Mark Lister , 13 August 2016

Financial markets often don’t do what we expect them to, and the average person could be forgiven for wondering if they make sense at all.

The Reserve Bank cut interest rates to the lowest levels ever, and told everyone they will go even lower still. Oddly, the NZ dollar went up strongly.

The strange reactions weren’t limited to currency markets either, with some share prices doing equally strange things.

Sky City reported a 7.6 per cent rise in revenue, profits that were 13.9 per cent higher, and increased its dividend. Sounds like a decent result, but the market wasn’t impressed and the share price fell sharply.

Then there was Steel & Tube, which reported a 10 per cent fall in profits for the year. The shares promptly went up 5 per cent, making them a top performer on the day.

In what world do growing profits garner a poor reaction and falling profits see the market cheer your results? The same one where slashing interest rates to record lows sees your currency rise to the highest levels in a year, I guess.

It all comes down to expectations.

In the case of the OCR, the Reserve Bank did nothing wrong.

The NZ dollar rose because markets had got ahead of themselves, setting them up for disappointment when those lofty (and probably unrealistic) expectations weren’t met.

Similarly, while Sky City saw its profit rise, the extent of this growth was below what most analysts were predicting, and consequently what was factored into the share price.

While the fall in Steel & Tube profits wasn’t great, it could’ve been worse. The company said back in May that profit could be down as much as 15 per cent, so the not quite as bad (but still poor) result got the thumbs up from investors.

Share prices, currencies and interest-rate markets are all looking ahead to the future, trying to figure out what lies ahead. That’s another reason for the Sky City reaction. While the overall result was decent, there were signs of a slowdown in the last few months, making investors less optimistic about the future.

There’s plenty of action still to come in the reporting season. Market expectations are generally high, which is reflected in where share prices are. Many results will look good compared to last year, but some won’t live up to the bar that has been set very high by investors.

Share prices, currencies and interest-rate markets are all looking ahead to the future, trying to figure out what lies ahead.

For the Reserve Bank, our newly-lowered OCR is still head and shoulders above the rest of the developed world, as are many of our economic indicators. That’s a tough tide for the governor to fight against, even if he cuts it further.

It’s hard to see the currency falling unless something changes on the economic front. It would probably take something going wrong in our economy, or a drastically improved outlook in other parts of the world. Neither of those things seem likely in the short-term.

This article was originally published in the New Zealand Herald on 15 August 2016.