Japan, Jacinta and the markets

Shocked

Unless you’ve been living under a rock for the past few years, you’ll know just how much politics can affect the markets. Two impactful political events are making themselves felt this week in Japan and New Zealand.

It looks like Japanese Prime Minister Abe learned what not to do from the recent British snap election. May called a snap election with a majority government and managed to slash her majority so badly she could only wobble back into power on the crutches of the ethically-dubious DUP. Abe has clearly taken notes. His snap election of Sunday 22nd resulted in a resounding landslide victory.

Abe has never looked so strong and if the markets like one thing, it’s a stable government. They have so many seats, they no longer need their coalition partners the Liberal Democrats. Economically, we may see increased government spending to fight deflation, especially in defence. Abe believes debt can only be overcome with growth, which goes against the austerity policy of many other countries.

If you cast your minds back, you’ll recall there was an election in New Zealand about a month ago. With no clear victor there has been much political negotiating about who will form a coalition government. In a somewhat surprising turn of events, it is second-place Labour, led by newcomer Jacinda Ardern, who will form an government with minority party NZ First led by Winston Peters. An unnatural combination, it is likely to worry markets, who will have hoped for a return to the steady policies of Bill English’s National party.

 

NZD Cash Rate Wednesday

They were worried for a minute

Bill English’s National Party might have held on to power and eased market fears, but the forecasts for the Official Cash Rate, due out at 8pm on Wednesday 27th GMT, are less clear.

Many expect the Bank to keep things steady in the current climate, but some argue the weakening currency and gloomy outlook in housing and construction make a rise before the end of the quarter more certain. Standing at 1.75% many feel the exchange rate is going to be crucial for the future direction of the RBNZ Cash Rate.

NZD is a volatile currency that tends to react to global forces. Trump and Kim’s war of words will have cautious investors heading back to safer markets, while China’s economy is a hot topic of debate that could push the Kiwi in a number of directions.

NZD and EUR election winners

Today's big winners - Merkel and English
Today’s big winners – Merkel and English

It all depends on who you talk to.

Some headlines are scaremongering that NZD has dropped from a week ago amid fears of weeks of coalition talks with a inward-looking nationalistic party. Bill English’s National party scraped back into power but it is going to be propped up by New Zealand First led by Winston Peters. Their tiny 9 seat party has a disproportionate amount of power under the New Zealand system. Other headlines are brushing it off saying the re-election of English means stability for the country, which the markets are going to like.

For the Euro, there has a been a sigh of relief as Merkel holds on to power for a fourth term. Widely seen as the new leader of the free world and with no other European leaders stepping up to vie for the top spot, it’s what the currency and its economic zone needed. Far-right election gains have been a worry here too, but they’re relegated to lag behind in third place.

Anything involving a vote by the general public can cause unexpected havoc as Brexit and Trump proved last year so markets will likely react positively as it looks like business as usual.

NZD: election week

Ardern vs English - New Zealand candidates
Ardern vs English – New Zealand candidates

The big contender for Friday’s New Zealand elections is a surprise outsider, Jacinda Ardern. The straight-talking 30-something has challenged patriarchal attitudes winning many supporters along the way since taking control of her party only two months ago. Her centre-left Labour party could cause major upset if they pull off a win against Prime Minister Bill English’s conservative National Party. Pundits are already comparing the 37-year-old to Justin Trudeau of Canada and Emmanuel Macron of France though neither of them face anachronistic questioning about their family plans.

New Zealand’s economy has done well under 9 years of National Party leadership so Ardern’s progressive agenda could ruffle business and banking feathers. Some expect a dip in the currency if her popularity grows amid fears that she will introduce a raft of tax-hikes to fund welfare changes.

For the budgetary minded, GDP figures on Wednesday 20th at 10.45pm, could help sway voters on the fence.