New Zealand bonds continue to rise after last week's Brexit vote

The New Zealand government bonds market traded modestly firmer on Monday amid global uncertainty over the UK vote to leave the EU after 43 years of membership in the bloc. The yield on benchmark 10-year bond, which moves inversely to its price fell 1-1/2 basis point to 2.375 percent, yield on 7-year note also dipped 1-1/2 basis point to 2.075 percent and the yield on short-term 2-year note tumbled 1 basis point to 2.015 percent.

On Friday, just over 72 percent of the UK population, the highest participation rate in a country-wide poll since 1992 have participated in a historic referendum to abandon the EU project for good, highly legitimising the 51.9 percent vs 48.1 percent in favour of leaving, result. This outcome flies in the face of the high implied probabilities, based on bookie’s betting odds, of staying in, is at odds with several of the final (pre-referendum) opinion poll findings, and indeed goes against the grain of the number of self-confessed EU-sceptics who are said to have reluctantly moved towards the ‘Stay’ camp.

But the decision has been taken. Although the physical departure from the EU will not occur for at least a few years -  article 50 of the Lisbon Treaty must first be invoked - domestically, the UK faces a very uncertain l-t economic future, and a sea-change in the political landscape. PM Cameron is to step down within three months and is likely to take along with him, Chancellor Osborne. The face of the next Conservative ‘administration’ that will be responsible for negotiating the country’s divorce and orderly exit terms from the EU will be altered, as the centre of gravity of the Tory government moves decisively further to the right.

Moreover, we foresee that the UK’s relationship with soon-to-be ex-EU partners will be significantly altered. Beyond that, in view of Scotland’s 62 percent vote in favour of remaining in the EU, the SNP will offer another referendum on independence to Scotland, on the basis of Scotland having been yanked out of the EU against the will of its people. The next time around the Scottish people will likely vote in favour of secession.

Interestingly, the Prime Minister John Key has downplayed market expectations that Friday's Brexit vote makes it more likely the Reserve Bank of New Zealand will cut the official cash rate (OCR) again on August 11. Though, economists and financial markets increased their expectations the OCR will be cut again from 2.25 percent after Britain voted 51.9 percent to leave the European Union, with most seeing a cut as near certain. Financial markets are also pricing in higher chances of further cuts to 1.75 percent or beyond.

"I don't think so in the short term, primarily because what he's looking at is the strength of the economy," Key told Guyon Espiner on RNZ when asked if Brexit made an OCR cut by Governor Wheeler more likely in the short term.

"And if you look at his last Monetary Policy Statement he effectively had growth at a slightly stronger rate than the Treasury, he's north of 3 percent. I think he will look at the world markets. One could argue he's got room to move if he needed to," he said.

In addition, Australia and New Zealand have agreed to work together on the "big issues" Brexit presents to both countries, including trade and immigration, Australia's Prime Minister Malcolm Turnbull said.

Lastly, the New Zealand May trade balance rose to 358 million, against an expectation of 182 million, from 292 million in April. Exports rose 4.57 billion (consensus was for 4.31 billion), from 4.30 billion in April, while imports rose 4.22 billion compared to market anticipation of 4.15 billion, from 4.01 billion in April.

The New Zealand’s benchmark S&P/NZX50 Index closed up 0.29 points to 6,686.93.