Markets on edge as Iran conflict escalates; Fonterra earnings loom

Futures are pointing to a slump for the S&P/ASX 200 index when trading opens this week after sluggish Friday sessions in the US and Europe, with President Donald Trump giving Iran a two-day deadline to re-open the Strait of Hormuz or face attacks on its energy infrastructure.

The kiwi dollar dropped as investors lost their appetite for riskier assets and after Fitch Ratings put New Zealand’s government on notice with a negative outlook on the sovereign AA+ credit rating over the administration's reluctance to make headway in reducing debt.

Political posturing by coalition partner New Zealand First will put the listed power companies in focus after leader Winston Peters signalled plans to split the generation and retail arms from the likes of Meridian Energy, Contact Energy, Mercury NZ and Genesis Energy.

And dairy companies will be in focus when Fonterra Cooperative Group and Synlait Milk report their first-half results after a run of rising prices at the past six Global Dairy Trade auctions.

Nervous times

Australian futures are pointing to a 1.8% slide for the ASX200 when trading opens across the Tasman after stock markets tumbled on Friday on Wall Street and in Europe. The S&P 500 dropped 1.5% on Friday, with the Dow Jones Industrial Average down 1% and the tech-heavy Nasdaq Composite falling 2%, while the UK’s FTSE 100 dropped 1.4%, Germany’s DAX sank 2% and France’s CAC 40 declined 1.8%.

Tensions in the Middle East escalated over the weekend, with US President Trump issuing an ultimatum to start bombing power plants if Iran doesn’t reopen the Strait of Hormuz in two days, with the Islamic Republic countering with a threat to shut the channel completely if its energy infrastructure is attacked.

The Polymarket prediction market is pricing in shorter odds for a ceasefire in the near term, with a 39% chance predicted for an end to the conflict by the end of April, 49% priced by the end of May and 56% by the end of June.

Brent crude oil futures remained elevated at US$109.55 a barrel at 7am in Auckland.

“Needless to say, since the weekend close, news on the conflict has been mainly bad, and sets the scene for investor risk appetite to sour further,” Bank of New Zealand senior markets strategist Jason Wong said in a note. “Global rates surged, with investors concerned about the risk of a prolonged war adding to inflation, pressure on fiscal accounts, and central banks needing to counter the impact with tighter policy.”

The yield on US 10-year treasuries climbed 13 basis points to 4.38%, putting pressure on New Zealand’s equivalent, which closed at 4.75% on Friday.

Fitch Ratings threw a spanner in the works for New Zealand after putting a negative outlook on the AA+ long-term foreign-currency issuer default rating, saying substantial debt reduction is becoming harder to envisage as successive governments delayed their returns to surplus by continuing to spend through a weak economy.

The kiwi dollar fell to 58.35 US cents at 7am in Auckland from 58.83 cents last week, and traded at 83 Australian cents from 83.07 cents.

Monetary conundrum

Bond traders have fully priced in a quarter-point rate hike in the official cash rate by the Reserve Bank at the July meeting, with 77 basis points of increases priced in by the end of the year.

Central bank governor Anna Breman will deliver a speech on Tuesday in Auckland, where she will outline how the monetary authority is viewing the Middle East conflict, which requires the juggling of rising fuel prices flowing through the economy and a drag on growth.

The S&P/NZX 50 index starts the week near a seven-month low, having tumbled 5.3% so far this month.

National carrier Air New Zealand has been one of the hardest hit through the energy shock. US and European airlines were weaker on Friday, with United Airlines cutting unprofitable routes in response to rising jet fuel costs.

Locally, first-half results from milk processors Fonterra and Synlait are the main focus for the day, coming after a run of six increases in the milk price at the GDT auctions. Fonterra plans to reveal a special dividend from its divested Mainland consumer business, while Synlait warned of another soft half as it works to turn around its operations.

Meanwhile the generator-retailers will be in focus after NZ First leader Winston Peters said his party will campaign on separating the generation and retail arms of the major power companies in an effort to bring down prices. The gentailers became something of a proxy for the general election in 2014 when the opposition Labour party campaigned on introducing a wholesale buyer of electricity.  

Reporting by Paul McBeth. Image from Adem Percem on Unsplash.