August 2024 Market Snapshot

The major factors influencing markets remained largely intact during the first six months of the year, but dynamics have started to shift in July and August. One example has been the relatively strong performance of a narrow group of mega technology stocks, often referred to as the Magnificent Seven, which dominated the equity market’s rally mostly due to excitement about artificial intelligence (AI). Recently, however a new theme has started to form, with rotation out of those big winners into other and cheaper sectors of the market, as risks associated with meeting the high growth expectations of mega cap technology companies increase.

The other major driver for markets has been around inflation and the timing of when central banks can commence easing. Since late 2023, bond markets have had a temperamental view of when interest rate cuts would start, as various economic and inflation reports have been released and altered views. However, lately the “goldilocks” scenario of reasonable growth without inflation has started to unravel – with markets now on notice for a worsening in the economic conditions after recent weaker than expected US data put a spanner in the works. Although, this should lead to earlier than expected rate cuts.

In global equity markets, investors are now looking at the current earnings reports with a real interest, particularly the high-flying big technology companies, which have achieved mixed results so far. Meta (who owns Facebook) announced earnings which pleased analysts, beating revenue and earnings expectations. Microsoft’s earnings announcement was digested less favourably, with analysts concerned about the momentum in their cloud business as well as worries about the amount of capital they are spending on AI-related projects. Amazon was another high-profile miss which did not help sentiment, with profit expectations for next quarter falling short of analyst expectations.

However, it’s been notable that in July the New Zealand share market outperformed offshore equities by the most in well over a year. This has been due to demand driven by a rotation into more cyclical stocks. It is also a sign that the market has the growing sense that perhaps it can’t get much worse from here. The now common saying among the business community of “survive until ‘25” seems appropriate. The Australian equity market has followed a similar pattern with consumer stocks leading the market higher, and the larger utilities and materials sectors providing a negative offset.

New Zealand interest rates have drifted for most of the year based on the latest data and commentary from both the Reserve Bank of New Zealand (RBNZ) and the US Federal Reserve (Fed). However recent data has strongly suggested rate cuts could occur in New Zealand as soon as mid-August as weakness in the local economy starts to fully manifest well ahead of previous RBNZ estimations. Over the next year the markets have priced in about 2% of rate cuts to occur.

In the US a similar picture for interest rates has started to unfold. It’s now likely the Fed will start its reductions in September as genuine fears of a possible recession have emerged in recent weeks. This will support returns from both fixed income assets and help equities by providing lower borrowing costs for companies.

Looking ahead the near-term, focus will be on equity earnings and how the latest results pan out versus forecast. Locally expectations are subdued and patchy, and rotation will no doubt remain the key theme as investors adapt. Recession will be on the mind of many, so data watching will remain very much in place. Rate cuts now look almost certain for NZ and the US over the next month and over the next year. Weakness in China has remained hard to move, and geopolitical events remain salient. This all probably means a return to higher volatility for the time being until these issues are resolved.

This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser. No representation or warranty is made as to the accuracy, reliability or completeness of any statement made in this article. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article. Any opinions in this article are not necessarily shared by BNZ or anyone else.