Global markets sold off on Friday, as the US unemployment rate fell to near a 49-year low of 3.7%, pointing to a further tightening in labour market conditions. The data saw another rise in US Treasury yields, with the 10-year at its highest levels since 2011.
As we touched on last week and have discussed in the past, the pace of interest rate moves higher will be a key factor for driving markets, given the importance of interest rates for driving economic growth and influencing valuations.
Further, “bond proxy” stocks are most vulnerable to higher interest rates. In the years following the Global Financial Crisis, sectors such as Utilities, Property trusts, and Telco’s saw large inflows from investors for their relative safety and high dividend yields, given interest rates on cash and bonds were so low – known as the yield trade. Now that rates are on the rise, it is likely that the yield trade will/already has begun to unwind, in our view.
Stock in Focus: Infratil (IFT:NZ / IFT:AX)
Shares in infrastructure investment company Infratil (IFT) have trended higher over the last few months.
In terms of recent news flow, IFT have upgraded their earnings guidance for the year end March 2019 from $500-$540m to $540m to $580m on the back of performance of the Longroad Energy business in the US. Infratil said the increase reflects a $34 million improvement in the contribution it expects from Longroad, a US wind and solar developer part-owned by the New Zealand Superannuation Fund.
The other news in the headlines to watch is the takeover bid by Infratil and Mercury NZ for Tilt Renewables, as Tilt’s independent directors have said they “strongly” recommended shareholders reject the offer which they believe undervalues Tilt significantly.
We currently have a BUY recommendation on IFT.
Members should look out for a full update on IFT to be released in our weekly report.
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Australia & New Zealand Market Movers
The Australian share market managed to close in positive territory on Friday (ASX 200 index +0.15%) as stocks recovered from a morning slump to end the week on a high. It was a tough week for the major banks, which lead market losses as the prospect of a credit crunch increased. Fitch Ratings said that the findings of the royal commission would put pressure on bank profits, even if it did not immediately affect their credit ratings At the same time, a strong greenback battered the Aussie dollar.
The New Zealand market finished the week on a lower note (NZX 50 index -0.46%) with the market continuing to retrace on Friday as rising US bond yields dented investors' appetite for stocks. Synlait Milk led the market lower, dropping to a five-month low. In stock news, Air New Zealand fell as the national carrier had a strategic partnership with Singapore Airlines re-authorised. Summerset has bought an 8-hectare site in Papamoa Beach for a $150 million-plus village, the development is Summerset's first in Tauranga and is expected to be built in 2020.
3 Things Markets Will be Watching this Week
1. Trade related news-flow is likely to continue to feature in headlines.
2. In an event light week, Tuesday’s Aussie Business Confidence survey will be carefully watched for any adverse impacts from US-China trade risk and the housing slowdown.
3. Important US inflation data is published on Friday.
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