Sharemarket and Kiwi dollar tumbles as US Fed pencils in rate hikes

The New Zealand dollar and share market fell after the United States Federal Reserve signalled it expects rate hikes in 2023 as economies improve and inflation builds.

Thursday, June 17th 2021, 7:04PM

by BusinessDesk

While investors had been expecting the central bankers might bring a rate increase forward, two increases were “a hawkish surprise”, said BNZ’s Nick Smyth.

The market’s reaction was swift, with the yield on both long- and short-term government bonds spiking approximately 10 basis points as investors priced in expectations of rising interest rates.

ANZ Bank today predicted the Reserve Bank of New Zealand may raise the official cash rate as soon as February.

The kiwi dollar plummeted, falling as low as 70.50 US cents having traded at 71.35 US cents prior to the Federal Reserve’s announcement.

The worst of the fall was short lived as unexpectedly strong NZ GDP data was released just hours later, helping the kiwi recover half a cent throughout the day.

Economists had tipped the economy to grow between 0.5% and 0.8% while the Reserve Bank's latest forecast was for it to contract by 0.6%. Instead, it expanded 1.6% in the March quarter.

The kiwi dollar was trading 70.96 US cents at 3pm in Wellington, down from 71.34 cents yesterday.

Equity markets had a more muted response with investors weighing up the benefits of an improving economy and negative effects of rising interest rates on asset prices.

The S&P/NZX 50 Index fell 40.40 points, or 0.3%, to 12,541.20. Within the index, 29 stocks fell, 14 rose and seven were unchanged. Turnover was $192 million

Craigs Investment Partners’ head of private wealth research Mark Lister said both the Federal Reserve and the GDP result were simply acknowledging what was already known.

“Taking the pulse of the economy, it does not feel like we need to have emergency monetary policy anymore,” he said

“You can feel what is coming and it is upward movement in interest rates”.

Lister said it was important to remember this was a sign of more economic activity and more people buying things that listed companies sell – even if higher rates are bad for equity valuations.

Even so, the great unwind of covid-related stimulus would impact the share market over the coming months and investors should re-think their portfolios, he said.

“You don’t want to be loaded up with high yield utilities or property stocks. You should balance them out with more economically sensitive stocks, such as banks and other cyclicals”.

Shares in dual-listed ANZ Bank were up 1.3% at $31.53 and Westpac Bank was up 1.2% at $29.06.

Retailer stocks, sensitive to economic activity, also made gains with Kathmandu up 1.9% to $1.62 and Z Energy 1.6% higher at $2.58.

These gains were outweighed by the majority of stocks declining, including utility Contact Energy, down 1.7% at $8.15, and property sensitive Oceania Healthcare down 1.3% at $1.50.

In currency, the trade-weighted index was at 74.23 at 3pm, from 74.27 yesterday. The kiwi traded at 92.95 Australian cents from 92.75 cents, 78.52 yen from 78.55 yen, 59.13 euro cents from 58.85 cents, 50.72 British pence from 50.67 pence, and 4.5575 Chinese yuan from 4.5685 yuan.

Tags: Market Close