Devon Funds Morning Note - 16 June 2025

Monday 16th June 2025

Crude tactics

Global

Global indices retreated on Friday after Israel launched a series of airstrikes on Iran, which retaliated with its own wave of missiles, pushing oil prices sharply higher, and seeing a flight to safe havens. Crude oil rallied nearly 14%, pushing towards US$75 a barrel, gold rose US$50 and the US$ gained. The Dow fell 1.8%, the Nasdaq declined 1.3%, while the S&P500 was 1.1% lower. Travel stocks were amongst the most pressurised, while energy and defence stocks gained. Events in the Middle East will provide an added dimension to key central bank meetings this week, with the Bank of Japan, Bank of England and Fed all set to make rate decisions.

The broader S&P500 fell a marginal 0.4% for the week, and in context remains within 3% of the record highs set in February. With trade wars appearing to have de-escalated, the attention now is on the escalation of more tangible conflicts in the Middle East, and what that means for geopolitical stability.

Trump warned that Iran needed to get back to the negotiating table, saying that he was giving the country a “second chance.” However Iran did not participate in a sixth round of nuclear negotiations with the US planned for this weekend.

Oil has surged as geopolitical risk has roared back into prices. Investors are now concerned about the impact of renewed tensions in the region on energy supplies. Iran is the third largest producer in OPEC. Israel has attacked South Pars, the world’s largest gas field, causing production to be partially suspended, and has also struck one of the country’s largest oil refineries.

There is also concern about the impact of retaliatory measures which might be aimed at the Strait of Hormuz in particular. The narrow waterway which separates Iran from the Gulf states is a major conduit for seaborne oil supplies, and handles around 20% of global flows. Militants have disrupted supplies in the past but there has not been a full-scale blockage. The Middle East region generally accounts for around 30% of global oil supplies.

How long the situation plays out for, and to what extent it evolves, remains to be seen but rising oil prices will put term pressure back into headline inflation globally. A falling oil price has been taking the wind out of inflation, and after being around US$80 at the start of the year, had dropped to around US$60 recently. With prices now around US$75 there are some suggestions that oil could go much higher. JP Morgan Chase has painted a worse-case scenario where oil prices hit US$130 a barrel. The investment bank has though retained its base case of oil being in the $60s for this year.

The oil price shock has come as investors, and consumers, were getting more comfortable about the economic outlook. The closely watched University of Michigan survey showed the index ticking up to 60.5 in June, well ahead of estimates for 54 and a 16% increase from a month ago. Consumers in the early part of June became less pessimistic as TACO continued to play out, and progress appeared plausible in the global trade war.

On inflation, the one-year outlook tumbled from levels not seen since 1981. The one-year estimate slid to 5.1%, a 1.5 percentage point drop, while the five-year view edged lower to 4.1%. US consumers are feeling better about the here and now, and also the future. The Current Conditions index jumped 8.1%, while the Future Expectations measure soared 21.9%.

However, just to give some context, US consumers still perceive wide-ranging downside risks to the economy. All of the sentiment indexes are still considerably below their year-ago levels, and inflation expectations remain above readings seen throughout the second half of 2024. And now consumers have rising energy prices to contend with as well with escalating geopolitical tensions.

As does the Fed which meets this week. Last week saw a couple of soft inflation prints, but it appears unlikely they will do anything other than adopt a wait-and-see approach. There is also retail sales and housing data out in the US.

In Europe, the indices were also weak. The STOXX50 fell 1.3%, and auto stocks led the losses. Renault fell also as its CEO resigned to take up the same post at Gucci owner Kering. The events in the Middle East in recent days, along with the tragic crash in India (the first ever of a Boeing 787 Dreamliner), are casting a shadow over the Paris Air Show which is on this week.

The FTSE100 eased 0.4%, supported by strength in oil majors BP and Shell. Cruise operator Carnival fell 4%. The Bank of England is expected to remain on hold this week, despite slower wage growth, given some uncertainties still on the trade front and now given the impact of higher oil prices on inflationary pressures.

Similar concerns will likely dominate the Bank of Japan’s meeting on Tuesday. No rate move is expected, but officials are reportedly set to taper bond purchases. The Nikkei fell 0.9% on Friday, while the CSI300 declined 0.7%. Industrial production and retail sales numbers out today in China will be in focus.

New Zealand

The Kiwi market also ended lower on Friday amid rising geopolitical tensions. The NZX50 declined 0.8% to 12,552. Fisher & Paykel Healthcare fell 0.7%, while Mainfreight was 2.6% lower and Fletcher Building declined 2.7%. The index was marginally lower for the week.

On the data front we have had a mixed bag of news on the kiwi economy of late, with the agriculture and tourism sectors doing well, but a lot of other areas continuing to struggle. This includes the kiwi manufacturing sector. The latest BNZ – Business NZ Performance of Manufacturing report has the sector slipping back into contraction. The report was aptly titled “Back in the Red.”

The seasonally adjusted PMI for May was 47.5, below the par reading of 50.0. This was down from 53.3 in April and a return to contraction after four consecutive months of expansion. The survey was also well below the long-term average of 52.5.

New Orders (45.3) declined sharply, while Employment (45.7) also reversed to hit its lowest level of activity since July 2024. The return to contraction also saw the proportion of negative comments from respondents increase to 64.5%, compared with 58% in April. Sentiment is being weighed by falling demand, weak orders, and low business confidence, along with rising costs, and economic uncertainty. Forward orders and investment remain subdued.

This won’t be helping our economy, although GDP numbers this week are expected to show growth of around 0.7% in the March quarter.

With this above the RBNZ’s projection of 0.4%, some commentators have been saying that this could justify a pause in rate cuts. A counter argument is easy to make. Most living in the real world know our domestic economy (farmers and tourism aside) is doing it tough – just ask retailers, school leavers trying to get an apprenticeship or anyone trying to sell anything of value (cars for instance) on Trade Me. Anecdotal comments from those in the construction sector suggests conditions are the worst in living memory.

The reality is the March quarter GDP is out of date, and was pre-Liberation Day. The May manufacturing print (and card spending/net immigration data last week) provide a much more timely and relevant picture. Rising oil prices will drive up petrol prices, but will also be a handbrake on growth. If anything, more OCR cuts are needed.

This morning, Meridian Energy has released its monthly operating report. National hydro storage increased from 88% to 94% of historical average. South Island storage increased to 88% of average and North Island storage increased to 138% of average by 9 June 2025. Total inflows were 106% of historical average. May was warm while rainfall was mixed. National electricity demand in May 2025 was 6.1% lower than May 2024. Retail sales volumes were though 0.7% higher. Segment sales in residential were 4.4% lower, small medium business 0.2% higher, large business 10.5% higher, agriculture 8.1% lower and corporate 3.8% higher.

Auckland Airport has released its monthly traffic update. Excluding transits, international passenger movements for the month of May 2025 increased by 6%. New Zealanders made up 52%, while Australians made up 10% and increased by 5%. Chinese nationals increased by 7%, and visitors from the US increased by 13%. Seat capacity increased, meaning load factors increased. Tourism remains a bright spot for the economy. Domestic passenger movements increased 1% in the month, with seat capacity increasing 2%.

On the subject of tourism, the big story this morning is that Tourism Holdings has received a $508m “takeover” approach from a consortium involving private equity house BGH Capital and members of the Trouchet family (which founded Aussie campervan company Apollo which merged with THL in 2022). Luke Trouchet is an executive director with THL and is taking a leave of absence from his executive role given the conflicts.

The offer is at $2.30 and is substantially above THL’s closing price on Friday of $1.46. The deal is subject to a number of conditions, including a satisfactory independent valuation appraisal and THL’s Board unanimously recommending shareholders accept the proposal. BGL has acquired a relevant interest in 19.99% of THL’s shares on issue, following the purchase of some shares from ACC and ANZ. The consortium is open to considering a transaction structure which results in a controlling interest but does not result in 100% ownership of the company. THL has had a tough time in recent years, being hit hard by Covid, and also having to deal with an uncertain outlook in its key US market this year. The shares had been down over 25% year to date, but the offer is still well below the long-term average for the shares. The shares are up strongly this morning.

Australia

The Australian market was lower on Friday, with the ASX200 easing 0.2% to 8,547. Technology, banks and base metals were lower (BHP dipped 2.6%). Qantas fell 5%. The energy and gold sectors though both rallied over 4% on escalating geopolitical tensions. Woodside soared 7.4%, and Santos surged 3.7%, while gold miner Newmont rallied 5.8%.

Two retailers saw significant selling pressure following last week’s trading warnings. Luxury retailer Cettire fell 20% after falling 31% on Thursday. Footwear retailer Accent, which owns the Hype and Platypus chains, fell 25%.

This week we have monthly employment data in Australia. The RBA is another central bank that will be watching the data and events in the Middel East closely, with anticipation having been building for more rate cuts in the coming months.

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