Global markets were mixed overnight, with the US market (S&P 500 index, +0.4%) ending a volatile session up, as investors nerves eased following news that Senate Minority Leader Mitch McConnell would offer a short-term debt ceiling extension to avoid a US debt default – until December. Markets remain volatile on concerns around inflation & interest rates, China developments, surging energy prices, and one risk has now been pushed out – being the debt US ceiling
Most sectors were higher, with investors buying the dip in some key technology stocks, with FAANG stocks all in the green. While reopening stocks which had been strong in recent session drifted lower giving back some gains. Th energy sector was the weakest, after Russia’s President Vladimir Putin said the country is ready to help lift supply of natural gas which saw the commodity pull back from its strong rally.
European Markets (Stoxx 600 index -1.0%) were down overnight, as inflation concerns weigh on the market coupled by German factory orders falling -7.7% in August and Eurozone August retail sales growth which weaker than expected.
Closer to home, RBNZ raised the OCR 0.25% to 0.50%, its first rate hike in 7-years which had been widely flagged and came as no surprise – with the RBNZ citing cost pressures are becoming more persistent. “The committee noted that further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment”. With expectations of possibly one more rate hike by the end of the year, and few more next year we could see the OCR hit 2.00% by mid-2023 (a level not seen since 2016).
Earlier in the week, the RBA made their interest rate decision on Tuesday to hold rates flat at 0.10%, with no indication for rates to rise until inflation remains within the 2-3% range, which will not be met by 2024. However, the RBA will taper its bond buying down from $5 billion a week to $4 billion until February and is taking a more supportive stance to keep interest rates lower.
A2 Milk (:NZX / A2M:ASX)
A2 Milk shares sank -6.3% yesterday following the class action from an Australian Law firm being announced which alleges the company engaged in misleading or deceptive conduct in breach of the Corporations Act, and breached continuous disclosure rules in posting several back-to-back downgrades.
A2 Milk will defend themselves stating they followed disclosure procedures. This could be a lengthy process which will create an overhang on the share price. Given results of class actions of this nature over the last 20 years there is a wide range of possibilities including no settlement – and there are estimates that the average settlement for A2 Milk could be 8 cents per share, with a maximum of 29 cents per share (the last relevant class action settlement was by infant formula business Bellamys which settled the class action for $49.7m in late 2019>
Overall, we believe this is a topical issue but the impact will be fairly limited in the overall scheme of things – with the company needing to focus on recovering the business out of its recent slump.
We remain HOLD rated on A2 Milk at the current juncture due to the uncertainty in operating conditions the business is likely to face over the next 12 months. While the class action is adding some near-term negativity it appears to be a relatively minor issue and a lot of negativity is being priced in to A2 shares at the moment.
Australia & New Zealand Market Movers
The Australian market was down on Tuesday (ASX 200 index -0.6%) taking on a weak lead from wall street as well as heading towards a side of caution as RBNZ announced their rate hikes.
The big banks were hit had, after being told by Australian Prudential Regulation Authority (APRA), to raise the serviceability buffer used to assess loans. A number of blue chips across sectors were also weaker, with travel stocks down given back some of their recent gains.
Energy stocks again led the market as the price of coal, gas and oil extended their strong rally, while tech stocks also edged higher following their recent slump.
The New Zealand market was down yesterday (NZX 50 index, -0.3%) with an understandably muted response as the market had priced-in yesterday’s interest rate hike.
Property related stocks were generally weaker again Oceania down -1.4% gain, Goodman Property Trust down -1%, Ryman healthcare and Property for Industry both down -0.3%.
3 Things Markets will be Watching this Week
- Key events this week include RBNZ rate call this Wednesday, and RBA decision this Tuesday.
- US Non-Farm Payroll Data due later this week (monhtly employment figures)
- Covid and lock-down related news flow both sides of the Tasman.