Local investors are already on edge after the New Zealand sharemarket experienced its second biggest weekly fall this year. Now, as more than 30 listed companies prepare to deliver their six month financial results this week, they will be bracing for the likelihood of a few more negative surprises in this week’s lineup.

Of particular interest will be results from Freightways and a2 Milk today, SkyCity Entertainment on Wednesday, Air NZ and Auckland International Airport on Thursday and Port of Tauranga on Friday.

The optimism that has characterised markets this year, based on the assumption that central banks would soon be cutting rates, all but evaporated this past week. That’s after those banks – once again – reiterated their earlier call that interests rates are likely to remain higher for longer.

And there was an added sting in the tail with the possibility of further rate hikes still to come.

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Unlike previously, this time markets took fright, seemingly taking them at their word.

In its latest Monetary Policy Statement, the Reserve Bank said that while monetary conditions are restricting spending and reducing inflationary pressure as anticipated, and supply constraints in the economy continue to ease, “inflation remains too high”.

The Bank said spending needs to remain “subdued” to better match the economy’s ability to supply goods and services, so that consumer price inflation returns to its target range.

In the US the message was even more pointed where minutes from the Federal Reserve’s most recent meeting revealed further rate hikes remain a real possibility after the central bank said it saw “significant upside risks to inflation, which could require further tightening of monetary policy”.

As a result the closely watched 10-year US Treasury yield reached 4.328 percent, just shy of October’s 4.3354 percent intraday high, above which yields would be at their highest level since November 2007. The New Zealand 10-year yield also hit a high of 5.094.

After enjoying a stellar run so far this year, the price of Bitcoin fell 11 percent for the week to US$26,135, its biggest weekly decline since November, as traders adopted a ‘risk off’ approach in response to the market slump.

The NZ dollar fell a further 1 percent for the week closing at 59.22 US cents, a nine month low.

What a difference a month makes…

August is living up to its reputation for being a volatile month for markets as investors finally faced up to the reality that interest rate cuts are likely to be still some way off and accordingly, pricing on equity markets needed to reflect this fact.

As a result, the New Zealand sharemarket all but wiped out the last of its gains for the year at one point on Friday after the NZX50 fell as low as 11,550, though a 60 point rally in the final hours of trading saw it limp back above its key support level at 11,600 to close at 11,611, down 1.9 percent for the week.

Month to date the local index has fallen on 12 of the last 14 trading days declining 3.7 percent so far in August making it by far the worst month of the year so far. Across the Tasman Australia’s ASX200 index is down a similar 3.5 percent this month, while in the US the benchmark S&P 500 index has already fallen 4.8 percent in August.

Adding to market jitters, Fonterra lowered its farmgate milk price forecast for the second time in a fortnight as demand from China, our largest trading partner, remains very weak.

The dairy co-op reduced its 2023-24 forecast to a midpoint of $6.75 per kilo of milk solids, after initially reducing it to $7kg/ms just two weeks ago following a 16 percent slump in the Global Dairy Trade index since May.

The latest forecast means prices are now back to the level they were at in 2018 at a time when farmers are facing a significant rise in their input costs.

Skellerup result a rare bright spot so far this earnings season

Rubber products manufacturer Skellerup continued its recent form of surprising on the upside with its year-end financial result.

The company reported a 7 percent lift in its full year profit to $50.9 million after experiencing growth in all of its divisions.

Skellerup chief executive David Mair said he was “particularly proud” of the result given the challenging global economic conditions the company faced during the period.

“The result reflects the success of our business strategy, purpose and focus,” he said.

The operating earnings of the company’s industrial divisions arm lifted 10 percent due to increased sales of its wastewater products, high performance foam and roofing applications.

However sales revenue growth of 5 percent was slower than in recent years.

The company rewarded shareholders with an increased full year dividend of 22c per share, while its shares ended the week with a gain of 8 percent at $4.47, though year-to-date they are down 15 percent.

Spark also reported a lift in its year end profit helped by the sale of a majority stake in its mobile towers business TowerCo to a Canadian pension fund as well as quitting its sports streaming business Spark Sport. However, adjusted underlying earnings of $1.19 billion increased less than 4 percent for the year.

Mobile service revenue rose 9 percent to $980 million, driven by strong connection growth and the return of overseas roaming to 86 percent of pre-covid levels.

Chief Executive Jolie Hodson said the company forecast its underlying profit for the 2024 financial year to be between $1.22b and $1.26b.

Spark shares closed on Friday at $5.08, down 1.5 percent for the week and 4.9 percent for the year.

Companies reporting results this week…

Monday: Freightways, Mercury Energy, Chorus, a2 Milk, Steel & Tube

Tuesday: Property for Industry, Winton, Comvita

Wednesday: Scales, Channel Infrastructure, EBOS, Summerset, Precinct Properties, SkyCity Entertainment, Seeka

Thursday: Air NZ, Move Logistics, Genesis Energy, Hallensteins, Auckland Intl Airport, Sky TV

Friday: Port of Tauranga, NZX, Vector, Vista, Michael Hill, NZME, Verita Services, Marsden Maritime

China’s economic woes continue to worsen

China’s central bank has, once again, been forced to defend its currency as concerns mount over the health of the world’s second-largest economy.

Efforts by the People’s Bank of China to arrest a slide in the renminbi follow a dismal series of economic data in recent days that showed weakening exports, waning consumer confidence and mounting issues amongst some of the country’s leading property developers.

Foreign exchange traders and analysts said downward pressure on the Chinese currency intensified after an unexpected interest rate cut by the central bank last Tuesday.

The move reflected mounting discomfort at the central bank over the speed of the Chinese currency’s fall, which has been driven by continued underwhelming economic performance and outflows from the country’s renminbi-denominated bond and stock markets.

The Chinese economy has struggled for months to rebound from the end of strict pandemic controls last year, with weak trade and little sign of the expected resurgence in consumer spending. In contrast with much of the world, price rises have been muted and data in July showed the economy falling into deflation. Beijing policymakers have set an economic growth target of 5 percent this year, the lowest in decades.

Adding to concerns, China’s escalating property crisis deepened last week with two major developers facing severe financial difficulties that threaten to send shock waves through the country’s economy and beyond.

Evergrande, the country’s largest property developer, filed for chapter 15 bankruptcy protection in New York on Thursday. The provision permits the company to protect its US assets and will allow cross-border bankruptcy proceedings as it undergoes a restructuring.

The filing from Evergrande, which defaulted in 2021 after a liquidity crisis, came a day after China’s securities regulator notified the company’s Chinese branch that it was being investigated for suspected disclosure violations. It has become the world’s most indebted property developer, with more than US$300bn (NZ$508bn) in liabilities.

And now Country Garden, which was once China’s largest property developer by revenue, also faces a risk of default in the coming weeks.

The company is one of the few major homebuilders to have avoided default since the introduction of a “three red lines” policy in 2020 that was aimed at reining in the debt levels in the highly leveraged sector. The red lines set limits on liabilities-to-asset ratios and ensure companies hold cash reserves equivalent to at least 100 percent of short-term debt.

Since the introduction of the policy, companies responsible for about 40 percent of Chinese home sales have defaulted.

Country Garden, which missed two significant bond payments last week, has until early September – when the grace period on those payments expires – to quell fears that it too is about to suffer the same fate as its defaulting peers.

The mounting turmoil in China’s property sector has left suppliers unpaid and homebuyers, who have often made hefty cash down-payments, without their finished apartments. That’s leading to buyers in hundreds of cities staging mortgage boycotts in protest at the unfinished developments.

As confidence in the real estate sector continues to plummet, so have home sales, depriving developers of much-needed cash to complete construction works and meet interest payments.

According to ratings agency S&P Global Ratings, new home sales for the top 100 property developers declined by 33 percent last month, compared with 2022, while Country Garden’s sales plunged by more than 60 percent.

With liabilities estimated at around 1.4 trillion yuan (NZ$310 billion), about 60 percent the size of Evergrande’s, Country Garden has nearly four times as many housing projects in China under construction, leading to fears of widespread social unrest if construction halts.

The company had promised to deliver 700,000 units this year, but in the first six months it has completed less than half that number.

In a filing last week the company described its current predicament as being an “unprecedented difficult period” in its history.

China is the world’s biggest property market and there are fears financial difficulties could spread to other parts of the economy and to overseas bondholders. US based BlackRock, one of the world’s largest investment funds, currently holds US$352m of Country Garden dollar bonds according to Bloomberg data.

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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