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Financial markets likely to look on the bright side this week

Monday 9th September 2019

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Barring something to scare the horses, such as a presidential tweet, financial markets' determination to look on the bright side appears likely to last into this week.

In New Zealand, the injection of optimism sparked by the United States and China agreeing to resume trade negotiations early next month after they broke down in May had spectacular results.

The benchmark S&P/NZX 50 Index gained 4.3 percent, taking its gain for the year to date to 27.3 percent.

“That's the best week for the local market since July 2009 when we were in the midst of a rebound from the post GFC lows,” says Mark Lister, the head of wealth research at Craigs Investment Partners.

While the New Zealand share market hit a fresh record, in the US, the S&P 500 Index ended last week 1.8 percent higher but was still 1.6 percent below its record high and has now gained 24.1 percent so far this year.

Nearly 1 percent of the key US index's gain came on Friday despite the monthly jobs data for August disappointing with a 130,000 gain in jobs compared with market expectations of 160,000.

“The jobs report was worse than expected” but it wasn't so bad as to add to the weight of evidence that the US economy might tip into recession. Rather it was more in “Goldilocks” territory and enough to sustain expectations that the Federal Reserve will cut interest rates again later this month.

In his last speech before the blackout period ahead of the Fed's next monetary policy decision, chair Jerome Powell assured investors that the US economy isn't heading into a recession but didn't close the door on the expected rate cut.

Powell said consumer spending and support from monetary policy should help deliver economic growth between 2-2.5 percent in the US this year.

Lister says the US share market's gains probably accounted for about a third of the New Zealand market's gains but that also “there's no let up in demand for Meridian, Mercury and other dividend stocks.”

In fact, Mercury NZ shares gained 8.4 percent last week and Meridian Energy shares rose 7.5 percent.

With the Reserve Bank's official cash rate now at 1 percent following last months' 50 basis point cut, investors have become even more yield hungry.

“The money's got to go somewhere and there's nowhere else” that will provide as high a return as New Zealand's listed utilities.

Lister says another factor aiding last week's increase was a number of index changes that sparked some index fund buying.

As far as the trade talks go, “who knows how that will play out, but it's better than not having a meeting,” he says.

The New Zealand dollar being a risk-sensitive currency, also had a strong week last week, closing in New York on Friday at 64.28 US cents, taking its gain for the week to 1.9 percent.

“I still think the path over the next six to 12 months for the currency is down” but that trend is likely to be interrupted by rebounds such as we saw last week.

“People are expecting our interest rates to come down” and a lower currency should go hand in hand with that decline.


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