Why next week will be a big deal for financial markets - Stock Takes

Next week's US presidential election is set to dominate the financial markets. Photo / NZME

Next week is shaping up to be one of the most consequential of the year for the financial markets, in more ways than one.

First, there is the result of the United States election but then there is some key labour data both here and in the US, not to mention the US Federal Reserve’s rate call next Friday, all of which will be key for setting future market direction.

The US non-farm payrolls report for October is expected to show a decline in jobs growth, but the data will most likely reflect disruptions caused by the hurricanes that hit the states in the southeast.

These events will fall due just as international markets digest results from the “Magnificent Seven″ tech giants.

Microsoft has already reported a 16% lift in September quarter revenue to US$65.6 billion ($109.5b) while its net income was US$24.7 billion ($41.2b), up 11%.

Alphabet, the company behind Google, increased revenue by 15% year on year in the third quarter, to US$88.3b ($147.4b) reflecting strong momentum across the business.

Craigs Investment Partners investment director Mark Lister said while the opinion polls suggest a neck-and-neck race between former President Donald Trump and current Vice-President Kamala Harris, polling over the last two elections has tended to underestimate Trump’s support, so markets are seeing him as the favourite.

That expectation has translated into US dollar strength, which in turn has put downward pressure on the NZ dollar to the tune of about 6% over the October month alone.

“We are probably on the cusp of the busiest few days of the year for the financial markets,” Lister said.

“While it is a little bit on the subdued side here in NZ, the next few days will be phenomenally busy on a global level.”

US non-farm payrolls data, due first thing tomorrow NZ time, may have a bearing on next Friday’s rate call from the US Federal Reserve, Lister said.

Sandwiched in between these big international events will be NZ jobs data for the September quarter on Wednesday – which is expected to see unemployment go from 4.6% to around 5%.

Lister said that too could have a bearing on where domestic interest rates go from here.

He added the Kiwi’s sudden weakness was “not a positive” from a monetary easing perspective, as it would add inflationary pressure to the economy.

“That’s something we have got to keep an eye on,” he said.

The Reserve Bank’s next opportunity to change its official cash rate will be on November 27, when the bank reveals its monetary policy statement.

The markets have baked in a half-point cut to the OCR, with an outside chance of a 75 basis-point reduction.

The rate currently sits at 4.75%.

Bank profits under the spotlight

Three of the major Australian-owned banks – Westpac, National Australia Bank which owns the BNZ and ANZ – will report full year results next week. Despite the tough economic conditions for many in NZ the banks are still expected to report healthy profits.

Robbie Urquhart, senior portfolio manager – Australian equities for Fisher Funds predicted a benign reporting period for the major Australian banks given recent data including the Bank of Queensland’s result this month which highlighted a stable net interest margin (NIM) and low credit impairments.

“We will be focused on the outlook commentary, and expect the banks to be positive on their NIM outlook from here. We expect mild deterioration in bad debts, but will look for guidance on how the banks expect this to unfold over the next year.”

He said the NZ bank subsidiaries’ commentary on how the recent cuts in the OCR was impacting customer behaviour and demand for credit by households and businesses would be interesting.

“It may be too soon to tell, but any changes there (hopefully positive!) would be instructive.”

Urquhart said he would also be looking out for any commentary on the competitive environment and whether competition is intensifying or not.

“I suspect this is also a key area of focus for consumers as well.”

Antonia Watson - CEO, ANZ New Zealand. Photo / Supplied

The bank results come amid the Government’s banking inquiry into competition. So far just ANZ New Zealand chief executive Antonia Watson has appeared in front of politicians to answer questions about its profits.

Watson argued that the bank needed to provide shareholders a fair return in order to attract investors.

The banks will be hoping to strike the balance of having results strong enough to make their investors happy but not so high that the Government cracks down hard on them – not an easy tightrope to walk.

Spark fizzles

Utilities are supposed to be about solid, but not spectacular, earnings and dividends, but Spark’s downgrades in recent months suggest the telco is not conforming to the script.

The company this week reduced its earnings and dividend guidance for the 2025 year, saying its financial performance “falls short of what is acceptable”.

Spark said its operating earnings (ebitdai) were expected to fall to around $1.12-$1.18 billion in 2025, down 4% from a previous forecast of $1.165-$1.22b, and cut its dividend forecast from 27.5 cents to 25c, 75% imputed.

Market research firm Morningstar has cut its “fair estimate” for Spark by 7% to $4.30 per share.

This followed the 6% reduction two months ago, which reflected structural cost issues in the group’s IT units.

“This time around, the cause for our downgrade is more sinister: deteriorating revenue trends in the core mobile unit – the engine that drives earnings and cash flow for the whole group,” Morningstar said.

“We appreciate that the economic conditions in NZ are tough.

“However, the abrupt downturn in management’s outlook for fiscal 2025 mobile service revenue, from 3% just two months ago to now ‘largely flat,’ is concerning.

“The forecast flat mobile service revenue outcome in fiscal 2025 would be the first since the Covid-19 year of fiscal 2021 and in sharp contrast to the average 5% growth reliably delivered since fiscal 2018, excluding the pandemic year,” Morningstar said.

Forsyth Barr made modest downgrades to its own estimates, reflecting lower mobile service revenue growth and mobile margins partially offset by small reductions in operating expenditure.

“We now expect labour and opex to be flat in nominal terms in full year 2026,” Forsyth Barr said.

“We reduce our dividend to 25cps for 2026 and retain our full dividend reset of 20cps in 2027.”

Forsyth Barr expects Spark’s earnings to be flat over the next three years.

Fonterra’s bond issue

Fonterra has been given the thumbs up from ratings agency Standard and Poor’s as it seeks to raise funds from a bond offer.

The co-op is offering $250m in five-year unsecured, unsubordinated, fixed-rate bonds, with the ability to accept $100m in oversubscriptions, to institutional investors and to NZ retail investors.

The offer has opened an indicative margin range of 0.85 – 0.95% per annum over the five-year swap rate.

The offer is expected to close today following a bookbuild process.

S&P has affirmed Fonterra’s ‘A-/A-2′ ratings.

The agency said Fonterra’s ability to allocate more milk solids to higher-margin products continues to underpin robust cash flow generation and strengthen the dairy processor’s credit ratios.

“This positions the co-operative well to execute its refreshed operating strategy, which centres around effectively competing against other milk processors and ensuring continuity of its milk supply,” it said.

“The stable rating outlook reflects our expectation that Fonterra will maintain financial discipline and strong credit ratios. We also expect it to prudently manage its investment ambitions and shareholder distributions while ensuring long-term supply of NZ milk.”

- Additional reporting Tamsyn Parker

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.