Shares and dollar fall as RBNZ pulls the trigger

Equity assets and the kiwi dollar slumped as the Reserve Bank of New Zealand (RBNZ) hiked the official cash rate for the first time in seven years.

Wednesday, October 6th 2021, 6:22PM

by BusinessDesk

“No longer is the Bank on emergency settings, it’s now back on the path of traditional central banking,” said BNZ’s head of research Stephen Toplis.

NZ’s benchmark equity index lost almost a hundred points in the hours following the 2pm announcement, as investors waved goodbye to the era of ultra-low interest rates.

The S&P/NZX 50 Index ultimately closed 0.3% lower, at 13,166.44, with a turnover of $162 million.

Toplis said the key takeaway from the policy review was that RBNZ was not concerned with the spread of covid throughout NZ and won’t let it prevent tighter monetary conditions.

“The RBNZ put this concern to bed by formally acknowledging it expects to see endemic covid. On this basis, there is no need for folk to assume the Bank will hit the panic button if covid spreads, as it inevitably will,” he said.

That statement indicated a measured increase in the cash rate to an average 2% in the September quarter 2023, he said. Possibly higher and faster than some expected.

This saw the yield on a 2-year government bond immediately jump 20 basis points to break above 1%, while longer-dated bonds saw a small spike but quickly fell back.

Higher interest rates affect virtually all kinds of stocks as it increases the cost of capital and therefore lowers valuations.

The companies with the largest declines today included Chorus which fell 3% to $6.58, Napier Port down 1.6% to $3.15, and Oceania Healthcare down 1.4% at $1.42.

Kiwi still flightless

Currency traders rushed to buy the NZ dollar at 2pm, pushing it up to 69.77, before immediately changing direction and selling as low as 69.30 cents.

Kiwibank economists said financial markets were almost fully priced for the interest rate increase.

“Traders had prepositioned and the reaction in financial markets was relatively subdued,” they said in a note.

The kiwi is still undervalued, they said and should end the year closer to 75 US cents and outperform the Australian dollar, reaching above 97 Australian cents.

However, economists and currency strategists have been saying this for months and the currency has only broken above 73 US cents once this year.

Jarden economist and investment strategist John Carran said he expects RBNZ to deliver two more rate hikes by February, but the outlook gets cloudy from there with global economics looking unpredictable.

“Generally, an environment of higher costs and elevated uncertainty could cause volatility in financial markets,” he said.

A2 Milk took another hit as news broke an Australian law firm had filed a class-action lawsuit against it, spoiling a recent rally that has seen the stock climb 20% since late September.

The class action alleges A2 Milk engaged in misleading or deceptive conduct and breached continuous disclosure rules when it made a string of earnings downgrades last year.

A2 Milk denied any liability and said it will vigorously defend the proceeding, but that didn’t prevent its share price from falling 6.3% to $6.38.

Key supplier Synlait milk also declined almost 2% to $3.64, having also rallied nearly 20% in recent weeks.

Higher rates; lower values

Even before the Reserve Bank’s decision today, equity analysts were building the prospect of higher interest rates into their valuation models.

When Jarden’s research updated its forecast for property investor Argosy this morning, they noted higher market rates would hold back earnings growth

“Our nearer-term forecasts and valuation are largely unchanged, with the increasing interest rate outlook dampening the earnings trajectory somewhat,” they wrote.

Argosy Property finished the day with its share price unchanged at $1.63, today.

Infratil climbed 0.8% to $8.40 despite Jarden downgrading the stock this morning due to climbing bond yields

The analysts said it would be years before investors would know whether its acquisition of a 40% stake in a high-performance computing data centre business would “turn into another knockout, like CDC”.

“We reduce our rating from ‘overweight’ to ‘neutral’ to reflect both the recent increase in Infratil’s trading price and the near-term likelihood of higher bond yields,” they said.

The analysts said they expect short-term headwinds from rising bond yields to partly offset earnings growth within its investment portfolio.

Tags: Market Close