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Newsroom.co.nz

Business

Andrew Patterson

NZ sharemarket on verge of bear market

NZ China the Reserve Bank Jay Powell Oil Economy New Zealand Stats NZ Inflation Infometrics

'Rising bond yields, a slowing economy, declining exports, particularly to China, and now escalating geopolitical worries, not to mention a still uncertain election outcome locally, have all taken their toll on investor confidence.' Photo: Getty Images

The NZX50 has fallen 19.5 percent since January 2021, meaning it is likely to be grizzly this week

After a generally fine long weekend across the country, the New Zealand sharemarket will start the week in a mood that could hardly be described as sunny.

Equity markets globally continue to tumble in the wake of rising tensions in the Middle East that has seen the NZX50 index, as of last Friday, now start with a 10, rather than 12 as it had just three months ago.

Expect the local market to fall further today after being closed yesterday for Labour Day following sharp falls in Japan and China of 0.8 and 1.5 percent respectively, while across the Tasman Australia’s ASX200 index also fell 0.8 percent to close at a one-year low.

Rising bond yields, a slowing economy, declining exports, particularly to China, and now escalating geopolitical worries, not to mention a still uncertain election outcome locally, have all taken their toll on investor confidence, which has seen the NZ sharemarket now back at the same level it was exactly a year ago.

Year to date the NZX50 has fallen more than 5 percent, with half of that decline occurring last week alone when the index suffered its biggest weekly fall this year closing at 10,994.

But a broader measure of the extent of the decline is evident since the local market’s top of 13,644 in January 2021. Since then the NZX50 has now fallen 19.5 percent, meaning it will likely enter bear market territory later this week, deemed as a fall of more than 20 percent from a previous peak.

With a busy schedule of leading companies holding AGMs this week including Fletcher Building, Port of Tauranga, Freightways, Skellerup and SkyCity Entertainment, investors will be keen for some updated commentary and insights from management as to their forward guidance, particularly the likely impacts of events in the Middle East.

In the US, the closely watched 10-year Treasury yield, which influences interest rates globally, crossed 5 percent for the first time in 16 years on Thursday, a level that continues to ripple through economies the world over by raising rates on mortgages, credit cards, and a wide range of loans. On the flip side, rising fixed term deposit rates continue to offer investors an attractive – and virtually risk free –alternative to stocks.

New Zealand’s 10-year Government bond yield is now at 5.61 percent having gained 36 basis points in just the last month alone.

Though economists used to quip that central banks were the only game in town because markets ‘danced to their tune’, now they are being eclipsed by geopolitics. As a result, it’s hardly surprising to see yields continuing to rise.

Gold prices have also benefited from the geopolitical turmoil gaining almost 7 percent over the past month as investors opt for the safety of the precious metal, while Brent Crude oil futures are back at US$92 a barrel after briefly falling below US$85 earlier in the month.

Having reached almost US$140 a barrel in the immediate aftermath of Russia’s invasion of Ukraine last year, oil prices have actually been remarkably restrained given the Middle East’s status as the world’s largest oil producer. However, that could all change rapidly if Iran decides to retaliate to an expected invasion of Gaza this week by Israeli forces.

With the NZ dollar at a one-year low of US58.28 cents expect petrol prices, and by implication inflation, to continue to push higher as tensions in the Middle East show little sign of easing, leaving the Reserve Bank in a difficult position managing the inflationary impact that would result from higher oil prices.

US Federal Reserve chair Jay Powell reiterated his concerns about the current situation in a speech he delivered last Thursday to the Economic Club of New York.

Though Powell struck a cautious tone just days before the central bank’s scheduled “blackout” period before its two-day meeting starting on October 31, he pointed to a range of risks officials now must consider as they determine how much more to squeeze the world’s largest economy to tame inflation.

Powell emphasised that the full impact of the Fed’s rate-raising campaign of the past 18 months was still not yet fully visible.

“A range of uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little,” he said in prepared remarks. However, he also noted the Fed’s interest rate policy has been muddied recently by mixed economic data and added geopolitical tensions sparked by the Israel-Hamas war.

The Reserve Bank will have its final meeting for the year on November 29 and will be desperately hoping that the oil price can be contained below US$100 a barrel, otherwise brace for a potentially nasty cocktail of economic impacts to follow.

Readers who can remember back to 1973 at the time of the last major crisis in the Middle East will have vivid memories of the devastating impact higher oil prices had on the NZ economy at the time. The implications of an all-out conflict in the world’s major oil producing region would be even more damaging this time around given the economy has barely had time to recover from the harm that Covid has already inflicted.

New trade data highlights weakening trade position as both exports and imports fall

New trade data shows New Zealand exporters are struggling as China’s slowdown continues to weigh on the local economy.

Stats NZ reported the September quarter showed goods exports fell $1.4 billion (8 percent), after a 3.7 percent rise in the June 2023 quarter.

Goods imports also fell $697m (3.4 percent), following a 7.5 percent fall in the June 2023 quarter leading to an overall quarterly trade balance that showed a deficit of $3.5b.

Annual exports to China have been falling since May 2023 with dairy exports in particular declining year-on-year in value to NZ$459m as weakening Chinese demand for Kiwi goods continued.

Meat exports also fell year on year.

Slowing global demand and continued subdued trade with China is likely to spell more trouble for exporters in the coming months, and consumer-sensitive imports will also be affected by a weakening domestic economy.

Highlighting the extent of our economic vulnerability, of the top 15 export commodities for the year ended September 2023, China was our top trading partner for seven of those commodities, Stats NZ noted.

In the year ended September 2023, China received 27 percent of the total value of New Zealand’s total goods exports ($70.4b). By comparison, in the year ended September 2013, that total was 18 percent ($8.3b) of New Zealand’s total goods export values ($46b).

Though China’s economic growth has been lower than widely forecast this year as the recovery from the pandemic takes longer than expected, on the plus side, there has been a rebound in global dairy prices over the past several weeks, suggesting consumer demand may finally be showing signs of recovering.

Slowing inflation paves the way for soft landing

Despite increasing headwinds continuing to buffet the New Zealand economy, economic forecasting group Infometrics remains confident the country is still on track for the much sought-after “soft landing”.

While acknowledging economic activity is set to remain patchy in coming quarters, it says year-end growth is predicted to bottom out at 0.9 percent during 2024, which is an upward revision of more than a percentage point from the trough that had been expected earlier this year.

But without immigration the situation would certainly be a lot worse.

“Part of the economy’s resilience is due to the record high net migration inflows that are currently occurring. The addition of 110,000 people to the population over the last year has filled workforce vacancies and skill shortages, boosted demand even as household budgets are being squeezed, and created a moderate pick-up in the housing market.”

At the same time as demand has held up, the easing in annual inflation to 5.6 percent suggests the Reserve Bank’s tighter monetary conditions are working as hoped. It said much of the slowdown in inflation to date had been driven by weaker global price pressures and the normalisation of international supply chains with inflation still forecast to trend down towards 3 percent by early 2025.

Infometrics believes the Reserve Bank is now unlikely to lift the official cash rate above 5.5 percent, though lingering price pressures could also prevent any rate cuts until late next year. It noted domestic inflationary risks that could persist well into 2024 include higher oil prices and transport costs, continued wage pressures if the labour market remains tight, or flow-on effects from the housing market recovery into broader consumer spending trends.

“The Reserve Bank is balancing these inflationary risks against weakness in the global economy, particularly in China, which is weighing on export prices. Significant cost increases since 2020 mean that the profitability of farmers is under major pressure. As a result, provincial regions with agriculturally based economies will struggle more than other regions over the next 18 months.”

Infometrics is also expecting prohibitive debt-servicing costs to limit the extent of any house price rises during 2024.

“The economic outlook is not without its challenges, which reflect the severe stresses the economy has been under throughout the last three years,” it said.

Coming up this week …

Tuesday