Selected market indicators for period ended 28 February 2018

Early in February the announcement that the US budget deficit would reach close to US$1 trillion in 2018 aroused fears of inflation and higher interest rates, pushed up bond yields and sent shocks through global equity markets.

The S&P 500 Index (a measure of US share prices) experienced its biggest loss in six years (at one point down -10%) before rebounding 8% in the next three days, part of the largest weekly gain since 2013. However, the rebound wasn’t enough to preserve the 15 month streak of positive returns from global equity markets. 

The MSCI World Index closed out the month down -3.5% (in local terms), erasing much of January’s gains. Unhedged investors lost -1.8%, the NZ dollar falling against the US dollar and yen over the month. While global market volatility spilled over into the New Zealand and Australian markets, the strong performance of a2 milk softened the fall in NZ (down -0.8%) and contributed to a positive return in Australia (+0.4%). Rising bond yields put downward pressure on bond prices; domestic and global bond returns for the month were near zero. Other yield-sensitive sectors such as real assets also suffered, with listed property and infrastructure underperforming the broader global equity market.

An estimate of a Balanced Fund gross index return based on selected market indicators for February is -1.2%.

Significant recent items include:

  • After keeping rates on hold at the end of January the US Federal Reserve signaled its expectation of three interest rate hikes over the course of 2018. The next rate rise is widely anticipated to be announced following the next meeting on 21 March.
  • A coalition agreement has finally been struck between Germany’s Christian Democratic Union and the Social Democrats; it will see Angela Merkel continue to be Chancellor of Germany for her fourth term.
  • History was made this month when a member of the ruling North Korean Kim Dynasty visited South Korea for the first time since the end of the Korean War in 1953, sparking hopes of further diffusion of political tension between North Korea and the rest of the world.
  • The VIX Index, a measure of market volatility and widely known as the “fear gauge of Wall Street”, reached its highest level since August 2015, sparking the unwinding of a number of strategies banking on continued low volatility, and in turn fueling further volatility.


Trans-Tasman Equities

NZ and Australian equities outperformed global markets, returning -0.8% and +0.4% over the month. The key reason was the strong performance of a2 Milk which rose more than +40% following the announcement of a partnership with Fonterra during the month. The recent surge saw the stock (temporarily) reach a market cap of more than NZ$10bn, becoming the largest stock on the NZX.

Global Equities

The fall in the MSCI World index (in local currency), down -3.5% for the month, essentially wiped out its January gains, bringing the year to date return to +0.1%. Emerging Markets (in local currency) continued to upstage the highs and lows of developed markets, closing out February with a loss of -3.9% (local currency, -2.3% unhedged).

Property and Infrastructure

Fear of increasing interest rates put further downward pressure on property and infrastructure stocks, compounding losses experienced in January. Property was down -6.2% for the month, dragging the 12 month return below zero (-2.4%). Energy, utilities and telco services were some of the weakest sectors in global equity markets over the month, contributing to negative returns from listed infrastructure (-4.4%).

NZ Bonds and Cash

NZ Government and Corporate Bonds returned +0.1% and +0.3% in February. The 10 year NZ Government Bond yield (2.94%) ended the month just ahead of the 10 year US treasury yield (2.87%) after the latter jumped +0.15% over the month. The NZ Cash return is now 2.0% for the 12 month period, and continues to lag most other asset classes.

Global Bonds

Global Aggregate Bonds fell over the month, returning (-0.2%), dragged down by Corporate Bonds which suffered in the wake of risk averse investor behavior at the start of the month. Global Government Bonds matched the return of local government bonds over the month (+0.1%) but continue to lag NZ Bonds over 12 months (2.2% versus 4.1%).


With the US budget deficit sending shockwaves through equity markets, many investors started bringing their money home causing large changes to the US dollar and yen in particular; the NZ dollar falling against both by -2.4% and -4.6% respectively. On a 12 month basis the NZ dollar is down against all major currencies, albeit only by -0.1% against the US dollar. The trade-weighted index lost -0.6% over the month, and is down -4.8% over 12 months.


This information has been prepared by Mercer (N.Z.) Limited for general information only. The information does not take into account your personal objectives, financial situation or needs.This information has been prepared by Mercer (N.Z.) Limited for general information only. The information does not take into account your personal objectives, financial situation or needs.

12 March 2018