Global markets were generally higher overnight as the market digested a European Central Bank (ECB) announcement. The ECB said it would not raise interest rates until mid-2019, a day after the U.S. Federal Reserve increased its key rate and hinted at two more hikes by the end of 2018.
The news saw the US dollar jump, while the Euro tumbled. Both the Aussie and NZ dollar have tumbled below 75 cents and 70 cents versus the US dollar respectively overnight with investors rushing into the US dollar. As we have discussed in the past, one of our key medium term views is that higher interest rate in the US will drive US dollar strength (all else equal a higher interest rate increases the return and hence the attractiveness of investing into a specific currency). This dynamic played out overnight.
We continue to see beneficiaries of a weaker currency such as exporters, offshore earners and tourism facing stocks like Airports and Airlines as a medium term investment theme.
Stock in Focus: Air New Zealand (AIR:NZ / AIR:AX)
Shares in Air New Zealand led the NZ index higher yesterday as the airline told investors at a briefing it still expects annual earnings to beat last year's result despite the squeeze from rising fuel costs, which it sees as an ongoing headwind into 2019.
Air NZ reaffirmed guidance for pre-tax earnings of more than $527 million in the year ending June 30, beating what it reported in 2017. Air NZ expects annual fuel costs of $990 million at US$75 per barrel. The average jet fuel price in the 2016 and 2017 years was US$60/barrel. The airline has already responded to the higher cost of fuel with increased prices on domestic and international routes. Air NZ also hedges a significant portion of its jet fuel exposure.
While we are positive on Air NZ given our tourism boom investment theme, potential investors do need to have an appetite for risk considering the highly competitive airline industry and impact of changing jet fuel.
We currently have a BUY (High-Risk) recommendation on Air NZ.
Members should look out for a full update on Air NZ to be released in our weekly report.
Click here now to login and view our Reports & Portfolio Holdings
Australia & New Zealand Market Movers
The Australian share market was a touch lower on Thursday (ASX 200 index -0.11%) as Australia’s largest bank – CBA dropped to almost a 5-year low. On the upside, there was a relief rally in Telstra shares as the struggling Telco it experienced its biggest daily gain of the year following a broker upgrade report. Shares in Blue Sky continued to tumble after it announced a $59.4m earnings hit with the stock now down nearly -90% for the year.
The New Zealand market was more or less flat yesterday (NZX 50 index +0.00%) as NZ shares hover at a record high. Air New Zealand and Fisher & Paykel Healthcare were higher as the NZ dollar fell, leading gains on the market. In other news, the Commerce Commission said it is concerned that the 'asset beta' Fonterra Cooperative Group uses to determine the farmgate milk price is too low, meaning it ends up paying its farmers a higher price for their milk than would be warranted. Mercury rose after it raised its earnings guidance for a fourth time as more rain around Taupo keeps the power company's North Island generation pumping out more electricity.
3 Things Markets Will be Watching this Week
1. Geopolitics as US President Trump meets with North Korean Leader Kim Jong-un on Tuesday.
2. The US Federal Reserve makes an interest rate decision Thursday morning (AU/NZ time)
3. Trade tensions with the US remain in focus following the G7 summit over the weekend.
Have a Great Day,
Team