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Australasian share markets insulated from US/China turmoil so far

Monday 13th May 2019

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Australasian share markets held up better than most last week as key major indices tumbled amid renewed anxiety about whether the United States and China can resolve their trade differences.

The S&P/NZX 50 Index gained 0.4 percent last week and the ASX 200 Index shed just 0.03 percent in a week in which the key US share index - the S&P 500 - sank 2.2 percent.

The New Zealand market was helped by last week's cut in interest rates and, while the Reserve Bank of Australia didn't trim rates ahead of next weekend's Australian federal election, the market still thinks it will lower the benchmark rate.

“Even though the RBA chose to hold, there's still an expectation we will see action from them sooner or later,” says Mark Lister, head of wealth research at Craigs Investment Partners.

The Australian markets are pricing in 48 basis points of cuts to the RBA's cash rate over the next 12 months and the RBA usually cuts 25 points at a time.

New Zealand's Reserve Bank cut its official cash rate to a record low of 1.5 percent last week and the market is pricing in a 32 percent chance of another OCR cut in August.

The US market has run up harder than most in recent months – it has gained 17 percent year-to-date compared with the NZX50's 14.6 percent gain – and it has been particularly sensitive to news about the US/China trade talks, Lister says.

“People are still expecting a deal to be done ultimately” and the rhetoric coming from the US “is just strategic and gamesmanship,” he says.

As well, because the higher tariffs US President Donald Trump imposed on Chinese imports into the US on Friday don't apply to goods already in transit, “they've essentially got another week or two up their sleeves.”

China's Vice-Premier Liu He, speaking as he was leaving Washington DC, said his country won't flinch under American pressure.

“It is like a marathon. The last phase can be the hardest,” Liu told Hong Kong-based Phoenix TV.

“To sit out the dark before the dawn, we have to hang in there and we hope we get the understanding and support of all aspects,” Liu said.

He repeated that China is firmly opposed to a trade war.

Lister says markets are “still very much taking a glass-half-full view of a positive outcome.

“It still looks pretty close to 50/50 and it's far from a fait acompli. They're both thinking about their constituencies and neither of them will want to lose face,” he says.

“There's every reason to see a short-term fall-off (in markets) on the horizon if we don't get a positive resolution to the trade talks.”

New Zealand won't be immune – China is the largest trading partner of both us and Australia, our second largest partner.

“You could argue that some people are a bit complacent about some of the trade issues and are under-estimating the chance for the talks to collapse,” Lister says.

The New Zealand market would have fared even better had it not been for Synlait Milk shares falling more than 5 percent.

That was because of a Court of Appeal judgment issued late Thursday reinstating covenants on the land in Pokeno on which Synlait has built a new factory, effectively making the factory illegal.

Synlait had in fact started building on the site in May last year and only took title to the land after a November High Court ruling removing those covenants which restrict land usage on the site to grazing, lifestyle farming and forestry.

Retirement village operators, Metlifecare, down 4.6 percent, and Ryman Healthcare, down 4.4 percent, also weighed down the index, reflecting concerns about how the faltering housing market might impact on those companies.

Figures due from the Real Estate Institute some time this week should shed further light on the state of the housing market in April.

“Sales volumes have contradicted the usual seasonal trend,” falling nearly 13 percent in what is usually the peak March month, Lister says.

But the government's decision to scrap plans for a capital gains tax and last week's OCR cut are factors which should support the housing market.


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