Strong financial rally

Press, 16 December 1988, Page 18

Strong financial rally

Financial markets rallied strongly yesterday, in contrast to plunge after the sacking of the Minister of Finance, Mr Douglas, by the Prime Minister, Mr Lange. The New Zealand dollar clawed back almost USlc of Tuesday’s loss of about US3c, interest rates dropped sharply, the New Zealand sharemarket rallied strongly, and the futures market was trading again. The wholesale rate on the 11/93 five-year Government stock, the in-terest-rate barometer,, dropped one percentage point — at one stage it was at 13.75 per cent before firming to close around 13.93 per cent. This was in contrast to Tuesday, when the rate went from 14.10 per cent to 14.68 per cent in reaction to Mr Douglas’ demise.

The foreign exchange market was extremely nervous yesterday, the kiwi trading in the U561.50/62.60C range,

mostly at the upper level. It closed at U562.50/60C, compared with Tuesday’s U561.65/80 finish and U 563.50 earlier that day. The sharemarket had one of its best rallies this year, the Barclays industrial index jumping 45 points compared with Tuesday’s 14.08 point slide.

Foreign-exchange dealers had expected the New, Zealand dollar to drop fast in trading on the American and European foreign exchanges as international investors ditched the Kiwi to avoid the risk of political uncertainty. But instead, bad trade figures from the biggest capitalist economy, the United States, kept overseas markets busy, pushing the U.S. dollar down and keeping the kiwi steady. Partly in response to this interest rates went crazy on local money markets, falling an extraordinary 1 percentage point at their lowest point during the day from the

record highs reached the day before. The general manager of trading for DFC New Zealand, Mr Peter Chan, said that the comments by the new Minister of Finance, Mr Caygill, had a calming influence on interest-rate and foreign exchange markets.

Interest rates and the New Zealand dollar should remain in a holding pattern at least until next Thursday when the Labour caucus met to decide on the leadership issue.

Mr Chan said he had discounted trading in the kiwi in New York and London overnight, preferring the Asian markets where so-called “hot money” had come from for investment in shortterm bills in New Zealand.

The response to the Douglas sacking had been swift in Asian markets on Wednesday. By 6.30 p.m., New Zealand time, there were signs on the Tokyo market that the kiwi was recovering from its sharp

US3c drop, he said. On the cross-rates yesterday, the kiwi was worth Aust73.o2c, 1.0884 marks, 34.25 p, 76.905 yen, and 0.9170 Swiss francs. The Reserve Bank tradeweighted index was set at 58.8 at 3 p.m. compared with 58.5 at 9 a.m. and 60.3 at 9 p.m. on dayOne bond dealer said that those in the market woke up yesterday morning and realised that their short positions in Government stock were not covered. This initially caused the rates to come back.

The movement of- the interest rate was an indication of how much the market had been driven by the division between Mr Lange and Mr Douglas. The rate ended around the point at which the Minister of StateOwned Enterprises, Mr Prebble, had been sacked at the beginning of the month.

Government stock rates, which set the trend for mortgages and other re-

tail lending rates, were standing at 14.14 per cent during the afternoon session. Rates came back further to 13.72 per cent after the Reserve Bank said it was entering the market to buy back longdated stock .and shift more funding to shortdated treasury bills. Around 0.3 per cent to 0.5 per cent of the fall yesterday was directly due to the Reserve Bank. It appears there was no political instruction behind the Reserve Bank’s actions.

But dealers speculated that the legitimate operation had a double purpose, and that the bank may be hoping for interest rates to settle at a lower level than in the last few days. The firm trend on the sharemarket yesterday appeared to be out of relief that some political action had finally taken place. Also the decline in interest rates had helped, said Mr Rob Gwyther, a research analyst at Jordan Sandman Smythe,