Global markets were higher on Friday, with Europe up strongly while the US market once again edged higher. There was positive economic news in terms of US monthly payrolls (employment data) which strengthened the US Federal Reserve's bias toward tighter monetary policy and the Trump administration revived chatter about tax reform.
The news also saw the US dollar surge, and with the US unemployment rate at 4.3%, we believe the market is underestimating the pace of rate hikes by the US Federal Reserve. This is key to our forecast for a higher US dollar and lower AUD & NZD (all else equal a higher interest rate drives demand for a currency and results in currency strength). The market is pricing about a 50% chance of another rate hike in the US this year.
Investors will remain focussed on quarterly profit reports especially as the market has been counting on earnings to support the relatively high valuations for equities. Earnings announcements also kick off in the NZ market this week.
Stock in Focus: Treasury Wine Estates (TWE.AX)
Treasury Wine Estates shares have been somewhat volatile of late, especially given it exports wine offshore and is hence sensitive to currency moves (hurt by recent strength in the Australian dollar)
TWE shares rebounded last week after the wine supplier reaffirmed its earnings guidance for the second half of the 2017 financial year. This also eased concerns raised by some analysts which are questioning TWE’s Asian expansion plans as unrealistic.
As we discussed last month, TWE has been one of our best performing stocks. Recent strategy changes by TWE to focus on premium wine brands has increased profit margins significantly. At the same time, TWE offers investors an attractive play on the gentrification of the Asian pallet – in particular given the growing taste for red wine. Growth remains strong in this sector (particularly in China) and we expect the momentum to continue over the longer term.
We are currently BUY rated on TWE as a medium term holding.
Members should look out for a full update on TWE to be released in our weekly report.
Australia & New Zealand Market Movers
The Australian share market closed lower on Friday (ASX 200 index -0.25%) but the ASX still managed to end the first week of earnings season slightly higher. A large slump in Commonwealth Bank weighed on the market. Investors sold CBA shares on Friday as further details emerged of the scope of the civil case being brought against the bank by the anti-money laundering regulator. CBA shares dropped a sharp 3.9 per cent to drag the benchmark ASX 200 index lower.
The New Zealand market lost a bit of ground on Friday (NZX 50 index -0.10%) with Kathmandu Holdings and Xero dropping while A2 Milk Co hit a record high. A2 Milk and Synlait released a statement on Friday saying the two are confident with the progress of their application to export a2 Platinum infant formula to China from Jan. 2018. Sales of the formula currently comprise about 8 percent of A2's total infant formula sales, it said.
3 Things Markets Will be Watching this Week
1. It’s all about corporate profits as Earnings season continues across the US and Australia.
2. Local earnings season kicks off in New Zealand.
3. The Reserve Bank of New Zealand releases an interest rate decision Thursday, with it being Governor Graeme Wheeler's last monetary statement.
Have a Great Day,
Team
