INSIGHTS

Last week was another very strong one for equities with the US, Europe, Australia and New Zealand all hitting new record highs. The 'phase one' trade deal between the US and China was finalised, so with a cease fire in place markets are free to refocus on fundamentals, for now.

Most markets have been strong this year, although Australian equities have been some of the best performers, with the ASX 200 up 5.7%. This puts January 2020 on track to be the strongest month since July 2016, and the best January return for the Australian market since 1994.

The strong start to 2020 for equity markets bodes well for the rest of the year, if the past is anything to go by. Historically, when US shares have risen during the first five trading days of the year the market has produced a positive calendar year performance 82% of the time. This year, the S&P 500 gained 0.7% during those first five days.

The top NZX 50 movers last week were Fletcher Building, up 6.5%, Meridian Energy which rose 6.0% and Contact Energy climbing 4.7%. Meanwhile, Gentrack plummeted 29.4%, Restaurant Brands lost 4.2% and Scales dropped 3.7%.

This week is a holiday-shortened one in the US, with markets closed for Martin Luther King Jr. Day on Monday. President Trump speaks in Davos (Switzerland) on Tuesday at the World Economic Forum, and with China trade tensions having subsided, investors will be watching for signs of similar issues building between the US and Europe.

In the UK, Boris Johnson’s Brexit deal should continue its passage through Parliament. Tuesday will see the House of Lords vote on the bill, while the House of Commons will debate any amendments the following day. Markets see a high chance of the Bank of England cutting interest rates next week on the back of lingering Brexit uncertainty.

The European Central Bank meets on Thursday, but it is likely to be the global earnings season that dominates headlines. While next week is when it really heats up, more than 40 S&P 500 companies will report over the coming days. These include IBM, Netflix, Johnson & Johnson, Intel, Procter & Gamble and American Express. With US shares up 12% since the end of September, investors will be keen to gauge whether this rally is justified.

In this part of the world, highlights include the December inflation report, the latest dairy auction and an update on the Australian labour market.

The December quarter CPI release is the key event at the end of the week in New Zealand. This will be the first major economic release of 2020, and it is important for the Reserve Bank of New Zealand ahead of the first interest rate decision and monetary policy statement of the year in a few weeks’ time.

The local market will also look toward the latest global dairy trade (GDT) action results. The headline GDT index rose 15.0% in 2019, and the first auction of 2020 saw it gain another 2.8%.

The labour force report for December will be the highlight across the Tasman, especially with odds of a rate cut in February sitting close to a coin flip. Last year the RBA made it clear that a stubbornly high unemployment rate was a key factor in its monetary policy decision making, and this is still the case in 2020.