Global markets continued to sell-off overnight as European and US stocks extended losses as investors appeared to give up on a short-term rebound. Markets are now clearly in a "risk-off" mode and investors are taking profits where they can. Once again, volatility is likely to be higher in 2018 (after an extended period of market calm in 2017) given market valuations and the prospect of rising bond yields and as the market reassesses the track for global interest rates, in our view.
In other news, the Reserve Bank of New Zealand kept the official cash rate unchanged at 1.75 percent and forecast it will rise to 1.9 percent in June 2019, unchanged from its prior projection in November. A full rate increase is still signalled by March 2020 when the benchmark rate is forecast to be 2 percent. Further, the RBNZ now does not project headline inflation to get back to 2 percent until mid-2020, around two years later than it forecast in November. The relatively dovish announcement has come in contrast to those who expected rate hikes in NZ, and we continue to believe the RBNZ will remain on hold in the near term. The NZ dollar has come under some selling pressure post the announcement.
Reserve Bank of Australia governor Phillip Lowe also tried to talk down the prospect of rate hikes by the RBA in a speech yesterday.
Stock in Focus: Air New Zealand (AIR:NZ / AIZ:AX)
Air NZ shares have been under some pressure of late as a surge in the price of crude oil (which recently touched 3-year highs) Is raising concerns around rising jet fuel prices which are the biggest costs for airlines.
This will put pressure on Air NZ’s earnings particularly for long-haul routes, which are already highly competitive, although Air NZ also have a degree of hedging for their fuel costs in the shorter term.
In other news, Air NZ recently posted strong operational stats for the month of December 2017 which reinforced our tourism boom investment theme. Air NZ said 1.69m passengers were carried by the airliner in December 2017, a +6.1% increase from December 2016. Competition for international and long-haul flights into Auckland International is intensifying. However, domestic and short-haul were the star performers with passenger numbers up +7.51% and +7.1% respectively in the recent update.
We currently have a High-Risk BUY rating on AIR.
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Australia & New Zealand Market Movers
The Australian share market pulled off early lows to end with mild gains yesterday (ASX 200 index +0.24%) as investors focused on earnings from some of the country's biggest companies. Financials were helping the Australian market to advance as NAB shares climbed after it said it was on track to meet it targets as it reported a 3% rise in first-quarter cash profit. Origin shares fell after the firm said that it would take a $533 million write down related to its gas operations.
The New Zealand market lost ground on Thursday (NZX 50 index -0.21%) as heightened global volatility continued to subside. The big news on the market related to 2 stocks on which trading was halted – Fletcher Building and insurer CBL Corp (CBL shares have been suspended due to concerns over its continuous disclosure obligations).
Fletcher Building shares were halted pending a review of key projects at its building and interiors unit (FBU’s troubled construction division) as it prepares its first-half accounts. The company expects to breach its debt covenants because of further "material losses" at its business and is scheduled to trade again on Monday after more information is released.
3 Things Markets Will be Watching this Week
1. US earnings season is in full swing, while local AU/NZ companies also head into earnings season.
2. The Reserve Bank of Australia makes an interest rate decision Tuesday,
3. The Reserve Bank of New Zealand also makes an interest rate decision this week on Thursday.
Have a Great Day,
Team