Business & Investing: Investors worried Fed likely to continue hiking interest rates again, JP Morgan CEO warns of an 'economic hurricane' and oil prices rise 50% in first six months of year
Local investors were feeling upbeat last week after the New Zealand sharemarket enjoyed its best week since February, gaining 3.2 percent and making it one of the best performing markets in the Asian region.
But this week is shaping up to be the real test for the local market.
Nearing the half way point of the year, the NZ market is yet to achieve back-to-back weekly gains as investors have increasingly switched their approach from ‘buy-the-dip’ to ‘sell-the-rally’.
The shortened trading week is set to begin on a downbeat note after a better than expected monthly jobs report in the US on Friday had investors worried that the Federal Reserve is likely to continue aggressively hiking interest rates, which is expected to push the US dollar higher and the kiwi lower.
Further unnerving sentiment, comments in the last few days from JP Morgan CEO Jamie Dimon, one of Wall Street’s most experienced and influential investment bankers, and Tesla founder and CEO Elon Musk added to an increasingly murky outlook for the world’s largest economy.
Dimon said he is preparing America’s biggest bank for what he described as an “economic hurricane”.
“You know, I’ve said [previously] there’s storm clouds out there but I’m going to change that … it’s a hurricane,” Dimon said last week at a financial conference in New York. While conditions seemed “fine” at the moment, nobody knew if the hurricane was “a minor one or Superstorm Sandy,” he added.
“You’d better brace yourself,” Dimon told a roomful of analysts and investors. “JP Morgan is bracing ourselves and we’re going to be very conservative with our balance sheet.”
Meanwhile, Musk told Tesla employees in an email that he had a “super bad feeling” about the economy and that the carmaker may need to cut up to 10 percent of its workforce (about 10,000 jobs). Tesla shares tumbled more than 9 percent in response to the comments.
Adding weight to their concerns, falling share prices in recent weeks, even as bond yields have eased, point to growing fears of a recession as investors worry that corporate profits are increasingly coming under threat.
With just three weeks left in the quarter for US companies (and for the half year for NZ companies with a June balance date) earnings reports in August will come under an intense spotlight for signs that the economy is slowing in response to rising inflation and falling consumer confidence.
And companies reporting results that come up short can expect to be punished by a market with a growing intolerance for subpar performance, though an increasing number are no longer providing earnings guidance given the growing economic uncertainty.
This Friday’s release of US inflation figures for May will have markets on edge. Year-on-year inflation is expected to be unchanged at 8.30 percent, while Core Inflation is expected to ease slightly to 5.90 percent.
Oil price continues to climb
Ominously overshadowing the global economy is the continued rise in the oil price with Brent Crude oil futures hitting US$121 a barrel last week, a 10-year high, despite pledges from Saudi Arabia and the UAE to increase supply.
The oil price has already surged more than 50 percent in the first six months of the year compared with a rise of 50 percent for the whole of last year.
This time last year the US Energy Information Administration forecast oil prices would average US$60.74 per barrel in 2022.
Last week Opec+ agreed to increase output in July and August to 648,000 bpd from the previously agreed 432,000 bpd, with the increased allocation spread across all its members. However, given most of Opec is unable to meet its present targets, with only Saudi Arabia, the UAE, and possibly Iraq, having any sort of spare capacity, and with Russia subject to sanctions, the outcome was described by some commentators as largely window dressing.
Morgan Stanley says markets are at an inflection point
Global markets are undergoing a fundamental shift after a nearly 15-year period defined by low interest rates and cheap corporate debt, according to US investment bank Morgan Stanley.
Co-President Ted Pick said the transition from the economic conditions that followed the 2008 financial crisis and whatever comes next will take “12, 18 or even 24 months” Pick told a New York financial conference.
“It’s an extraordinary moment; we have our first pandemic in 100 years, we have our first invasion in Europe in 75 years, and we have our first major inflation problem in 40 years,” he said.
“When you look at the combination, the intersection of the pandemic, the war and the inflation issue, it signals a paradigm shift, the end of 15 years of financial repression and the start of a new era to come.”
Eurozone inflation gaining pace
Eurozone inflation soared to a record 8.1 percent in the year to May, increasing pressure on the European Central Bank to speed up the pace of its exit from ultra-loose monetary policy.
The jump in eurozone price growth, from 7.4 per cent in April, was much higher than forecast by economists, who had been expecting a rate of 7.7 per cent.
The core number, which excludes more volatile energy and food prices and is closely watched by ECB policymakers, also rose above expectations from 3.5 to 3.8 per cent.
The higher than expected core measure, which signals price growth is gathering pace across most categories of goods and services, could tip the balance at the ECB’s meeting in Amsterdam this week in favour of raising interest rates at a more aggressive pace than currently outlined.
Rumour mill cranks up over possible Sky Television takeover
Speculation by the Australian Financial Review that Sky Network Television was actively courting a private takeover deal sent its shares surging almost 10 percent last week.
The article said that Sky’s advisers had been encouraging selected buyout firms to ‘kick the tyres’ with a view to a possible takeover offer.
Sky Television hadn't responded to the speculation by the close of trade on Friday and its shares finished the week at $2.64, up 5 percent for the week.
Coming up this week …
Wednesday
- Scales Corp AGM
- Residential Mortgages Standard & Special interest rates – RBNZ
Friday
- Business Employment Data (March Qtr) – Stats NZ
- Business Financial Data (March Qtr) – Stats NZ
- Electronic Card Transactions (May) – Stats NZ
