Analysts expect volatility until result of referendum is known at week's end

World markets reacted favourably to opinion polls showing Britain is leaning towards staying in the European Union (EU), but investors are strapping themselves in for what looks likely to be a rocky ride until the final result is known at the end of the week.

The New Zealand share market ended 22 points higher on the S&P NZX 50 Index at 6869 and most Asian markets were firmer. Late in the Australian trading day, the S&P ASX 200 index had gained 1.3 per cent.

The British pound gained some ground on the back of the polls, which saw the Sterling/kiwi cross rate retreat from around 50p last week to 48.5p yesterday. The rate is expected to rally over 50p in the event of an "exit" vote while a "remain" vote would see the kiwi retreat to sub 50p levels.

Fears that Britain would opt to exit the EU, nicknamed "Brexit" by the British media, rocked world markets last week, although global equities rebounded on Friday after both the "remain" and "leave" camps suspended campaigning following the fatal attack on Labour MP Jo Cox.


While the temporary suspension of polling brought with it a cooling down of enthusiasm in the "exit" camp, financial markets still see it is as a 50/50 call.

Westpac senior market strategist Imre Speizer said the suspension of campaigning may have affected the polls and bookmakers' pricing of an "exit" had receded a little.

"But it's early days and sentiment could swing around a bit," he said. "It's fair to say that it will be quite volatile over the next two or three days," he said. "It still looks very close to 50/50 in the eyes of the market," he said.

"It is a major risk-averse event that's for sure."

A successful exit by Britain would once again put EU unity - already stretched by Greece's huge sovereign debt problems - under more pressure, economists said, and there was potential for the move to result in more anti-globalisation sentiment around the world.

"With Brexit, there is an element of a wider theme, which leaves us feeling little nervous," said ANZ senior economist Philip Borkin.

"The political element around the world is shifting to extremes, and no government is going to get a clear mandate in that environment."

By itself, the exit of Britain from the EU is not seen as having major ramifications for New Zealand.

However, the effects could start to mount up if other countries in the EU follow suit and trade barriers are resurrected, against the backdrop of the protectionist policies put forward by US presidential candidate Donald Trump.

Together UK and Europe account for about 14 per cent of New Zealand's trade.
Economists expect to see a sudden downturn in the UK economy if it votes to leave the EU. How far beyond the UK it would extend is open to conjecture.

The UK is still a reasonably significant trading partner for New Zealand, though not as important as it used to be.

Britain remains an important market for lamb, wine and pipfruit industries.
"But significantly, a Brexit outcome could quickly spill over into Europe," ANZ said in a commentary.

There would likely be pressure for copy-cat referendums in other nations, feeding populist movements in France and Italy, the bank said.

While Britain's exit from the EU could have ramifications for the Sterling/kiwi cross rate, the currency's value against the US dollar is expected to remain elevated around US71c, regardless of the outcome, because of New Zealand's steady growth prospects and relatively stable political scene, Borkin said.