New Zealand shares and the kiwi dollar may see an initial relief rally when markets open tomorrow but will then trade sideways after preliminary results from Saturday's election show the incumbent National Party won the most votes but not enough to govern.
Preliminary results show the populist New Zealand First party and its 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 Labour, together with the Green Party, will now attempt to woo Peters to form a government.
Annette Beacher, head of economic analysis in Asia for TD Securities, said every time National pulled ahead in polls prior to the election the New Zealand dollar rallied "so a clearer lead from National even without an outright majority is slightly NZD supportive for the open" on Monday. However, there is "no green light for a rally" given the uncertainty around potential coalitions, she said.
"It was a good result for National, so that's a plus for kiwi but it is a fact that no government will be formed, probably for the next two weeks, as they will be waiting for the special votes to come in," said Westpac Banking Corp senior strategist Imre Speizer.
As a result, Speizer is expecting a knee-jerk reaction higher followed by a period of range-trading as the wheeling and dealing gets underway. The market widely expects Peters to go with National but it will all depend on "what's in the goodie bag," he said.
Peters was quoted as saying "nobody quite knows what the result last night means" and has said he will make a decision by writ day on Oct. 12 - the day the final election results are officially returned to the Governor General.
National leader Bill English has said he will begin a discussion with New Zealand First to find common ground and form a "strong and stable government" while Labour leader Jacinda Ardern has not conceded the election.
"The majority of people have voted against the status quo. It's up to us to see if we can then produce government from that," she told reporters outside her house Sunday.
Matt Goodson, managing director at Salt Funds Management, said the base expectation is that National will go with Peters. He said the outcome, however, is neutral to perhaps slightly negative for markets given that National is unable to govern alone.
"The reality is that National can't form a government by itself or with its partners, which would have been the best-case outcome in the short term for financial markets," he said.
"It could become positive for markets if National reaches a quick strong agreement but could be negative if it really strings out and if the conditions demanded are quite high," said Goodson.
He noted the clear loser is the housing market, given New Zealand First's policies on immigration and foreign ownership of housing "appear to have a very high chance of gaining traction."
Companies with exposure could feel the impact as "it could be a bit of a headwind for the housing market, which could impact economic growth."
Shane Solly, a director at Harbour Asset Management, also said markets may have a "cautiously positive response" to the outcome but until negotiations are complete investors will likely remain cautious. He also said that Peters' migration policies may have an impact on some companies.
Tim Kelleher, head of institutional foreign exchange sales at ASB Bank, said "you'd assume Peters would go with the National Party but you can't guarantee that."
He is also expecting a "small relief rally" for the kiwi dollar but said sellers will swiftly emerge. The New Zealand dollar could push to 73.50 US cents or 73.75 US cents after trading at 72.83 US cents as at 5pm on Friday but "I would have thought there would be sellers on rallies" as forming a government could take weeks, he said.
Kelleher said swap rates are unlikely to move as markets will be expecting the status quo. "They would only have moved if Labour had gotten in as they would have issued more debt," he said.
The two-year swap rate was at 2.22 percent and 10-year swaps were at 3.23 percent Friday.
Matthew Circosta, a sovereign analyst for Moody's Investors Services, was sanguine after the vote.
"We expect the broad consensus on fiscal discipline to be maintained within the coalition government when it is formed, and the government to continue to deliver on the goals of maintaining budget surpluses and reducing debt over the medium term," he said.
Overall, New Zealand's strong economic profile reinforces robust public finances, he said. High-income levels, robust population growth and continued strong Asian demand for New Zealand dairy, tourism and education support strong growth prospects.
"We expect real GDP growth of around 2.5 percent to 3 percent through 2017 and 2018, above the Aaa-rated median of about 2 percent," he said.
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