Sharemarket falls as investors anticipate future interest rate hikes

Wednesday, 14 July 2021

The sharemarket weakened after the Reserve Bank signalled interest rates were heading higher, reducing the relative appeal of stocks.

The benchmark S&P/NZX 50 Index fell 65.257 points, or 0.5 per cent, to 12,719.68 on Wednesday.

The Reserve Bank kept the official cash rate at a record low but said it would end its quantitative easing (QE) programme by July 23, sooner than expected, following stronger economic conditions. That prompted economists to start pricing in interest rate increases as early as August.

“Investors were expecting a tapering of the QE programme, and they have got a cessation of it,” said Fat Prophets head of research Greg Smith. “The realisation is that we are at the bottom interest rate wise and they are only going to head up.

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The prospect of higher interest rates weighed on the sharemarket.

“The RBNZ is probably going to be one of the first major central banks to raise rates.”

Investors had become used to the safety net of ultra low interest rates, which had boosted the appeal of New Zealand’s high yielding dividend stocks, Smith said.

“Investors maybe have become a bit complacent about interest rates staying low forever,” he said. “The reality is they are not and the consequence of all the stimulus we have seen is ultimately going to be higher inflation and higher interest rates.”

Higher interest rates may dent valuations of growth stocks and reduce the relative appeal of dividend stocks, he said.

Still, interest rates probably won’t increase rapidly, ensuring the appeal of stocks remains, he said.

“Gradually increasing interest rates are not something to be feared, it’s a net positive for the financial sector because it shows our economy is actually tracking pretty well,” Smith said.

The sharemarket experienced a negative short-term reaction across a broad range of stocks, he said.

ANZ Bank dropped 1.8 per cent to $29.39, Z Energy fell 1.4 per cent to $2.82, and Fletcher Building slid 1 per cent to $7.21.

Mainfreight edged down 0.3 per cent to $76.18, Auckland International Airport fell 0.5 per cent to $7.50, Spark slid 1.6 per cent to $4.84 and Contact Energy dropped 2.5 per cent to $8.19.

Asian shares were mostly lower on Wednesday, tracking a decline on Wall Street as investors weighed the latest quarterly earnings reports from big United States companies and data pointing to rising inflation.

On Wall Street, the S&P 500 fell 0.4 per cent on Tuesday, with most of the companies in the benchmark index losing ground. Banks, industrial stocks and companies that rely on consumer spending accounted for a big share of the decline. Technology stocks bucked the trend, helping counter some of the broader slide. Small company stocks took some of the heaviest losses.

– With AP