Sliding dairy, oil prices to cast pall over investors

Weak dairy prices and falling oil prices are expected to weigh on share markets. Photo / supplied

Weak dairy prices and ongoing fears over the collapse in oil prices are likely to weigh on local markets today as investors fret over the impact on the domestic economy.

West Texas Intermediate futures for May delivery - which settle with the physical delivery - went into negative territory for the first time this week as dwindling demand and limited storage meant the price of stowing away unused barrels of oil exceeded the value of the commodity.

That's weighed more broadly on the demand outlook for, and prices of, other commodities including New Zealand's key dairy exports.

Dairy prices fell 4.2 per cent in the overnight Global Dairy Trade event, shedding all of the gains at the prior event two weeks ago. The GDT Price Index is now approximately where it started 2019. Whole milk powder, which makes up the bulk of the auction, fell 3.9 per cent to US$2,707 a tonne.

Further falls are likely, said NZX senior dairy analyst Amy Castleton. While dairy prices have been holding up better than many commodities, "I'm expecting prices will keep coming down for most of the rest of the year," she said.

This won't be good news for the economy as it struggles to weather the impact of covid-19, with dairy exporters such as Fonterra Cooperative Group and A2 Milk citing robust demand through the outbreak.

Growing importance

Bank of New Zealand head of research Stephen Toplis said this week that the primary sector will end up accounting for 70 per cent of the nation's exports given the standstill in tourism.

"This means the New Zealand economy, and the NZ dollar, become more vulnerable to commodity prices than was already the case," he said.

The New Zealand dollar was trading at 59.80 US cents at 8am in Wellington versus 59.85 cents at 5pm yesterday.

The kiwi dollar also remained under pressure after Brent crude futures fell as much as 32 per cent to US$17.51 a barrel, the lowest since 2001. The Brent crude spot price was recently down 22.8 per cent at US$19.75 a barrel.

The outlook for US oil remains grim, with West Texas crude June futures down as much as 68 per cent at US$6.50 a barrel

The "risk averse mood continued, with equities and oil recording further losses," said Westpac Bank economists.

Wall Street was weaker with the Dow Jones Industrial Average down 2.7 per cent at 8am in Wellington, the S&P 500 down 3.1 per cent while the Nasdaq fell 3.5 per cent.

Focus on refinery

The New Zealand stock market was already hit by the oil sell off yesterday, with investors taking the souring sentiment to pause after last week's sharp rally.

Refining NZ was already in focus after it announced plans to review its business, while New Zealand Oil & Gas has said it's on the hunt for new opportunities.

Transport fuels retailer Z Energy, which is a shareholder of the refinery operator, had been contending with an increasingly competitive market before the outbreak grounded planes and kept commuters at home.

News that government ministers are looking at how to extend the wage subsidy scheme after the initial 12 weeks may offer investors some optimism in certain sectors.

Among the options under consideration are cashflow replacement grants for small and medium-sized businesses hard-hit by the lockdown, which could help some firms in retail and hospitality.