MARKET REACTION: NZ stocks, dollar tread water after election amidst uncertainty

Monday 25th September 2017

New Zealand markets are treading water as coalition talks get underway after Saturday's general election although sentiment is also being weighed on by offshore events.

Preliminary results show New Zealand First party leader Winston Peters firmly in a kingmaker position as all parties fell short of the necessary 61 seats to secure a parliamentary majority. National won 58 seats while Labour has 45, the Green Party has seven, and New Zealand First has nine, according to the Electoral Commission. That result, however, could shift as the Electoral Commission also said 384,072 special votes - 15 percent of the total cast - remain to be counted.

Both National and the Labour-Green bloc will now attempt to woo Peters to form a government.

The New Zealand dollar was trading at 72.97 US cents from 73.30 US cents as at 8am in Wellington from 73.39 cents on Friday in New York. Traders say investors were likely cheered when the National Party won the most votes but any upside has been capped as National can't form a government on its own.

At midday, the S&P/NZX50 Index was up 4.82 points or 0.06 percent to 7,819.6. Within the index, 25 stocks had risen, 13 had fallen and 12 were unchanged. Turnover was around $25 million.

ASB Bank chief economist Nick Tuffley said coalition negotiations are unlikely to start in earnest for two weeks but that financial markets are coping with uncertainty "relatively well". He notes the final vote count confirming the allocation of seats is expected on Oct. 7 and Peters has signalled a decision by Oct. 12, when final election results are officially returned to the governor general.

"New Zealand and financial markets have no option but to patiently wait out the next three weeks," said Tuffley.

Grant Williamson, director at Hamilton Hindin Greene, said the market had taken the results in its stride but continued uncertainty is causing investors to remain on the sidelines, with Peters still able to "go either way" and play the two major parties off against one another over the coming weeks.

With markets in Australia and across Asia set to open during the afternoon, it remains to be seen whether volumes, which have been weaker over the past few weeks, will pick up. So far this month, the local benchmark index has seen 555.6 million shares traded, compared to 801.2 million in September 2016 and 926.7 million in 2015. During September 2014, when the last general election was held, the NZX50 saw 827.6 million shares traded.

"At this juncture, it is unclear which coalition is likely to emerge, or how long it will take to form," said Westpac Banking Corp senior strategist Imre Speizer in a note. The kiwi may lift if a National coalition is viewed as a greater likelihood than a Labour one, however, "the presence of New Zealand First in any coalition would limit any New Zealand dollar gains," given its policies, said Speizer.

Among other things, Speizer noted New Zealand First seeks much more restrictive immigration policy than either of the major parties and wants to tighten restrictions on foreign investment, and restrict ownership of houses and farmland to New Zealand citizens and residents and would seek to reform the Reserve Bank act "with an eye to making the exchange rate more exporter-friendly."

While he doesn't expect New Zealand First to get everything it wants "it may be able to negotiate one or more of reduced immigration targets, tighter foreign investment restrictions, and/or a reduced RBNZ focus on inflation," said Speizer.

Kiwibank chief economist Zoe Wallis also sees the kiwi sticking to a tight range as talks get underway. Last week the local currency largely stuck to a 72.50 US cents-to-73 US cents range and "an early declaration from (New Zealand First leader) Winston Peters may stir volatility, but otherwise, we anticipate the NZD holding last week's range, though possibly with a mild upside bias," she said.

Investors also appeared to be taking a wait-and-see approach in the swap markets, with two-year swap rates down 2 basis points to 2.20 percent and 10-year swap rates down 1 basis point to 3.23 percent. While there is no outcome, the market is leaning more to a more market-friendly outcome so "at the very margin we are lower in yield," said Sam Twigg, a broker with OMF.

He is not expecting much more reaction and said until there is a definitive result, investors will likely remain focused offshore for direction. Twigg also noted that the central bank has a rate review on Thursday, which should come into focus for markets. The Reserve Bank is widely expected to keep rates on hold at a record low 1.75 percent and reiterate that it has no plans to shift them any time soon. Thursday will mark acting governor Grant Spencer's first rate review.

Currency markets are also being pushed around after Germany’s election showed surging support for a far-right party that left Chancellor Angela Merkel scrambling to form a governing coalition and as both the US and North Korea continue to step up their rhetoric.

(BusinessDesk)

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