Santa Sell-off, Uncertainties Heading into 2019

21 December 2018

Please note this will be our last daily update for the year, and we will resume in mid-Jan 2018. We wish everyone a Merry Christmas and a prosperous New Year.
Global markets continued to sell-off overnight, as US stocks dropped over -1%, with disappointing earnings reports adding to the gloom after the Federal Reserve quashed hopes of a toned-down approach to its interest-rate hike trajectory.
Adding to the nervousness on Wall Street, President Trump threatened to partially shut down the US federal government on disagreement around funding the wall along the US-Mexico border. Not helping global sentiment was a new warning from the Bank of England about the cost of Brexit.

As shown in the chart above, the US market (S&P 500 index) is clearly in a correction period, now at its lowest levels since Sep 2017, dashing hopes for a Santa Rally (trading is expected to thin out ahead of the holiday period, where abbreviated trading and shortened weeks often supports what's called a 'Santa rally').
Interestingly, it is the growth names and cyclical stocks such as manufacturing companies which have been hit hard, while companies in defensive sectors like telco’s, property and infrastructure are outperforming. This is one indication that the markets are (rightly or wrongly) predicting an economic recession in the US. The defensive, dividend paying nature of the NZ market has seen the NZX outperform, as it remains up about +4% year to date. The Aussie market is suffering, with the ASX at its lowest level since December 2016.
Volatility has exploded since October, and returned to markets after what was an extremely quiet 2017. We are clearly in the latter stages of what has been a long bull market since the 2008/2009 financial crisis. While we think medium-term investors should not panic in times such as these, given the uncertainties we believe it is prudent to allocate a portion of the portfolio to cash in order to protect against down-side moves.
In terms of buying stocks, we see individual stock opportunities, although downward market risks persist – as investors fret about US Federal Reserve policy (markets have become fearful that the Fed will go too far and push the US into recession), geopolitics such as Brexit and the trade war between the US/China, and potentially slowing economic growth in key markets. It also seems that “good news” is not being reflected in a market rally right now, while “bad’ or “ok” news is being severely punished by the market.
Unfortunately, we will not have quick answers/resolutions to the issues facing investors as we head into 2019, and we expect that the start of 2019 will continue to be a volatile period for investors.

Australia & New Zealand Market Movers

The Australian share market was hit hard on Thursday (ASX 200 index -1.34%) as the ASX sits at a 2-year low. Losses were experienced across the board, with the materials sector suffering the biggest losses. In stock news,  MYOB shares fell 14% after private equity giant KKR revised its bid for the accounting software company. In October, its initial offer was worth $3.70 but on Thursday, it pitched a new offer worth just $3.40 a share. MYOB's board informed KKR it is not recommending shareholders accept the revised offer.


The New Zealand market was in positive territory yesterday (NZX 50 index +0.11%) as investors sought out blue-chip stocks, such as Spark New Zealand and SkyCity Entertainment Group, before heading into the holiday period. The New Zealand dollar was sharply weaker against the US dollar after weaker-than-expected economic growth (GDP fell -0.3% for the quarter to an annual rate of 3.0% growth) in the third quarter added to the view that rate cuts may be back on the table. . Interestingly, ANZ economists have changed their forecasts and are predicting interest rate cuts by the RBNZ over the next couple of years


3 Things Markets Will be Watching this Week

  1. Tensions between the US & China following the arrest of Huawei’s chief financial officer will likely dominate headlines.
  2. The US Federal Reserve makes its final interest rate decision for the year Thursday morning (AU/NZ time).
  3. NZ economic growth (GDP) figures and Australian employment data is also published Thursday.


Have a Great Day,


Global markets continued to sell-off overnight, as US stocks dropped over -1%, with disappointing earnings reports added to the gloom after the Federal Reserve quashed hopes of a toned-down approach to its interest-rate hike trajectory.

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