Lowest Volatility in Decades, RBNZ Sees NZD Fall

15 May 2017

Daily Market Insights

Global markets were little changed overnight as volatility remains subdued. A rebound in the oil price saw the energy sector make gains while investors digested a weak batch of US corporate earnings and news that Trump has dismissed the FBI chief.
 
Closer to home, the Reserve Bank of New Zealand has kept interest rates unchanged this morning which we discuss below.
 
The US market continues to hover around all-time highs, with little moves in either direction. In fact, global markets have been remarkably calm of late, with the VIX (a measure of the volatility of the Us share market, namely the S&P 500 index) at its lowest levels since 1993 – see chart below. What this means is open for debate, although there is no doubt that it is extremely rare for Wall Street to be as calm as it is right now.
 

 
RBNZ on Hold
The Reserve Bank of New Zealand has kept the official cash rate unchanged at 1.75% this morning. Heading into the announcement it appears the market was looking for signals for a rate hike in the near future, although on first read the RBNZ seems to remain neutral on its monetary policy stance. This has seen the NZ dollar fall about 1 cent this morning versus the US dollar to 68.5 cents.
 
The RBNZ stated that “Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly”. Once again, expect RBNZ (and the RBA) to keep interest rates on hold in the near term.
 
Interestingly, the RBNZ also stated that “House price inflation has moderated further, especially in Auckland. The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions. This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand”.
 
 
 
Australia & New Zealand Market Movers
The Australian share market rebounded yesterday (ASX 200 index +0.61%) as investors reacted to Tuesday nights pro-growth Federal budget. The Big Banks remained mixed with WBC, CBA, and NAB ending the day lower while ANZ managed to recover ground and ended the day higher.   
 
In terms of stock moves, shares in sandalwood producer Quintis plummeted -40% as it said an important supply deal was terminated in December last year, but admitted this information was not conveyed to the board or top management. This kind of announcement is clearly unacceptable and raises very serious management and governance issues. We had previously downgraded our recommendation on Quintis as we felt the situation was volatile given a number of events including the managing director’s departure (which has been alleged to be in order to prepare a takeover bid) and risks were too high given it is also currently reliant on a single large customer in the important Chinese market. Clearly the most recent events make us even more cautious on Quintis and we are currently reviewing our recommendation.  
 
 
The New Zealand market was slightly higher on Wednesday (NZX 50 index +0.16%) led by local lender Heartland Bank for a second day as its rival Australian-owned banks faced new deposit levies across the Tasman, while Comvita extended its decline. Heartland Bank has the widest net interest margins among local banks as it avoids much of the mortgage market for more profitable, but riskier, business. Shares in dairy company’s A2 Milk and Fonterra also helped push the market higher.

3 Things Markets Will be Watching this Week

1.                 The Reserve Bank of New Zealand makes an interest rate decision on Thursday. 

2.                 Profit announcements continue in Australia with more of the Australian banks set to announce this week.

3.                 The Australian Budget is announced on Tuesday.
 

Have a Great Day,

Team

Global markets were little changed overnight as volatility remains subdued. A rebound in the oil price saw the energy sector make gains while investors digested a weak batch of US corporate earnings and news that Trump has dismissed the FBI chief.

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