Business & Investing: What's behind the dreadful first three weeks of the year on financial markets here and overseas
After basking in one of the best summers for many years, investors who haven’t been keeping abreast of developments on global financial markets since Christmas will be in for a shock.
And yesterday’s announcement that NZ has now reverted back to the red Covid traffic light setting is now the latest setback just three weeks into a year that has already started badly.
While the arrival of the Omicron variant in the community was an inevitability given the rapidly rising number of border cases isolating in MIQ facilities, this latest development in the ongoing Covid saga poses the potential for significant disruption for businesses in coming months as more employees become infected and have to take time off work.
The already battered hospitality sector is set to endure more pain, given 100-person gathering limits, but equally the timing for the horticulture sector couldn’t be worse as it approaches the peak fruit picking season in February and March with limited seasonal workers likely to be available as Omicron cases escalate. Manufacturers and exporters are also likely to face pressures resulting from tight labour conditions.
The latest Trade Me jobs data showed a record 69,600 job vacancies in the December quarter – a 25 percent increase from the same period a year ago. With unemployment already at a record low and severe staff shortages looming as one of the biggest potential threats for 2022, businesses face the prospect of much higher labour costs in order to attract staff leading to the start of a potential wage-price spiral.
If the first three weeks of the year are anything to go by, investors should be bracing for another year that is set to challenge them on multiple fronts.
Global financial markets are already panicking at the prospect central banks will be forced to hike interest rates faster than had been previously expected in order to combat growing inflation risks. Add to this the withdrawal of monetary stimulus, shrinking margins due to growing cost pressures, slowing earnings, rising oil prices and continued Covid impacts that show no sign of easing and the mood has certainly soured since Christmas.
The latest NZIER Quarterly Survey of Business Opinion showed business confidence and demand fell as Covid looks set to drag on for a third year. The December survey which was carried out between 8 November and 10 January found a net 34 percent of firms expect a deterioration in general economic conditions over coming months on a seasonally-adjusted basis – a sharp increase from the net 11 percent of firms feeling pessimistic in the previous quarter.
What will be of particular concern for the Reserve Bank is the fact that over half of businesses surveyed raised their prices in the December quarter, and a net 65 percent plan to increase prices in the next quarter. NZIER said these results point to inflation pressures in the New Zealand economy “remaining strong over the coming year.”
All of this has resulted in one of the worst starts to the year on record for equities.
Tech stocks hardest hit
To date the NZX50 is down 6.1 percent this month having already lost more than 800 points in the first 13 days of trading, while in the US the blue-chip S&P 500 index has lost more than 8 percent of its value, marking its worst month since March 2020 at the height of the Covid sell-off. 149 stocks in the S&P500 have now declined 20 per cent or more since the start of the selloff.
Market technicians have also highlighted the S&P 500 is only 50 points away from breaching its weekly 60-day moving average, a level it hasn’t broken since the Covid sell-off in March 2020, while the NZX50 has already breached both its 60-day and 90-day moving averages for the first time in almost two years.
Technology stocks though have been the hardest hit with the tech-heavy Nasdaq index now in correction mode, having fallen almost 13 percent year to date
Netflix shares plunged on Friday, losing as much as a quarter of their value after the streaming service disappointed on subscriber numbers and investors continued to bail out of stocks that have prospered in the pandemic. The company predicted it would add just 2.5m subscribers in the first three months of this year, far fewer than the 4m additions analysts expected it to repeat from the first quarter of 2021. Its shares fell more than 24 percent as a result, wiping almost US$55bn from the company’s market value.
In addition, shares in networked fitness provider Peloton also fell sharply following a report it was temporarily halting production of its bikes and treadmills. Video conferencing service Zoom is trading at its lowest level since May 2020, having now fallen more than 70 percent from its peak.
Supply chain to NZ
Locally, market leaders including retirement village operator Ryman Healthcare (down 10 percent ytd), F&P Healthcare (down 11 percent ytd) and Auckland International Airport (down 6 percent ytd) have all weighed on the performance of the local market.
With the earnings reporting season set to get underway in a few weeks, investors are likely to be increasingly focused on potential margin pressures as labour and freight costs continue to push higher.
Exporters in particular are facing significant cost pressures when it comes to skyrocketing international transport costs as international shipping companies report record profits. Bloomberg reported last week that Denmark’s A.P. Moller-Maersk A/S, the world’s second-largest container carrier, is on track for an annual profit that is likely to surpass its combined results from the past nine years.
Cryptos
Cryptocurrencies have also inflicted plenty of pain on investors’ portfolios in recent weeks with Bitcoin and Ethereum falling 23 and 32 percent respectively since the start of the year. Both are currently trading at six month lows. Bitcoin has now fallen for three consecutive months and is down almost 50 percent from its US$69,000 peak in early November, with Ethereum falling by a similar percentage.
Currently, the only two bright spots on global markets are oil and gold which remain in the green for the month. Brent Crude Oil futures are up 12.6 percent for the month at US$87.70 a barrel, a 7-year high, while gold is trading at a 7-month high of US$1834 an ounce as inflation concerns continue to attract investors to the precious metal.
US Treasuries have also surged higher since the start of the year, pushing equities lower. The 10 Year yield is up 16 percent for the month at 1.72 percent, though off its high of 1.9 percent earlier in the week.
The NZ dollar remains under pressure, trading at a 14-month low of 67.15 US cents.
Coming up: the release of the December quarter Consumer Price Index on Wednesday January 27, the start of earnings season on February 10 and the Reserve Bank’s first Monetary Policy Statement for the year on February 23 will all be closely scrutinised as we kick off a year that investors will be hoping ends better than how it has begun.
[PS. Where do you think the NZX50 will be at the end of the year? Include your answer in the comments below and closest to the final figure on Dec 31 wins a bottle of bubbles!]
