INSIGHTS

Global sharemarkets took a beating last week on the back of mounting coronavirus fears. New cases have emerged in a range of countries (including New Zealand) and South Korea has seen the number of cases rise sharply. The S&P 500 in the US fell 11.5%, taking it into correction territory (down more than 10%) in what was the worst week since October 2008. UK shares fell 11.3% and Europe was down 12.3%.

The local market held up better. Although, the NZX 50 still declined 6.7% in the worst weekly performance since November 2008. The top NZX 50 movers last week were a2 Milk (+4.3%), Scales (+0.7%) and Metlifecare (-0.4%), while Refining NZ (-17.0%), Meridian Energy (-14.1%) and Summerset (-13.6%) were the worst performers. Australia performed better than most with a 9.5% fall last week, although antipodean markets will start the week nervously given the volatile session on Wall Street on Friday night.

US shares are now 12.8% below the previous high (which occurred on February 19) while the NZX 50 is 6.7% down from its peak. Commodities have weakened with oil and whole milk powder down 24.9% and 4.3% respectively since the beginning of the year. Meanwhile, haven assets have performed strongly. Gold has continued to rise this year (despite falling at the end of last week) while steep declines in interest rates have seen bonds and fixed income rally. Year to date, the NZ dollar is down 5.0% on a trade weighted basis and 7.2% lower against the US dollar, which will offset the decline in dairy prices as well as soften the blow from falling US share prices for New Zealand investors.

Looking ahead, markets will be intensely focused on further coronavirus developments this week. In terms of economic releases, the Caixin PMI is released in China on Monday afternoon, while the ISM manufacturing index and the latest jobs report are out in the US. The ISM manufacturing index rebounded strongly in January, moving into expansionary territory for the first time since July 2019. The sub-indices were also stronger, with new orders the strongest in eight months. However, the IHS Markit PMI for February signalled a sharp deterioration in activity across both the manufacturing and services sectors. This PMI saw output contract for the first time since October 2013, with new export orders down as firms reported growing hesitancy from customers.

Across the Tasman, GDP figures are due but Tuesday’s RBA meeting could be the focus. Rate cut odds have increased substantially in the wake of the coronavirus outbreak, with markets seeing a high chance of central banks responding to the uncertainty and have been seen to have moved quickly to price in rate cuts in numerous places, including the US and New Zealand.

In New Zealand, the results of the latest global dairy trade auction are due early Wednesday morning. The market will be watching for any further weakness in prices with farmers and economists alike hoping for signs of stability after two weak auctions. The headline GDT index has fallen 7.4% over the past two auctions, and like most commodities it has been impacted by nervousness around the coronavirus outbreak. Prices are down 3.3% on a year-to-date basis (slightly more than that for whole milk powder), and 3.6% lower than a year earlier. Encouragingly, Fonterra recently reaffirmed that its forecast milk payout for this season would be in the range of $7.00-7.60, noting that it would provide an update on the impact of coronavirus at the interim result in mid-March.