Here's my summary of the key events over the weekend that affect New Zealand, with news of a sudden bout of risk aversion by investors.
The CBOE VIX took a dramatic jump higher at the end of trading on Wall Street, in fact to its highest level since 2011.
This was because equity markets fell - China was down -4.3%, Europe -3.2% and the US -3.2% - as are commodities - the CRB index was down -1.7% - as are US interest rates and the US dollar. Concerns about China and fresh Greek exit risks were the main drivers.
And not helping, American manufacturers say August brought the slowest improvement in business conditions for 22 months. Markets ignored that the country was on its annual holiday shutdown. A similar survey in Europe reported stable growth. The index levels for both regions were similar.
But is was China's data that caused investors to worry the most. Factory output is sharply lower in August, much more so than expected and its lowest level in more than six years.
The WSJ is reporting that the Chinese central bank is about to release a 'flood of liquidity' - up to NZ$150 bln - by dropping its reserve requirement on banks by -0.5%. On top of that, China plans to let its main state pension fund invest in the stock market for the first time, which at the 30% level they signaled, could bring in another NZ$250 bln of 'support'. China's moves aren't doing things by halves.
Watching all this with some unease will be many key central bankers who are gathering in Jackson Hole, WY for their annual conference. And at least one heavy hitter is lining up US Fed policy makers with a warning not to raise rates at their next meeting. China's wobbles couldn't come at a more inconvenient time for the Fed.
However, there is a view that the equity market correction is overdue, needed, and a healthy sign. We have had the longest bull run in stock market history.
In New York, the UST 10yr yield benchmark dived on Friday and is now at just 2.05%. This is its lowest level since the end of April.
The oil price is also lower and now down to US$40/barrel, with Brent crude down to US$45/barrel. There is no sign the oil glut is lifting.
The gold price is up sharply again as the gloom descends, now at US$1,160/oz.
This week may be a rough one. There is little data to be released and northern markets are still on holiday mode - fertile ground for volatility.
The New Zealand dollar stands out from all this turmoil as something of a safe haven. It starts the week firmer at 66.8 US¢, at 91.5 AU¢, and at 58.8 euro cents. The TWI-5 is at 70.9.
If you want to catch up with all the local changes on Friday, we have an update here.
The easiest place to stay up with event risk today is by following our Economic Calendar here »
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16 Comments
"Oil heading to $10 to $20 a barrel." I recall a US economist (?Theroux) testifying before a Senate energy committee during an oil price "crisis" in the late 1980s or thereabouts that the cost of producing a barrel of oil then was about $10. Seems that that's where it should have been all along, except for Cheney's intervention in his secret controversial energy policy setting early in that administration
That was the 1980s, and it stayed low until about 2004 when no more oil could be pumped per day is peak oil was 2006 or so. New oil now is over $80US a barrel for new fields (and most deep sea is over $100USD, so that is the marginal price we have to pay for more oil.
The negative offset against cheap oil imports.
With excesses building in everything from cotton to wheat, hedge funds can’t seem to get away from crop markets fast enough.
Supplies expanded after the Bloomberg Agriculture Index surged to a record in 2008 amid booming demand from China. Higher prices prompted farmers to increase output, sometimes with the benefit of government subsidies. Food costs tracked by the United Nations fell for a ninth month in July, the longest slump in more than a decade. Read more
Well if you only want to consider yourself, today yes. On the other hand if you do not care about the geo-political outlook of sending the oil producing nations bankrupt, the riots, violence and humanitarian distaster (think syria) that can come from that, yeah sure.
Then after some of these nations drop oil production as a result then you might find oil rockets back past $100 could get a bit rough even for us.
Or consider the implications of world wide US dollar shortage, because with the low oil price the oil producers need US dollars for current expenditure and are no longer able to build up surplus funds to be recycled back into US denominated financial assets to be on loaned by US banks to fulfill the demand for foreign investment by emerging markets who wish to develop their own industrial infrastructure.
"Whilst there were obviously different variables in place in the early 1980s, the point still stands that before we get any dollar weakness we’re likely to experience an external (eurodollar) dollar liquidity shortage that eats external reserves and pops the dollar on a trade-weighted basis, but at the same time creates an inflationary effect in the domestic US economy."
http://ftalphaville.ft.com/2014/12/22/2077841/the-upcoming-petrodollar-…
At the moment, the US dollar could be better described as the Armadollar, because recent armed conflict in the region has fostered an arms race between the Sunni despotic monarchies of Saudi Arabia, UAE, Oman, Bahrain and the Shia Theocracy of Iran. This has stimulated massive military spending and orders of military equipment and armaments from the West, most especially from American arms suppliers.
http://www.merip.org/mer/mer112/arms-sales-militarization-middle-east
Gareth Morgan is vindicated - after 5 years - the "Big Kahuna" is coming
A social basic income is coming - as explored in yesterday's BBC "The Inquiry" - the last 5 minutes
The Inquiry - BBC - What Happens When Robots Take Our Jobs?
Robots are coming for your job. Blue-collar jobs in industries like manufacturing have been disappearing for years but now white-collar work is under threat too. Machines are already taking roles that used tobe done by journalists, lawyers and even anaesthetists. One recent study calculated that 47% of total employment in the US is at risk of automation in the next 20 years.…
Oh well, glad my job as a Sales Manager in Chemicals where knowledge is required is not under threat. A McDs robot will have a short payback when they come in, no wages, ACC, leave, sick pay (gets fixed instead). Since govt loses revenues, GST increased etc. The basic income is just a load of old commy crap.
Don't be so sure.
" Typically, expert systems function best with specific activities or problems and a discrete database of digitized facts, rules, cases, and models. Expert systems are used widely in commercial and industrial settings, including medicine, finance, manufacturing, and sales."
Read more: http://www.referenceforbusiness.com/encyclopedia/Ent-Fac/Expert-Systems…
er, no. A misunderstanding of how excise taxes work. They are on volume (per litre) not based on the crude price. Similarly, refining and distribution costs.
Only the crude component can go down in the way you suggest - and it is. U91 well under $2/l in my neighborhood. Will likely go lower.
The biggest cost of petrol - almost half - is the cost we impose on ourselves - taxes. They take 94c of every litre. The cost of crude, refining, and distribution is paid from the remainder.
http://www.interest.co.nz/charts/commodities/oil-and-petrol
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