Global markets ended a choppy session lower overnight as investors digested the latest policy announcement from the US Federal Reserve.
Shares pared gains as Jerome Powell spoke at his first news conference as chairman of the Fed. Stocks had initially extended their rally in the immediate aftermath of the Fed's decision to lift rates for the sixth time since late 2015. The vote to lift the federal funds rate target range to 1.5% to 1.75% was unanimous 8-0. However, it was the outlook for rates which was of more interest. Seven officials projected at least four quarter-point hikes would be appropriate this year, while eight expected three or fewer increases to be warranted.
US central bankers projected a median federal funds rate of 2.9% by the end of 2019, implying three rate increases next year. The Fed noted the “economic outlook has strengthened", with higher GDP and lower unemployment rate projections. Overall, we saw the announcement as mixed as it indicated underlying economic strength, but disappointed those expecting 4 rate hike s in the US this year. As we have discussed previously, we are watching developments closely as the pace and track of interest rates is likely to be a key factor in determining share market returns this year.
Closer to home, yesterday saw both Fonterra and Synlait Milk announce earnings updates, and the divergence between the NZ based dairy company’s performance was marked. Synlait shares jumped +14% as it smashed expectations s it announced a record profit, while Fonterra shares rose +1%.
Stock in Focus: Fonterra Shareholders Fund (FSF:NZ / FSF:AX)
FSF released an uninspiring half year result yesterday with a net loss of $348 million in the six months ended Jan 31, down from a profit of $418 million a year earlier.
While sales climbed 6% to $9.8bn, FSF wrote down the value of its Beingmate Baby & Child Food investment by $405 million, calling the performance of its Chinese partner "unacceptable". The write-down and a $183 million settlement with Danone led to a first-half loss, although it appears these events were already well flagged and expected by the market. We find it quite remarkable that FSF is struggling in the Chinese infant formula market, while companies such as A2 Milk are having great success.
Excluding one-time items, 'normalised' profit dropped -36% to $248 million as the company's gross margin fell -6% to $1.66 bn while operating expenses climbed 3% to $1.26 bn. CEO of Fonterra Theo Spierings has resigned after seven years in the role, but said his resignation isn't related to the company taking the recent large losses.
We currently have a BUY rating on FSF as a medium term agricultural holding.
Members should look out for our full update on FSF to be released in an upcoming weekly report.
Australia & New Zealand Market Movers
The Australian share market was in positive territory yesterday (ASX 200 index +0.23%) as shares edged higher. Both of the Australian market's heavyweight sectors, the banks and miners, saw some buying during the session. Rio Tinto traded flat at $75.23 after telling shareholders it sold its Hail Creek and Valeria coal assets in Queensland to Glencore. In other news, Myer posted a record loss as the struggling retailer announced a massive write-down of its assets.
The New Zealand market rallied on Wednesday (NZX 50 index +1.40%) as the market rose to a new record high led by Synlait Milk, which jumped to an all-time high after posting strong first-half earnings growth. Synlait's partner A2 Milk also gained, along with Kathmandu Holdings and the Fonterra Shareholders' Fund. Synlait Milk posted a record first-half net profit on increases in the manufacture and sales of high-margin products and its relationship with a2 Milk. Profit jumped to $40.7m in the six months ended Jan. 31, from $10.2m a year earlier, as revenue rose to $439.3 million from $288.7 million in the prior period.
3 Things Markets Will be Watching this Week
1. Global politics remain in focus as details around trade tariffs to be implemented by the Trump Administration are announced.
2. The US Federal Reserve makes an interest rate decision Thursday morning (AU/NZ time).
3. The Reserve Bank of New Zealand also Reserve makes an interest rate decision Thursday morning..
Have a Great Day,
Team
