Global markets were higher overnight, helped by high-flying shares of Alphabet and Netflix, as well as the US Federal Reserve’s confidence in the strength of the US economy.
As we discussed yesterday, the US Fed is clearly on the path to higher interest rates, once again hiking its interest rate to the 2.00%-2.25% range. The US Central Bank still foresees another rate hike in December, three more next year, and one increase in 2020 amid steady economic growth and a strong job market.
By contrast, yesterday saw the Reserve Bank of New Zealand (RBNZ) keep rates on hold at 1.75% hold for the 22nd month in a row, further widening the rate differential between the two countries. RBNZ Governor Adrian Orr continued to state the next move could be "up or down". Our view for some time now has been that central bank interest rates will remain unchanged in NZ and Australia, and this is a key reason for our forecast for a weaker NZD & AUD currency (all else equal higher cash interest rates increase the return generated on holding cash and the appeal/demand for a currency).
Stock in Focus: Harvey Norman (HVN:AX)
Shares in HVN have been hit hard, as its record-breaking profit run looks to have ended – reinforcing our negative view on the retail business.
The recent result is beginning to show signs the retailer is struggling in its core Australian retail business. We believe the Australian and New Zealand housing market appears to have peaked – which has been a major source of HVN’s growth over the last decade.
The arrival of Amazon and competition intensifying from JB Hi fi and Kogan, and at the same time a weakening AUD (which will lead to higher cost of goods) will result in lower sales revenue and weaker margins impacting profits going forward in their core markets, in our view.
We currently have a SELL recommendation on HVN.
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Australia & New Zealand Market Movers
The Australian share market was lower yesterday (ASX 200 index -0.18%) dragged down by mining and banking stocks after commodity prices weakened and the royal commission’s interim report looms. In stock news, accounting software business Xero is on the hunt for new acquisitions and plans to raise US$300 million through an issue of convertible notes it will list in Singapore.
The New Zealand market sold off on Thursday (NZX 50 index -0.68%) as A2 Milk extended its decline since its chief executive sold down her holding. Rising bond yields also dimmed the lustre of property stocks. Outside the benchmark index, Tilt Renewables was unchanged as independent directors again recommended minority shareholders reject a $2.30 a share offer from Infratil and Mercury NZ, saying the suitors' attempts to undermine the independent adviser valuation wasn't an assessment of the renewable energy company's worth.
3 Things Markets Will be Watching this Week
1. Trade related news-flow is likely to continue to feature in headlines.
2. The US Federal Reserve makes an interest rate decision Thursday morning AU/NZ time.
3. The Reserve Bank of New Zealand also makes a monetary policy statement on Thursday morning.
Have a Great Day