Brexit? What Brexit? Currency niggles Bremain but let the rally resume

Perhaps global financial markets are becoming a little punch drunk because they mostly shrugged off the Brexit-inspired alarms with some astounding rallies, in particular the FTSE 100 Index gaining 7.2% last week.

That was the British market’s best weekly performance since February 2011.

The New Zealand share market went along for the ride, the Top 50 Index jumping 3.9%.

However, currency markets are still pointing to trouble ahead for the British economy, producing the unwanted side effect of boosting the New Zealand currency.

The British pound fell a further 3.7% against the New Zealand dollar last week, taking its fall for the year to date to 16.6%.

The Kiwi is also up 2.1% against the Australian dollar and more than 5% against the US dollar so far this year.

All of which bodes ill for New Zealand dairy farmers and the latest global dairy trade auction coming up this week.

“Given the recent trends in commodity prices, it is difficult to envisage a positive result, despite futures markets looking stable,” says Mark Lister, head of wealth research at Craigs Investment Partners.

“I just can’t see how they’re [dairy prices] really going to lift in a substantial way,” he says.

“In addition, uncertainty over the implications of the Brexit decision, the increased competitiveness of European producers as a result of the weaker euro and a stubbornly high New Zealand dollar have created additional medium-term challenges for the sector,” Mr Lister says.

He notes the key price for New Zealand farmers, whole milk powder, is down 8.7% year-to-date.

And it’s too soon to say anywhere is out of the Brexit woods altogether.

“I certainly wouldn’t say we’re out of the woods yet. There’s still a lot of uncertainty to come and we don’t really know how the situation’s going to pan out,” Mr Lister says.

Key questions
These include who the next British prime minister will be, who will lead Britain’s Labour Party and whether Scotland will hold another referendum to leave the United Kingdom so it can remain part of the European Union.

“There is a whole range of questions that we won’t have answers to for some months, which means that there are a lot of opportunities for further shocks and further uncertainty.”

Given the regularity with which Australia has changed prime ministers over the last few years, the uncertain outcome of the Australian federal election isn’t expected to have much impact on financial markets this week.

The other key local event this week will be the release of the latest quarterly survey of business opinion (QSBO), although Mr Lister says because it was conducted before the Brexit vote, it’s likely to be less useful than usual as a pointer to economic performance.

The QSBO will follow last week’s monthly ANZ business confidence survey which showed a strong rebound in June to about double the historic average confidence reading and about equal to the pre-GFC average.

Offshore, the key known event will be Friday’s jobs reports in the US after the extremely weak report for May.

Economists are expecting about 180,000 jobs to have been added in June, up from just 38,000 in May.

Although it was undoubtedly the post-Brexit relief rally that fuelled the New Zealand share market’s rise last week, the largest gainer had its own positive news to thank.

Kathmandu shares jumped 22.3% for the week after the outdoor clothing retailer lifted its profit guidance for the year ending this month from just over $30 million to between $32-35 million.

That’s up from $20.4 million the previous year.

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