Sharemarket drops 1.1% as higher inflation seen pushing up interest rates

Thursday, 27 January 2022

The sharemarket dropped to its lowest level in more than a year after two hotly anticipated announcements pointed to higher inflation pushing up interest rates, denting the appeal of equities.

The benchmark S&P/NZX 50 Index dropped 1.1 per cent, or 135.329 points, to 12,050.32 on Thursday, its lowest close since October 2020.

First off the block, the US Federal Reserve signalled it plans to begin raising the benchmark interest rate as soon as March to counter escalating inflation.

Then in New Zealand, Stats NZ said annual inflation accelerated to 5.9 per cent in the December quarter, marking the highest level since June 1990. That’s expected to keep pressure on the Reserve Bank to continue ratcheting-up interest rates.

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“Those two things have set the market on edge a bit today,” said Devon Funds Management head of retail Greg Smith. “Concern that inflation is running out of control or the economy is running too hot is leading to concern that interest rate rises are going to follow.

“We are clearly in an inflationary environment. There is a bit of concern that central banks generally are behind the eight ball and that the low interest rate party is over.”

Still, Smith said interests rates would not rise aggressively overnight as central banks would be conscious of the risk to the economy of raising rates too quickly.

New Zealand’s Reserve Bank is scheduled to review interest rates on February 23. In November, the bank raised the benchmark interest rate for the second time in two months, to 0.75 per cent, and signalled it expected to hike more quickly than previously signalled to contain inflation.

“Further increases in interest rates are going to be something that the market has to acclimatise to this year,” said Smith.

High growth technology companies and property related stocks weakened.

Pushpay, the digital payment service for churches, dropped 3.5 per cent to $1.11. Cinema software company Vista Group fell 1.4 per cent to $2.07.

Retirement village operator Ryman Healthcare shed 3 per cent to $10.20. Construction firm Fletcher Building slid 3 per cent to $6.54.

Fast-food company Restaurant Brands edged up 0.3 per cent to $14.60 after reporting its sales last year rose 20 per cent to $1.1 billion, with about $100 million of the increase due to an extra eight months trading from its purchase of 69 KFC and Taco Bell stores in California in 2020.

Meanwhile, Asian stock markets tumbled after the Federal Reserve comments.

Market benchmarks in Tokyo and Hong Kong fell by more than 2 per cent, while Seoul and Sydney sank nearly 3 per cent.

Wall Street's benchmark S&P 500 index lost 0.1 per cent on Wednesday.

The Fed statement said the US central bank “expects it will soon be appropriate'” to raise rates. Investors expect as many as four rate hikes this year, starting in March. The Fed also said monthly bond purchases that push down long-term rates by injecting money into the financial system would be phased out in March.

- With AP