Global markets slipped overnight with European markets selling off more the Wall Street. In contrast, both the Australian and New Zealand dollar have continued on an upward trajectory recently, particularly against the US dollar which has been surprisingly weak.
There was news that negotiators finalised the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership agreement with 11 nations (including Australia & NZ) in the trade pact. That put it at odds with the US, where President Donald Trump announced new tariffs on some imported goods (solar panels and washing machines) stoking fears about the global trade environment, and adding to the greenback's negative outlook at the margins.
The USD is now at its lowest in three years as measured by the Bloomberg Dollar Index (against a basket of currencies). Investors have sold the currency in part because of concern over Trump's protectionist push. Treasury Secretary Steven Mnuchin also endorsed the US dollar's decline as a benefit to the American economy and Commerce Secretary Wilbur Ross said the US would fight harder to protect its exporters.
Our medium-term view remains for strength in the USD versus the AUD & NZD. One stock which is sensitive to the USD (NZD/USD exchange rate) is NZ Refining which we discuss below.
Stock in Focus: NZ Refining (NZR:NZ)
In terms of recent news, NZR announced full year processing fee income of $328m up +18% from last year while releasing their November and December Throughput and Margin report. The oil processor achieved throughput of 7.3 million barrels for the two-month period, and a gross refinery margin of USD $6.83 per barrel, which was a solid result for NZR generating $50.7m in processing fees. The average exchange rate for the period was 69 cents (NZD versus the USD).
While it was a pleasing to see that refining margins remain well above historical averages, believe the next leg higher in terms of NZR’s profitability will have to come from currency gains. We highlight that NZR is more suited to investors with a higher risk appetite given earnings are exposed to volatile market factors.
We currently have a High-Risk BUY rating on NZR.
Australia & New Zealand Market Movers
The Australian share market continued its move higher yesterday (ASX 200 index +0.29%) as investors pushed the market back to levels last seen at the middle of January, amid ongoing optimism for economic growth at home and overseas. Amid the optimism, financials were stronger for the second day in a row, with Macquarie and Westpac posting sold gains.
Insurance firm QBE was a standout in the sector, rising 5.4% as analysts considered potential paths for the company after new CEO Pat Regan foreshadowed a full-year loss. Santos shares gained after the oil and gas producer posted increases in quarterly and full-year sales as it continues to deliver on its turnaround strategy and benefits from climbing commodity prices
The New Zealand market was higher on Wednesday (NZX 50 index +0.20%) as shares were mixed as trading picked up, with A2 Milk and Mercury Energy gained while Metro Performance Glass fell. Pushpay Holdings was the best performer on the NZX 50 as its shares rebounded after a pullback. In stock news, Kathmandu rose as the outdoor equipment retailer said it expects a 20% lift in first-half net profit on a 4% lift in total sales and wider gross margins.
3 Things Markets Will be Watching this Week
1. US earnings season continues – with a particular focus on company comments around the impact of US tax cuts.
2. The US political deadlock which has resulted in a government shutdown.
3. The European Central Bank makes an interest rate decision Friday.
Have a Great Day,
Team