The sharemarket dropped more than 1%, tracking losses on Wall Street, as concerns mount about future interest rate rises and the outlook for the global economy.
The benchmark S&P/NZX 50 Index fell 1.1%, or 129.819 points, to 11,907.99 on Wednesday. On the broader market 23 stocks rose and 112 fell with $107 million shares traded.
In the United States on Tuesday, the S&P 500 fell 1.2%, the Dow dropped 1.1% and the Nasdaq slid 1.1%.
“We had a soft night on Wall Street overnight with the major indices down, admittedly after a good run, but a bit of weakness internationally, which has maybe just set the tone today for it to be a more cautious day,” said Mark Lister, head of private wealth research at Craigs Investment Partners.
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A surprise interest rate hike by the Reserve Bank of Australia on Tuesday was a reminder that central banks were still quite nervous about inflation, Lister said.
“Maybe we’ve got a little bit too complacent in thinking that the increases are done from here and that there’s no more, so that probably weighed on sentiment,” he said.
Stronger employment data in New Zealand on Wednesday, while good for economic activity, also raised concerns about how New Zealand’s Reserve Bank might react, he said.
“It points to risks that there is still more demand out there that they need to try and slow and more inflation out there that they need to try and deal with, so markets are in a little bit of a cautious mindset on the back of that,” Lister said.
The strong employment data cemented expectations that the Reserve Bank would hike the official cash rate again this month, but also raised the possibility that there may be another one beyond that, he said.
STUFF
Fonterra factors in fat and protein levels in milk when buying it off farmers.
Dairy prices posted solid gains for a second consecutive global auction, firming up expectations for Fonterra’s milk price this season.
The Global Dairy Trade price index gained 2.5% at auction overnight on Tuesday, following a 3.2% gain at the previous auction which came after four consecutive declines.
The average price for whole milk powder, which has the most impact on what farmers are paid, jumped 5% to US$3230 (NZ$5070) a tonne.
The latest result “will have many sellers and farmers breathing a sigh of relief,” NZX dairy analyst Alex Winning and economist Amy Castleton said in a note.
“This will hold milk prices for the 2022-23 season at about current levels and make for a reasonable opening forecast for the 2023-24 season, if the assumption is that prices will remain at least around this level for much of the season,” they said.
“Buyers, however, may be starting to consider whether they need to buy now before prices go up much further.”
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Westpac senior agri economist Nathan Penny says the latest dairy auction bodes well for next season.
Westpac senior agri economist Nathan Penny said as the result came late in the season, it would not change the outlook for this season’s milk price.
He reaffirmed his forecast of $8.30 per kilogram of milk solids for this season, which is in line with the midpoint of Fonterra’s forecast range.
Penny said the result was a step in the right direction for a positive outlook next season, albeit it is still very early days.
He expects improved Chinese demand and subdued global milk supply will lift global dairy prices next season, resulting in a $10 per kgMS milk price.
Still, not all forecasters are so bullish.
ASB economist Nat Keall said that even though dairy prices had clawed back further ground at this week’s auction, he still expects a decline in next season’s milk price to $7 per kgMS, although he notes there is now “a smidge of upside risk” to his forecast.
Keall said dairy market fundamentals don’t look to have changed dramatically as production looks set for a modest recovery from the largest exporters, the European Union and New Zealand, and the global economy is still set to slow this year in a headwind to dairy consumption.
“High levels of Chinese whole milk powder production combined with subdued consumption mean we’re unlikely to see aggressive bidding by Chinese processors any time soon,” he said. “Dairy price trends are seldom linear, and we wouldn’t be surprised to see prices pull back over coming auctions, before making more sustainable gains over the latter part of the season.”
Synlait Milk fell 1.3% to $1.54. Craigs analyst Stephen Ridgewell cut his 12-month target price on the company’s shares by 22% to $2.22 from $2.84 after the milk processor last week downgraded this year’s profit guidance for a fourth time, driven by lower demand from its key customer, The a2 Milk Company.
Ridgewell said Synlait (SML)will likely struggle to roll over $180m of retail bonds which are due in December next year, and it will probably have to raise capital to replace the bonds by increasing bank debt, selling assets or selling shares. The bonds have the highest yield on the NZX debt market at 11.25%.
“We are cautiously optimistic that we are already at the point of maximum uncertainty and SML shares are close to bottom, but a dilutive equity raise cannot be ruled out and SML is only suitable for investors with a high risk tolerance,” Ridgewell said.
Comvita dropped 4% to $2.88. Forsyth Barr analyst Margaret Bei lowered her forecast for the honey company’s profit over the next two years by 3% to 4%, due to larger-than-expected debt and higher interest rates.
The increased debt appeared to be driven by the timing of some orders, with cash inflows expected to land early next year, she said.
PGG Wrightson shares advanced 0.7% to $4.35 after the rural supplies firm reaffirmed its forecast for about $57m of operating earnings in the year to June 30.
Chairperson Joo Hai Lee said the company had performed well over the first nine months of the financial year.
Autumn got off to a solid start, the outlook for the global sheep meat and beef trade was good, and rural input costs were reducing from historical highs with global fertiliser prices coming back, he said.
Lee said PGG Wrightson’s outlook remained cautious given the volatile operating environment at a macro level but the company continued to perform well and execute on its strategy.
“There is strength in the diversity of our businesses, and this gives us confidence that we are well-placed,” he said.
