Stagflation fear sends NZ shares sliding

New Zealand shares tumbled on Tuesday as short-dated government bond yields hit new highs after ANZ Bank predicted the official cash rate could be doubled by May.

Tuesday, March 8th 2022, 6:51PM

by BusinessDesk

The S&P/NZX 50 Index fell 168 points, or 1.4%, to 11,744.95. Turnover was $173 million.

Sky-rocketing oil prices have prompted ANZ’s chief economist, Sharon Zollner, to forecast a 50-basis point interest rate increase in both April and May this year.

This would mean the Reserve Bank of NZ would double the official cash rate in just two months, something Zollner said was a “risky choice”.

“But there aren’t any low-risk policy options anymore,” she wrote in a note.

“The RBNZ would prefer to look through oil price shocks, but right now, with inflation expectations so high and rising, they just can’t.”

The yield on a two-year NZ government bond, which is most closely linked to the official cash rate, exploded 125 basis points to hit a six-year high at 2.46%.

Zollner noted that despite high inflation, there was a mounting risk of a global economic slowdown – often called stagflation, a portmanteau of stagnation and inflation.

BNZ’s Jason Wong said stagflation was “the talk of the town” with central banks in a difficult spot: forced to raise rates to tamp down inflation but risking a recession in the process.

NZ’s benchmark equity index is now in a technical correction, having fallen more than 10% this year, while the US Nasdaq index is nearing a technical bear market.

“Some investors in the market are thinking we are going to see a rapid increase in interest rates and our market is yield sensitive – so it won’t like that,” said Peter McIntyre, an investment advisor at Craigs Investment Partners.

“The good old ‘stagflation’ word is being thrown around now, which has probably spooked a few market participants, as well,” he said.

Skellerup Holdings led the market lower today, falling 6.6% to $5.41. Investors may have been spooked by sudden volatility in currency markets in the past 24 hours.

Wong said “panic buying” had sent the NZD well above 69 US cents as commodity prices surged. The currency ultimately settled back down and was trading at 68.41 US cents today.

Air New Zealand shares dropped 6.5% to $1.37 with high oil prices threatening its margin and the deadline for its billion-dollar capital raise creeping closer.

Heartland Group Holdings – one of the few stocks to disappoint investors during earnings season – fell 5.5% to $2.08.

These were some of the worst falls but 15 of the top 50 companies fell more than 2%, while just nine made gains.

New Zealand Oil & Gas had another turn near the top of the NZX board, up 4.9% at 54 cents.

My Food Bag also bounced 6.5% from low levels, recovering to 98 cents. McIntyre said the meal kit company was delivering on its forecasts and paying investors a decent yield, which should be attractive.

Tags: Market Close