Harbour Outlook: Delta fails to dampen equity markets
The MSCI All Country World (global shares) Index rose 2.4% (in USD) in August, buoyed by positive earnings momentum and a more dovish than expected US Federal Reserve.
The New Zealand earnings season was strong with beats outnumbering misses 2 to 1. This helped drive a strong 5% return for the S&P/NZX 50 index over the month.
Chinese economic momentum looks to have stalled in recent months. Both Caixin and broader PMIs missed consensus estimates during the month, with the non-manufacturing side of the economy particularly weak.
The outbreak of COVID-19 in the community scuppered the Reserve Bank of New Zealand’s (RBNZ) plans of a rate rise in August. The tone of the RBNZ remains hawkish which saw bond yields rise across all maturities during August. This caused market returns to be negative with the Bloomberg NZ Bond Composite 0+Yr Index returning -1.0% over the month.
The RBNZ left the OCR unchanged yesterday given heightened health-related uncertainty.
But with the central bank’s inflation and employment objectives met, the Monetary Policy Committee has a strong desire to reduce stimulus once this uncertainty passes.
We agree that interest rates eventually need to be a lot higher, but health outcomes will determine when the tightening cycle begins. In fixed income portfolios we are positioned for the OCR to remain on hold while the COVID-19 delta variant outbreak unfolds, but for longer term yields to rise and inflation pressures to persist.
We hope you are all keeping safe & well as we find ourselves back in level 4. We have done this before, and we can do it again!
As well as the challenges of a snap lockdown, today has been one of the busiest days of the year for both companies reporting and the macro-economic calendar.
Today the New Zealand equity market bucked the trend from markets overnight with equity prices recovering after strong local company results and AGM updates positively impacting some of our largest companies.
Fixed income and currency markets, however, were more affected by the COVID-19 outbreak news, with the Reserve Bank of New Zealand (RBNZ) displaying considerable risk awareness in deciding not to proceed with a rate hike today that it was widely expected to make.