Global markets sold off sharply on Friday, as investors dumped shares on Wall Street (which experienced the worst trading day since the 3rd of Jan) as weak factory data from the United States and Europe led to an inversion of US Treasury yields, fuelling fears of a global economic downturn.
Recent weakness in European and US data has renewed worries about the world economy. The US yield curve has inverted for first time since 2007 (i.e. long-term interest rates are lower than short term rates) following the soft manufacturing data, which is a warning that the bond market is expecting a US economic recession (yields on US 10 year bonds are below the rates on three-month bonds).
This does not necessarily imply a recession is a certainty, although as we highlighted earlier in the month in our outlook update – there remains a large question mark around global economic growth. A global economic growth slowdown is a risk which could cause a significant market correction, particularly if the US & Chinese economy’s slow materially, and this was a major reason for the sharp sell-off late last year.
On the flipside, there have been positives this year around global Central Bank moves, and global politics. Hence market volatility is likely to remain elevated in our view, and we are likely in the latter stages of what has been a very long bull market since the global financial crisis in 2009.
For the week ahead, the focus locally will be on Wednesday’s RBNZ decision. The NZ Reserve Bank is expected to keep rates on hold at 1.75% & reiterate the next move could be up or down. Economists, however, remain split on whether or not a cut is actually on the cards down the track. We expect a cautious tone from the RBNZ on the outlook for both the domestic and global economy.
Stock in Focus: QBE Insurance (QBE:ASX)
The long-awaited turnaround for QBE may finally be here, with its shares rebounding +25% this year, after delivering their 2018 full year result which surprised the market and met guidance.
QBE reported net profit after tax for the 2018 financial year of $390m, a big turnaround from last years loss of -$1,249m, a year plagued by a number of significant weather catastrophes. This resulted in a better group operating ratio for the year, partially offset by weaker investment return.
Given the benefits of QBE’s simplified business and macro-factors moving in favour of QBE’s investment program, QBE provided upbeat guidance for the 2019 financial year – with a further improvement in the group operating ratio from its cost reduction program and lower risk profile, as well as expectations of higher investment return given higher interest rates. QBE also benefits from a falling Aussie Dollar. We remain positive on QBE as a turnaround story led by its new CEO to run a more efficient and simpler operation.
We currently have a BUY recommendation on QBE.
Australia & New Zealand Market Movers
The Australian share market made gains on Friday (ASX 200 index +0.45%) as the ASX finished the week with a rally led by the big banks and market heavyweight CSL. Most sectors were up, aside from mining and telecom shares, which were down slightly. In stock news, shares in St Barbara crashed after the gold miner said continued production at its historic Gwalia mine in Western Australia would have to rely on trucking ore rather than hoisting it out. Suncorp was after it said shareholders would receive a special dividend of 8 cents per share from the proceeds of its Australian life insurance sale.
The New Zealand market rallied on Friday (NZX 50 index +0.95%) as the prospect of low interest rates for longer stoked demand for companies offering regular income such as the power generators. Synlait Milk extended its recovery from a weak first-half result earlier this week. Air NZ shares also had a strong day, after its shares have been hit hard post its profit warning in February.
3 Things Markets Will be Watching this Week
- Signals around the health of the global economy will remain a focus for investors.
- US economic growth (GDP) figures are published Thursday night (AU/NZ time).
- The Reserve Bank of NZ makes an interest rate decision on Wednesday.
Have a Great Day,