Finely balanced, markets walking a tightrope

Key developments

Global equity markets performed strongly in June with the MSCI World index (in local currency) returning 5.9% over the month. Early in June markets were assured by the US Federal Reserve (the Fed) Chair that the Fed will “act as appropriate to sustain economic growth”. While these words are unlikely to become as influential as ECB Chair Mario Draghi’s “whatever it takes” comments in 2012, they were enough to make investors feel comfortable with softer economic data in the knowledge (or hope) that the Fed will be there to underpin growth. A likely source of volatility in the next 12 months is whether the market’s definition of appropriate action is the same as the Fed’s.

New Zealand and Australian share markets lagged the broader global developed market index but still delivered strong local currency returns of 3.9% and 3.7% respectively. Lower interest rate expectations further enhanced the attractiveness of higher yield names in the New Zealand market with Meridian up 20.8%, Auckland Airport up 12.4% and Meridian up 12% over the month. Low yields also led investors towards listed New Zealand Real Estate securities, with the index returning 6.2% over the month.

The strong rally in global share markets was despite economic data surprising to the downside, particularly in the US. During June, we saw more evidence of a slowdown in the US manufacturing sector with a weaker than expected ISM index reading; however, we acknowledge non-manufacturing remains strong. The US labour market showed its first sign of cracks with a weak ADP Payrolls read and consumer confidence disappointing to the downside, with trade tensions taking their toll.

Domestically, the RBNZ left the OCR at 1.50% at its June meeting, while sending a clear message that at least another rate cut is likely given the backdrop of slowing domestic and global data. At present, the market expects two cuts in New Zealand compared to four expected in the US.