NZ benchmark stock index drops 1% as ECB weighs on global markets

Friday 4th December 2015

New Zealand's benchmark S&P/NZX 50 Index dropped 1.1 percent after the European Central Bank eased policy less than expected and Federal Reserve chair Janet Yellen stoked expectations of a Fed hike this month, eroding the appeal of higher-yielding stocks.

The NZX 50 dropped to 6046, a week-low, as 42 of the 50 stocks in the index fell. Meridian Energy, the country's biggest electricity generator, led the decline, falling 3.4 percent to $2.27. Spark New Zealand, the country's biggest telecommunications company, fell 2 percent to $3.22, and MightyRiverPower, the partially privatised electricity generator, slipped 1.4 percent to $2.86.

Overnight, the ECB cut its interest rate on deposits, broadened the range of assets accepted in its asset purchase programme and committed to rolling over the stock of debt it had purchased. The move disappointed traders betting on further stimulus for the moribund European economy, drove up the euro and triggered a global selloff in equity markets. The kiwi slumped to 61.11 euro cents at 2pm in Wellington, from 62.72 cents at 5pm yesterday. In the US, Yellen gave a cautiously upbeat account of the US economy, including an improving labour market, adding to bets the Fed will raise interest rates after its next meeting on Dec. 15-16.

"We've significantly outperformed global markets over the last year, and companies in New Zealand have definitely benefited from lower interest rates," said Shane Solly, director at Harbour Asset Management. "Some of our stocks are very yield sensitive - Spark, Meridian, Mighty River. Those are big names with a high dividend income component. When interest rates start moving around, those stocks get impacted."

The NZX 50 has gained 9.1 percent this year, reaching a record high on Dec. 1 as investors faced with low interest rates on fixed-income securities and tepid rates on offer to retail investors from bank deposits were attracted to the dividend yields available on New Zealand shares. Traders are betting Reserve Bank governor Graeme Wheeler will cut the official cash rate to 2.5 percent next week, in the face of weak inflation.

"We are at a point where we've got some quite significant potential changes in structural settings for monetary policy globally," Solly said. "Investors are just stepping back and pausing to think about what that means, and in some cases locking in some very good gains."

BusinessDesk.co.nz

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