Liam Dann: Gimme Shelter – Markets an island of calm in Covid storm


This week I’ve tried to draw inspiration from Charlie Watts, the late great drummer for the Rolling Stones.

That might be a bit indulgent for a business column but it leads me to some comforting financial market analysis and some heartening macro-economics.

So, if you’re not a Stones fan, bear with me.

Watts’ passing last week, aged 80, was in some respects just another sad note in a week of grim news.

But it was also a chance to celebrate his work.

I’ve taken inspiration from the Stones all my life, but it is only in later years that I’ve understood how much of their genius lay with Watts.

He provided a steady path through songs in which chaos reigned around him: Satisfaction, Paint it Black, Gimme Shelter, Sympathy for the Devil … the listgoes on an on.

Through the late 1960s and early 1970s the Stones produced wild, sometimes violent songs that rocked to the point of total collapse.

Without the singular focus of a drummer like Watts they may well have.

He kept his focus tight, he played to serve the song but he always understood the big picture.

Somehow he was able to drive on calmly through the noise without being overwhelmed by it.

In the interests of staying sane, that’s what I’m trying to do through lockdown.

Right now the medium-term outlook is where all the anxiety lies.

It’s a storm of uncertainty rendering economic forecasts all but redundant.

Everything hangs on the success of the elimination strategy, the length of lockdown and then the rate of vaccination.

It would be silly for me to pretend to have insight into these things. None of the economists I’ve talked to in the past few weeks claim to.

But we still need to find a stable path through the chaos – a steady beat.

I’ve narrowed my focus to financial markets, the daily movements of New Zealand’s stocks, bonds and dollar.

Let’s start with the Kiwi dollar. It’s heavily traded around the world so provides a really good snapshot of global confidence in New Zealand’s outlook.

Right before lockdown it was trading at US70.18c.

We were on the eve of a highly anticipated interest rate hike – possibly a double.

It dropped sharply as we went in to lockdown and the rates hikes were postponed.

By Friday last week it was trading at US68.03c.

That’s not a collapse by any stretch, but regardless, it has climbed back up in the past week even as Covid case numbers have risen.

As at midday Friday it was trading at US69.5c, inline with where it has been all year.

A lot of the trade in the Kiwi dollar is quite binary, based on our interest rate outlook so the currency market is quite closely linked to debt markets and yields on NZ dollar bonds.

Yields on 10-year government bonds have also climbed back up in the past few days.

It was also pretty good week for the local sharemarket, give or take an a2 Milk led meltdown on Thursday.

The NZX-50 went through 13,00 points for the first time since early February.

Globally, investors were upbeat last week. Wall Street hit record highs. So that helped. But the NZX-50 had been stuck in the doldrums for months.

Lower interest rates also appeal to equity markets and the lower Kiwi dollar means New Zealand company shares are cheaper for foreign investors.

The bottom line is that investors here and around the world have looked through the trauma of New Zealand’s current lockdown with a lot more ease than I’ve been able to from my bedroom window.

One of the reasons markets have been so calm about New Zealand’s outlook is the strength of our fiscal position.

That’s the big-picture stuff.

ANZ economist and fiscal guru Miles Workman estimates Finance Minister Grant Robertson has between $15 and $20 billion up his sleeve before he will need to look at raising our current debt profile.

There’s $5b left on hand in the original Covid fund.

The minister has also signalled there are some significant funds that were allocated but where there was an underspend.

That’s could be worth between $2b and $3b, Workman says.

Then might be another $1b that could be clawed back from already allocated spending on projects that the minister decides not to go through with at all.

On top of all that, strong economic performance in the past year has the Crown accounts looking much better than Treasury forecasts.

With stronger than expected tax takes, and lower than expected expenditure on unemployment benefits and so on, that economic strength could add as much as $10b to the final equation.

That’s pretty decent firepower given what we know about the economy’s ability to handle lockdowns and make up for lost output on the rebound.

Ultimately there is capacity to borrow more too. But it doesn’t look like we’ll need to – at least not yet.

That’s reassuring.

Ok, between that big fiscal view and the daily drumbeat of the markets, there is great uncertainty.

There’s real stress and pain, businesses struggling to survive and people struggling to keep their heads together.

The next few weeks look set to be tough.

Stay focused on the path in front of you. Trust in the strength of New Zealand’s economic and social foundations.

Take shelter where you can. Even if it’s just in the rhythm of a great rock n roll tune.

Source: Read Full Article