The first quarter of the year is ending very differently from the way it started.

The NZX50 fell for a seventh straight week making it the market’s longest losing streak since February 2021 and completely wiping out its year-to-date gain of 7 percent from early last month.

The result reflects a dramatic change in sentiment from just seven weeks ago when investors were confident inflation was peaking and that central banks would be cutting rates by the end of the year.

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Those prospects are now rapidly dimming with several leading stocks trading at multi-year lows including Ryman Healthcare (10-year low) and Fletcher Building (two-and-half-year low), while both companies have also now fallen out of the NZX top 10 by market capitalisation.

Shares in dairy processor Synlait hit a six-year low of $2.40 during the week bringing its year-to-date decline to more than 30 percent after recently warning its full-year profit was likely to be down 50 percent on last year’s result. Fellow dairy producer A2 Milk has also seen its share price slide 16 percent year-to-date.

Were it not for F&P Healthcare, which accounts for 13 percent of the index and has largely held on to its 13 percent gain for the year, the NZX50 would be significantly lower.

International research agency Fitch Solutions downgraded its outlook for the NZ economy following last week’s larger-than-expected GDP contraction.

Fitch is now forecasting GDP growth for this year to be just 1.1 percent from 1.5 percent previously.

Recent Stats NZ data showed the economy contracted 0.6 percent in the December quarter raising the prospect the country is already in a technical recession.

Rising debt-servicing costs and lower house prices would constrain private consumption Fitch said in its latest report.

With the next Reserve Bank monetary policy review less than a fortnight away, Fitch is forecasting the central bank to lift the Official Cash Rate by a further 50 basis points, taking the OCR to a peak of 5.25 percent.

Fewer customers wanting Warehouse bargains

Highlighting the growing financial pressure consumers are facing, the country’s largest retailer delivered a stark warning to shareholders after announcing a halving in its net profit for the six months to the end of January.

The company said it had experienced a dramatic contrast between its first and second quarters, with a strong surge at the beginning which faded in the second quarter as economic conditions tightened, costs increased, and it bore the cost of restructuring.

Group chief executive Nick Grayston described the trading environment as “challenging” as the retailer contended with high inflation and continuing cost of living pressures. As a result it said it had consciously kept a lid on its prices.

“We are taking decisive action to improve financial performance and operational efficiency across the Group. This includes rebalancing capital expenditure to focus on operational performance and reprioritising transformation projects to concentrate on EBIT delivery.”

Up to 340 jobs would be cut at its Auckland-based support centre, while the company said it would also make organisational changes by closing its operations and bringing online platform and sports retailer Torpedo7 into the group structure, Grayston said.

Warehouse Group shares ended the week at $2.01 having traded as high as $3.75 just six months ago.

Spotlight now on Germany’s Deutsche Bank

Bank stocks took a further hit on Friday, led by Germany’s Deutsche Bank, as policymakers struggled to calm nerves after failures on both sides of the Atlantic.

Europe’s Stoxx 600 banks index, which comprises the region’s biggest lenders, fell almost 4 percent, while an 8.5 per cent drop in Deutsche shares had investors rattled. Shares in Commerzbank fell 5.5 percent as jitters over the wider sector persisted following the collapse of two regional US institutions and a rescue deal for Credit Suisse in recent weeks.

Deutsche’s slide came after a surge in the cost of insuring the lender’s debt against default. The price of the bank’s five-year credit default swaps — derivatives that act like insurance and pay out if a company defaults on its payments — climbed from below 150 basis points on Wednesday to 200bp on Friday, according to data from Refinitiv.

Global authorities have repeatedly tried to allay investors’ concerns after the failure of several US regional banks, and last weekend’s hasty takeover of Credit Suisse by its rival UBS.

“Deutsche Bank has fundamentally modernised and reorganised its business and is a very profitable bank,” Germany’s chancellor Olaf Scholz said on Friday, after being asked if the lender was the “new Credit Suisse”. “There is no reason to be concerned about it” Scholz told journalists.

European Central Bank president Christine Lagarde told a eurozone summit in Brussels that the banking sector was “strong” and that the ECB was fully equipped to provide liquidity to the euro area financial system if needed. She insisted there was “no trade-off” between controlling inflation and fostering financial stability.

Meanwhile, US Treasury secretary Janet Yellen said regulators were “prepared to take additional actions if warranted” to ensure the safety of bank deposits.

Cash is king once again

In the wake of the Silicon Valley Bank collapse and subsequent banking meltdown a growing number of cautious investors in the US are turning away from volatile markets and toward more liquid alternatives such as cash.

Money market funds, widely thought to be one of the safest, lowest-risk investment options, have seen a huge influx of cash in recent weeks as investors look for more stable ground.

These funds invest in short-term securities including government bonds, certificates of deposit — or fixed-term savings accounts — and commercial debt. The goal of such funds being to provide investors with a relatively stable investment option that offers higher returns than traditional savings.

New data has revealed that since the Fed began to raise interest rates a year ago, the amount of money in money market funds has increased by roughly US$400 billion, with more than $120 billion being invested last week alone, according to US based Apollo Global Management. It is estimated a record US$5 trillion is now invested in such funds, money that in many cases had previously been invested in stocks.

US investment bank Goldman Sachs estimate Americans could potentially sell as much as US$1.1 trillion in stocks this year and put that money into credit and money market assets instead.

But money market funds aren’t without risks of their own, especially when they experience a large wave of inflows all at once.

The more money there is invested in these funds, the greater the risk that cash could also flow out just as quickly, creating a money-market liquidity crisis — where funds may not have enough cash on hand to meet those redemptions, similar to what Silicon Valley and First Republic Banks both experienced recently.

Money market funds are also deeply interconnected with the wider financial system, and often face the same risks as banks. They typically invest in securities with maturities of 90 days or less, meaning they are highly sensitive to changes in interest rates. They also invest heavily in commercial debt — so if there’s a significant economic downturn there’s a risk issuers could default on their obligations.

Money markets last experienced a meltdown in the pandemic-induced panic of 2020 that required the US Department of the Treasury and the Federal Reserve to step in to prevent a destabilizing rapid withdrawal of money from the funds.

Regulations and updates were suggested by the US Treasury in the wake of the turmoil, but the vulnerabilities exposed during the panic remain largely unchanged.

Gold continues to shine

Traders are betting on the price of gold to keep rising after it touched a 12-month high last week, convinced the US Federal Reserve’s cycle of interest rate rises is almost over and safe havens such as gold are sought out in response to the current worries engulfing the banking sector.

Spot prices for gold this week touched US$2,000 per ounce for the first time since the immediate aftermath of Russia’s invasion of Ukraine. Prices eased after testing the level several times throughout the week, but trading in options contracts linked to the metal suggest many investors are expecting an even more sustained rally in the weeks ahead.

Suki Cooper, precious metals analyst at Standard Chartered, told the Financial Times that in the days immediately following the collapse of Silicon Valley and Signature Banks, there was a massive increase in “tactical” positioning as traders looked for assets considered safe havens in times of crisis.

In previous crises, this impact has been offset by other investors being forced to sell gold to meet margin calls on other investments. However, Cooper said months of investor outflows meant positioning was light at the start of the latest problems, reducing the amount of further selling.

Gold hit an all-time high of US$2075 in August 2020 and has largely traded in a sideways pattern ever since. Since reaching a low of US$1681 in October last year, gold has rallied almost 20 percent versus the S&P500 which is up barely 5 percent over the same period.

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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