Markets in holding pattern until US panorama clearer

Both the New Zealand dollar and the stock exchange are a tad weaker but relatively steady today in the wake of US President Donald Trump's inauguration and analysts expect the situation to continue as markets take a wait-and-see approach.

ANZ Bank New Zealand senior economist Phil Borkin said Saturday's inauguration did little to shed light on the Trump's administration's plans. Markets had rallied strongly after Donald Trump's election in November with the greenback pushing higher on promises of tax cuts and fiscal spending but "markets are now showing a healthy dose of scepticism because we still don't have the details. We don't know how he is actually going to achieve the goals he's set out," Mr Borkin said. "Until we get that information, until markets are able to dissect it, we will remain in this holding pattern," he said.

Longer term, Mr Borkin said, the kiwi will probably weaken against the US dollar but will hold up on a trade-weighted index basis. "The economic credentials here are very good," he said. The New Zealand dollar was trading at 71.84USc  versus 72.14USc  late Friday and 78.63 on a TWI-basis versus 78.90 late Friday.

NZ Institute of Economic Research senior economist Christina Leung also said she doesn't expect a "sharp easing" in the currency from Mr Trump's presidency. "The continued solid growth outlook for the New Zealand economy should continue to support the NZ  dollar at a high level," she said. There will be some modest easing, however, as the US Federal Reserve continues to raise interest rates which will reduce New Zealand's yield advantage.

She noted that Mr Trump's stimulus plans have lifted inflation expectations but also pointed to the uncertainty. "Whether there will be effects on actual inflation would depend on which spending plans he actually follows through on."

Westpac Banking Corp acting chief economist Michael Gordon also underscored the lack of clarity around potential policy to predict the impact. "The policies he has been pushing are largely domestically focused and it's hard to pin down what they actually mean for New Zealand, which means you are coming down to stuff that he hasn't promised, the stuff he is going to do impulsively and you just can't predict that." Mr Gordon noted there is always policy uncertainty but "the additional layer this time around is you have a guy in charge who extremely thin-skinned and vindictive and you don't know how he is going to respond to any kind of setback."

Hamilton Hindin Greene broker James Smalley also said investors are waiting for more clarity as "we are in uncharted territory." He noted, however, the market is currently vulnerable to any risk-off trade due to the level of foreign ownership in the market. If investors become concerned about what Mr Trump does, they will start to reduce holdings from what they consider the more speculative part of their portfolio, namely markets like New Zealand, Mr Smalley said. "If it's a risk-off trade, our markets don't do too well," he said. While that could create a good buying opportunity for domestic investors, "it might mean we get a lot more volatility in our market."

Mr Smalley said a key bellwether stock regarding potential impact is Fisher & Paykel Healthcare, a company which has manufacturing in Mexico and exposure to the US healthcare sector. The stock was last trading up 0.2% at $8.89. The S&P/NZX 50 Index was down 0.1%.

He noted any move toward greater protectionism in trade will have an impact. "We are obviously a very open, trade-based economy and rely on global growth and global trade and anything that's negative for that, is going to be negative for us," he said. Mr Borkin also warned of potential fallout from an anti-trade stance in the US.

"If we saw a world where protectionist measures started to rise and there were trade wars between some big, global super powers I don't think New Zealand would necessarily do very well in that world," he said.

(BusinessDesk)