for the year compared to the NZX50 which is down 12 percent year-to-date.
In the US stocks sold off with the S&P500 declining 3.4 percent ahead of the US Federal Reserve’s final monetary policy statement for the year on Wednesday (US time).
A stronger than anticipated Producer Price index reading in the US on Friday will only reinforce the Federal Reserve’s expected decision to continue raising its key interest rate while its fight against inflation remains ongoing.
However, US Fed chair Jay Powell last month laid the groundwork for the US central bank to slow the pace of rate rises from this week’s policy meeting with most economists expecting a 0.5 percentage point rise in the Fed Funds Rate.
Stubbornly high rates of inflation have forced the world’s most influential central bank to implement four consecutive 0.75 percentage point rises, bringing its main policy rate to between 3.75 percent and 4 percent.
Investors will now turn their attention to this Tuesday’s (US time) highly anticipated consumer price index data, which will coincide with the Fed’s two-day policy meeting.
US government debt sold off on Friday, with the yield on the 10-year gaining 0.07 percentage points to 3.56 percent. Government bonds typically fall in price as borrowing costs rise, as higher interest rates eat into the real returns on fixed-interest securities. The yield on 10-year US government debt in late October hit 4.24 per cent, its highest level since the financial crisis in 2008, but has since retreated as inflationary pressures have subsided.
Meanwhile, stocks in Asia continued their strong rebound as relaxations to China’s zero-Covid policy boosted investors’ hopes that the world’s second-biggest economy would reopen early next year. Hong Kong’s Hang Seng index has risen more than 20 percent in the past month. The Hang Seng Mainland Properties index, which tracks some of China’s largest developers, rose 10 percent on Friday bolstered by Beijing’s recent moves to end a ban on equity refinancing and extend $162bn in loans through state banks.
China’s real estate developers have endured a challenging year and the index remains on track for its worst year in a decade, despite having risen 33 percent this quarter. The moves come as Beijing prioritises economic growth over suppressing the virus for the first time since the coronavirus pandemic began.
Analysts, however, caution that infections are likely to surge as a result, delaying a swift reopening of the economy and keeping activity depressed until the second half of 2023 as the reopening infection wave will continue to force people to remain at home.
The NZ dollar ended the week unchanged at 64.12 US cents as it continues to benefit from a weaker US dollar.
Fonterra upgrades outlook
Fonterra upgraded its full-year profit guidance by as much as 55 percent which it attributed to the improved performance of its ingredients business.
The dairy giant said it expected full year profit for the year ending July to be in a range of 50-70 cents per share (cps) compared to 45-60cps last year.
The forecast farmgate milk price was in a range of $8.50-$9.50 per kilogram of milk solids, narrowing from $8.50-$10.00, with a midpoint of $9.00.
Fonterra chief executive Miles Hurrell said it was a positive start to the year given the current global operating environment.
“We continue to feel the impact of geopolitical and macroeconomic events, with higher costs at every point in our supply chain. It’s a similar story behind the farm gate with our farmer shareholders managing significantly higher input costs.
“Globally, milk supply from key exporting regions is down over the last 12 months.”
Fonterra’s shareholders fund units ended the week up 6.5 percent at $3.20
SkyCity faces ‘material’ fine for serious regulatory breach
SkyCity Entertainment Group confirmed the Australian Transaction Reports and Analysis Centre (Austrac) had filed civil penalty proceedings in the Australian federal court alleging its Adelaide casino contravened the Australian Anti-Money Laundering and Counter-Terrorism Act 2006 (AML/CTF).
The proceedings follow an enforcement investigation that Austrac began in June 2021 into the Adelaide casino’s compliance.
If proven, the company may be hit with fines of up to $50 million for the alleged breaches based on similar penalties imposed by Austrac on other gaming companies and banks.
In a research note to clients investment broker Forsyth Barr said the prospect of SkyCity incurring a financial penalty is now “reasonably high”, given the alleged level of wrongdoing and the penalties previously applied by the Federal Court following Austrac initiated civil penalty orders.
In its filing, Austrac said it had identified 124 cases of SkyCity failing to do due diligence on gamblers, 59 instances of customers posing high risks in terms of money laundering laws, and 65 customers allowed to channel money through accounts with the casino, while alleging the company also had knowledge of these breaches.
SkyCity shares ended the week down 4 percent at $2.66 after falling as low as $2.60 following the announcement.
Air NZ upgrades first half outlook
Air New Zealand has upgraded and narrowed the range of its guidance for earnings in the first half of the current financial year, although it remains wary about the full-year outlook.
Earnings before tax and other significant items is now expected to between $275 million and $325m in the six months to Dec 31.
That compares with a range of between $200m and $275m cited in an update in September.
The airline said lower aviation fuel prices have contributed about $20m to the improvement. It had forecast an average of US$127 ($199) per barrel of aviation fuel for the half, with prices having moderated to US$102m at present.
Is the oil price signalling trouble ahead?
Since peaking at US$125p/b in June the price of oil has fallen every month since, bar one (October).
Brent Crude oil futures closed on Friday at US$76.58p/b, down 11 percent for the week and 40 percent below the June peak.
While motorists will welcome the price declines at the petrol pump, the oil price has traditionally also been a leading indicator of the outlook for the broader global economy and right now the slumping price is potentially signalling trouble ahead.
Brutally high oil and gas prices have been a major feature of 2022 and one of the leading contributors to sky-high inflation globally. But in recent months the price of crude has taken a drastic plunge amid worries about slowing demand for fuel and the prospect of further tightening by the Federal Reserve will ultimately lead to recession. Ironically though, shares of energy companies have continued to climb.
In the US the S&P 500 is down more than 17 percent this year while shares of oil giants Exxon, Halliburton and Chevron are all up more than 45 percent. But even though gas prices are falling, they’re still higher than they have been over the past few years. That’s contributed to record-breaking profits for the US energy sector.
According to the International Energy Agency, the net income of global oil and gas producers is expected to double in 2022 to a record US$4 trillion with the sector reporting the highest year-over-year earnings growth of all 11 sectors that make up the S&P500, at 137.3 percent, due in large part to the impact of Russia’s war in Ukraine.
While crude prices are dropping, equities traders appear to be taking on a different bet. They’re hoping that OPEC’s recent decision to stick with supply cuts and Europe’s agreement to cap the price of Russian oil at US$60 a barrel will keep the global supply of oil very tight, even if demand does drop.
And a drop in demand isn’t necessarily a given. The reopening of China from restrictive Covid-zero shutdowns could significantly increase demand for fuel next year.
Exxon announced last week that it will lift capital spending next year by 10 percent to between US$23 billion and US$25 billion, with the goal of raising oil and gas production to a record 4.2 million barrels of oil equivalent per day by the end of 2027.
While the switch to alternative fuels continues to gain pace, oil companies continue to be some of the most profitable enterprises on the planet right now.
Coming up this week…
- Trade Weighted Index – RBNZ
- Food Price Index (Nov)
- Balance of Payments (Sept Qtr) – Stats NZ
- Westpac Bank AGM (Aust)
- Gross Domestic Product & Consumption (Sept Qtr) – Stats NZ
- Vehicle Registrations (Nov) – Stats NZ