Global meltdown has immunised markets against flu

There's nothing like a benign financial chart to remind you that the world isn't teetering on the edge of apocalypse.

With New Zealand being an early adopter of the virus formerly known as swine flu, it has been tempting to panic about the implications for our already fragile economy.

Thankfully global markets remain thus far unaffected.

The NZX-50 closed up 2.4 per cent for the week yesterday and Wall St (as of Thursday's close) was up 2.65 per cent for the week.

Perhaps they are just too jaded.

News of this latest crisis is akin to a hardened heroin user being told by his doctor to give up coffee. After months of outrageous volatility the market's nervous system is too shot to register this flu thing.

It will take an intergalactic asteroid strike to compete with last October's meltdown and even then it would need to land directly on the head office of Goldman Sachs to top the explosion of Lehman Brothers.

Okay, there are some real risks to a pandemic. This virus is still spreading and it could mutate into something more nasty. What the markets are telling us is that - at this stage - they don't believe it will.

But what about more industry-specific risk?

Earlier in the week New Zealand was garnering the kind of global publicity it hasn't had since Shrek the sheep was found. This is an anti-Shrek story. Some Japanese tourists even cancelled their holidays.

Surely the imminent implosion of the nation's biggest foreign exchange earner would panic traders.

Well the dollar did drop on Monday - by about half a cent against the greenback. In the current climate that is nothing and certainly too marginal to blame on the flu.

Alan Bollard can move the currency more than that with his choice of lapel pins.

"He's wearing the pewter dolphin. Sell kiwi. Sell kiwi!"

Actually Bollard - who has a collection of whimsical man-brooches and dons them for all his OCR press conferences - wore a tiny Silver Fern on Thursday. That can be interpreted as implicit support for a Graeme Henry-led recovery through to 2011 (with monetary policy it's all about reading between the lines).

Reading between the lines on this week's dollar chart it's pretty clear the only thing the currency traders really cared about was the yield they'll get on their investment kiwi dollars compared to other currencies.

The dollar dropped about one cent after Bollard's unusually specific call that rates would stay down until late 2010.

It was a shrewd move by the Reserve Bank Governor who with one sentence was able to push the dollar in the right direction for an export-led recovery, reassure the trading banks that they have scope to drop their short-term fixed rates and reassure borrowers that they can afford to float and hope.

The more New Zealanders there are on floating rates the more effective the bank's monetary policy becomes.

The risk for Bollard is that he is wrong. It is possible that he could be wrong that prospects for a rebound are distant and that inflation is not an immediate threat. It is possible but not very likely. Bollard is not a gambler. The scale of the financial crisis has forced him to widen his risk threshold and try some fresh approaches but the time frame is likely based on a conservative estimate of how long this recovery is going to take.

It shouldn't be a shock that a recovery from this mess will take a long time to work its way through the real economy. Employment has historically always been the laggard of economic indicators.

But we can console ourselves - as we head in to a grim winter of pig flu and job cuts - that the human spirit is irrepressible. So too is human commerce and the green shoots continue to sprout.

The front page of Thursday's Business Herald consisted entirely of positive stories. Not because of any editorial attempts to cheer people up but because the most interesting stories of the day fell that way for the first time in many months.

Beneath the hubbub of the pandemic panic financial markets are looking to get on with it. Let's hope - for everyone's sake - that this influenza outbreak is a short-lived distraction.