Equities and dollar retreat as bond yields climb

The NZ headline share index and the kiwi dollar fell for the third consecutive day, backing away from record highs as rising bond yields sap demand for both assets.

Tuesday, January 12th 2021, 5:21PM

by BusinessDesk

The S&P/NZX 50 Index fell 106.4 points, or 0.8 percent, to 13,183.69. Within the index, 29 stocks fell, 13 rose and eight were unchanged. Turnover was $142.6 million.

A wave of uncertainty has put the brakes on investor enthusiasm around the world.

Indices on Wall Street closed lower overnight after a week of tumultuous politics, and European markets fell from 10-month highs on concerns about surging covid cases.

Asian markets were mixed, with Hong Kong’s Hang Seng and Australia’s S&P/ASX 200 holding onto small gains while NZ’s stocks tumbled.

Stuart Williams, head of equities at Nikko Asset Management, said the uncertainty in the US and the new, more virulent strain of covid-19 were coinciding with higher bond yields causing some investors to pull back on risk assets.

“There is a lot to be very happy about in New Zealand, but there is a bit to be worried about in the rest of the world and whether it finds its way in here,” he told BusinessDesk.

The yield on a 10-year government bond in the United States hit its highest level since March overnight after breaking through 1 percent earlier in the week. This move pushed the NZ equivalent upwards, with the swap rate on a 10-year government bond hitting 1.0825 percent today.

Low interest rates have played a critical role in driving asset prices higher and rising bond yields threaten to put a dampener on hefty equity valuations.

“That confuses equity valuation in terms of whether rates will continue in that direction, or if it has reached a peak,” Williams said.

Auckland International Airport led the market lower, falling 3.4 percent to $7.65, as the stocks sits in the centre of these converging stories.

The airport is often considered an infrastructure investment, traditionally offered a long-term yield not dissimilar to a bond.

Simultaneously, its full earning potential is reliant on international travel and not helped by additional measures to tighten the border in an effort to keep the highly infectious variants of covid-19 at bay. Air New Zealand also fell 0.6 percent to $1.74.

Meridian Energy fell as low as $7.82 at market open but recovered as another wave of clean energy index fund buying was channelled through the market at the end of the day.

The stock closed down 2.7 percent at $8.19, and other utilities also posted falls.

Trustpower dropped 3 percent to $8.30, Mercury NZ declined 1.1 percent to $7, Genesis Energy fell 0.8 percent to $3.75, and Contact Energy was down half a percent at $9.99.

Pushpay posted the day’s biggest gain, up 2.5 percent at $1.64, after it named a new chief executive and lifted its full-year guidance by US$2 million on a better-than-expected performance in December.

The higher bond yields helped the weakened US dollar recover some strength, pushing the local currency down for a third consecutive day.

The kiwi dollar was trading 71.68 US cents at 5pm in Wellington, down from 71.94 cents yesterday.

“Bond yields have lifted and that’s seen the US dollar lift, the US dollar has been absolutely savaged over the past year and it is due a correction,” said Pat Gillian, a director at Forex Limited.

“We don’t think it is a trend change, more an overdue correction, but it will be a welcome relief for exporters.”

The trade-weighted index was at 74.36 at 5pm, from 74.63 yesterday. The kiwi traded at 93.08 Australian cents from 93.28 cents, 74.73 yen from 74.93 yen, 59.01 euro cents from 59.08 cents, 53.01 British pence from 53.26 pence, and 4.6386 Chinese yuan from 4.6645 yuan.

Tags: Market Close