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NZ Morning Focus

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Fuseworks Media
Fuseworks Media


- Financial market sentiment remained supported in the run-up to the Brexit vote.

- Bookies put Brexit odds at about 25%; polls around 50%.

- US home sales rose 1.8% m/m to the highest level in nine years.


UPCOMING TODAY: There is no significant economic data due for release in New Zealand, Australia or China today.

CURRENCY: Riding the wave of better market confidence, with NZD/USD at its highest levels in just over a year. Volatility is likely to be higher than usual as the Brexit vote approaches.

RATES: Overnight kiwi trading saw better receiving interest in the long end and may see the curve open with a flattening bias.


GLOBAL MARKETS OVERVIEW: Markets continue to tread water ahead of the key Brexit votetomorrow. Equities rose in Europe, with the Euro Stoxx up 0.4%, and the FTSE 100 and DAX each up 0.6%. Conversely, US equities were largely unchanged at the time of writing. Despite US equity volatility lifting again, with the VIX climbing 8% to 20.0, the AUD and NZD have been supported by the better environment for risk. US Treasury yields were about 1-2bp lower across the curve, while UK 10-year yields rose 2.6bps. In the commodity space, gold was little changed while oil fell after inventories declined less than expected, before prices rebounded somewhat. Lower energy prices saw the CRB commodity index fall 0.6%, with copper (+0.7%) the best performer on the other side.


US HOUSING DATA STRONG: May existing home sales rose 1.8% to a 5.53m annualised rate. This is a high for the recovery, and excluding the sub-prime boom, is a very healthy level of activity. Yellen said nothing new; EU consumer confidence fell a touch; Brexit polls remain neck-and-neck.


THE FINAL COUNTDOWN: The Brexit vote approaches. Bookies seem relatively sure of their ground, picking just 25% odds that the UK will vote to leave the European Union tomorrow, despite polls that continue to suggest it is too close to call. Meanwhile, financial market participants are holding their collective breath. With liquidity already lower and volatility higher, a leave vote, should it eventuate, would most certainly throw the cat bodily among the pigeons. Certainly the number of internal emails this author has seen about appropriately managing the various types of risk over the event underlines the expectation that moves could be dramatic (harking back to the violent moves seen when the Swiss National Bank unexpectedly dropped its currency floor). Volatility would not be limited to currencies, in the case of a vote to leave. It is entirely possible that the bookies are right and the event proves to be a damp squib, as broadly speaking, polls tend to overestimate appetite for risky change. But even a "stay" vote will cause some volatility (particularly in the GBP) as hedges are unwound.

THE KIWI FLIES AGAIN: Seemingly on a trajectory towards USD0.72, the kiwi is flying again as relatively solid yields and more of a risk-on tone returns to markets. But truly "anything could happen" over the next two days. If your business couldn’t handle that, you might want to take cover.

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