Despite a sell-off in March sparking some worry amongst investors, the year to date has been a notably positive one for international equity markets.
World share markets continued to rally through July with the MSCI World index (in NZD) up 10% since April and the Dow Jones Index notching up 13 consecutive days of gains, matching its longest winning streak since 1987. Importantly, equity investors are viewing the current environment in “goldilocks terms” for the United States, neither too hot nor too cold. And despite the headwind of interest rate rises, the latest economic releases have in fact reassured the market that the war against inflation isn’t yet breaking the economy, with consumer spending and company earnings both holding up. Mega-cap technology has been a particular infatuation for investors on the promise of artificial intelligence (AI) which is expected to become a factor in virtually everyone’s lives sooner than previously expected. Caught up in the technology bullishness, Apple became the first company to achieve a market capitalisation of US $3 trillion (now back under at time of writing) with Microsoft expected to soon follow.
Australasian equities joined the rally, helped by the prevailing offshore “risk on” sentiment. However, they have been hindered by localised economic factors with NZ in technical recession, and a lack of market representation from large technology companies with AI links.
Commodities have been mixed with oil prices rising to fresh three-month highs due to tightening global supply and rising demand. Dairy prices fell sharply at the latest global dairy trade auction despite China returning to the table, with the whole milk powder price plunging 8%, taking it back to prices not seen since June 2020.
In Europe, it seems that the ongoing tightening approach is getting traction with recent indications that German economic activity is stagnating, but another rate rise was agreed for the Eurozone to arguably “finish” the job. However, the United Kingdom remains locked in a stare down with inflation and the market still forecasts further rate hikes to come with inflation still around 8%. In contrast, China, New Zealand’s largest trading partner, continues to struggle economically and has done so for much of this year. More stimulus is required because the momentum has faded, and a pandemic hangover is plaguing China’s recovery.
Meanwhile the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate on hold in July after 12 consecutive hikes and will meet again as this is published. The market now believes that although any further interest rate rises are off the agenda, a rate cut is a long way off and unlikely to be seriously considered until 2024. Expectations for any further rate rises did diminish significantly following the results of the NZIER Quarterly Survey of Business Opinion, which highlighted notable declines in the labour market and easing capacity pressures. However, the June quarter Consumers Price Index (CPI) showed that the part of inflation that does not include food and energy prices remains stubbornly high, and the next quarterly release will include the removal of the NZ fuel subsidy that expired at the end of June on top of a significant recent lift in oil prices.
World bond markets in contrast to global shares have remained circumspect, but interestingly it has been two sides of a coin over the past few months with government bonds being down in price (up in yield) but company debt being steady comparatively. In addition, global interest rate markets have been adjusting to moves higher in Japanese Government Bond (JGB) yields with plenty of market commentary on how higher Japanese rates could unleash a tsunami of Japanese investors to sell their overseas bond holdings and return to their domestic market, putting upward pressure on global rates. Exacerbating matters was the recent downgrade by Fitch of US government bonds from AAA to AA+ and the announcement of a significant increase in bond issuance by the US Treasury Department.
As we always say, the ups and downs are part and parcel of investing and the focus should be on ensuring you are well positioned to suit your timeframe and risk tolerance.
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