The three things to watch in markets

Key points

• Share markets continued their new year rally, aided by positive noises from trade negotiations and further dovish rhetoric from the US Federal Reserve (the Fed)
• Economic data released during the month continue to portray lower economic activity, especially in Europe and China, though China has looked to combat this through a range of stimulatory measures
• Domestically, the economic outlook is continuing to soften, though at this point, the transition appears to be from strong to moderate growth, with risks to the downside

Key developments

Global equity markets continued to strengthen in February with the MSCI World index (in local currency) rising by 3%. Stocks benefited from improving market sentiment which was largely driven by further evidence that the Fed remains on pause and positive news flow surrounding the US and China trade negotiations. US earnings season was in full swing during the month and, while we saw some strong earnings results, negative outlook statements outnumbered positive statements three to one, putting a dent in otherwise buoyant investor confidence.

The New Zealand share market benefited from the improving sentiment, moving higher with the global trend. Our domestic index was given a further boost by its largest constituent, a2 Milk, which rallied by over 13% during the month following a strong earnings result. While the New Zealand earnings season delivered some success stories, the reading from the latest outlook statements remained cautious. Revenue trends are moderate, and costs, especially labour costs, are gradually rising.

Australian shares also performed strongly during the month, driven by strong returns from the banks. Bank share prices rallied following the release of the final Royal Commission Report that was greeted positively by the market, which in a sense means a significant high point in expectations of regulatory change, fines and costs has now been reached.

While the recovery in equity markets has led to a repricing of credit risk, particularly globally, bond yields have not retraced their earlier moves. New Zealand bond and swap yields have reached record lows for some maturities. This is something we would expect to see during periods of recession, as opposed to periods of strong (but moderating) economic growth.