Market review

It was a challenging third quarter for global financial markets, with most major equity and bond markets finishing lower. While central banks appeared to be winning in their fight against inflation, other economic data has been stronger than expected, suggesting that interest rates may need to stay higher for longer.

After a good first half of 2023, US equity markets retreated in the third quarter with the S&P 500 Index falling 3.3% and the NASDAQ 100 Index, which has a larger exposure to technology shares, falling 3.9%. Their declines came as the Federal Reserve delivered one more rate hike, and projections showed the possibility of one more later this year.

One of the worst-performing regions was Europe, where the Euro Stoxx 50 Index fell 4.9%. Economic data has shown a significant downturn, particularly in Germany – ordinarily the region’s economic powerhouse.

International bond markets continued to struggle against the backdrop of higher interest rates. Although inflation is falling towards central banks’ target rates, many have reiterated there is more work to do, potentially bringing further interest rate hikes.

The price of oil surged by as much as 30% over the quarter after Saudia Arabia and Russia said they would extend their voluntary production cuts through to the end of the year. The decision raised concerns of significant shortages heading into the final quarter of the year, which could weigh on global growth and add to already elevated energy prices.

During the quarter, most Western economies have seen the price of petrol at the pump increase which is expected to put even greater pressure on the cost-of-living concerns.

During the quarter, economic data showed that the US economy continues to hold up strongly. Many had expected that the cumulative interest rate hikes over the past year or two would begin to slow the economy.

However, stronger-than-expected growth and retail sales data suggest US consumers are yet to feel the pinch of higher interest rates, while a resilient labour market means companies are yet to cut back on staff despite the higher costs of employing them.

The People's Bank of China cut its one-year prime rate by 10 basis points as its post-COVID economy recovery has faltered. At a time when most central banks are raising interest rates to cool inflation, China is dealing with a slowing economy, driven largely by a property crisis.

Embattled Chinese property company Evergrande filed for bankruptcy protection in the US, which would allow the heavily indebted company to protect some US-based assets (this came after the company defaulted on some debt payments in 2021). Meanwhile, Country Garden, another one of the country’s property giants, warned that it could see significant losses in the first half of the year.

Following their global counterparts, New Zealand equities were lower over the quarter with the NZX 50 Index falling 5.2%. The index reached its lowest level of the year, making New Zealand equities one of the weaker performing of 2023. New Zealand shares have underperformed as inflation has remained higher than several of its global counterparts and given the prospect of local interest rates being held higher for longer.

The Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate unchanged at 5.50%, however its latest projections showed the chance of another interest rate hike was increasing. The terminal rate, which is the rate the RBNZ believes the OCR will peak, rose 10 basis points to 5.60%.

Dairy prices fell to their lowest levels in nearly five years at the Global Dairy Trade auction. The decline was driven in part by a softening of demand out of China as it deals with its own economic challenges. The fall in prices saw Fonterra cut its payout forecast to a range of $6.25 to $7.75 a kilogram. Dairy prices did rebound late in the quarter, offering some reprieve to the sector.

It was a mixed quarter for economic data in New Zealand. Annual inflation fell to 6.0%, down from 6.7% in the quarter prior. Non-tradeable inflation, which can be more challenging to bring down, remained stubbornly high at 6.6%, driven largely by food prices, which included a 21.1% annual rise in fruit and vegetable prices.

Meanwhile, retail sales figures also fell short of expectations. On a positive note, the economy grew in the second quarter at a faster-than-expected pace and a revision of first quarter data meant the economy avoided a technical recession.