Moody's cuts rating for all big Aussie banks, still relying on Govt support; US Fed to keep raising rates, Brexit talks start; China in university clampdown; UST 10yr yield 2.19%; oil and gold fall; NZ$1 = 72.3 US¢, TWI-5 = 76.7

Here's my summary of the key events from overnight that affect New Zealand, with news a major credit rating agency has downgraded all four Aussie banks, including their NZ subsidiaries.

Moody's has cut the long-term ratings of the New Zealand banks, ANZ, ASB, BNZ, Westpac to A1 from Aa3. That is a one-notch downgrade and takes them out of the 'very strong' classification, and into the 'strong' category. At the same time, Moody's has changed their outlook from 'negative' to 'stable'.

This change comes as their Aussie parents suffered a similar one notch downgrade to Aa3 from Aa2 and leaving them in the "very strong" category. A key reason these ratings are so high, says Moody's, is their expectation that each bank would receive strong Australian government support if they encountered any difficulties.

Moody's cited the reason the New Zealand banks get the rating they do is conditional on the expectation the Aussie parent banks would support their New Zealand operations in the event of difficulty. Moody's did not mention New Zealand government support as a basis for their ratings. They also said the new credit rating level is supported by "strong stand-alone financial profiles", "asset quality is currently very strong", and "capital remains robust". They also said all four each have "a strong buffer to withstand rising risks in the housing market as household leverage and house prices continue to rise, increasing sensitivity to employment shocks, or an eventual rise in interest rates."

One analyst says these downgrades will not affect funding costs.

In other news, the head of the NY Fed says that while American inflation is a bit low, it should rebound alongside wages as the labour market continues its improvement. He said the recent patch of weak data is unlikely to derail plans to keep raising interest rates.

In Brussels, the Brexit talks are finally underway. It will be a long process. Interestingly, the UK side is being led by a former New Zealand diplomat and current professor at Lincoln University. His role is 'chief adviser'.

In China, an academic crackdown is underway. “Higher education ... must adhere to correct political orientation,” President Xi said in a high-profile speech to top party leaders and university chiefs. Universities must be transformed into “strongholds that adhere to party leadership” and political education should be made “more appealing”, the president ordered. It is being described it as the latest front of Beijing’s efforts to quell opposition to its rule. It may not be obvious from outside, but clearly there is growing discontent.

In New York, the UST 10yr yield is higher today at 2.19%. The curve inversion in China is extending, with the 2-10 variance now -6 bps.

The price of oil is lower today at just under US$44.50 a barrel, while the Brent benchmark is now just under US$47.

And the price of gold is lower as well, down -US9 to US$1,245/oz.

And continuing the trend, the Kiwi dollar is a little lower too but only against the greenback where it is at 72.3 USc. On the cross rates we are unchanged at 95.2 AU¢, and 64.8 euro cents. The TWI-5 index is still at 76.7.

If you want to catch up with all the changes yesterday, 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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59 Comments

The Chinese conundrum is coming home to roost - for the country to become richer and more powerful, the Government needs to let the creativity of it's people have free reign. But this also leads to questioning the status quo on all things including political leadership and the distribution of wealth. As people become wealthier, they also tend to expect a greater say in how they are governed. Hence the Chinese Government's angst. Can't have one without the other. Question is, how will they distract their population? Human history says that this is most commonly done by starting a war.

Expect a further downgrade of Australasian banks when Australia losses it's AAA sovereign rating.

At present all three rating agencies have Australia as AAA. S&P has them on 'negative' watch, but Moody's and Fitch both have them as 'stable'. The only risk for a AAA downgrade is from S&P and that is important only if you think their ratings methodology is superior to the other two.

btw, China's Dagong ratings agency already has Australia downgraded to AA+. This same agnecy has the USA as A-, has NZ as AA, and has China as AAA+.

You have to laugh at the Dagong ratings agency , rating China at AAA+ and the rest of the world lower .

Thats for a country which does not have a free floating freely traded currency , has massive concealed debts , a shadow banking system , ignores all form of intellectual property ownership , patents and trademarks, which cheats in international trade rules and makes the WTO look like a joke

How can Dagong be even remotely credible ?

I think that was DC's point..

Depends who cares.

A tectonic geopolitical shift happened in Astana, Kazakhstan, only a few days ago, and yet barely a ripple registered in Atlanticist circles.

At the annual summit of the Shanghai Cooperation Organization (SCO), founded in 2001, both India and Pakistan were admitted as full members, alongside Russia, China and four Central Asian “stans” (Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistan). Read more

OMG! How many ratings agencies do we need? Next thing we will hear is that there is a Chaston Ratings Agency (CRA)...

Stable or otherwise Moody's and Fitch may still downgrade, maybe a month or three behind S&P but they likely would. My understanding is the Australian government's explicit/implicit AAA support of the big four banks is worth at least one rating level. Besides, the conditions that cause Australia's sovereign downgrade will have major flow on effects to the big four.

Likely timing is post the MYEFO which should be around December.

Here are six charts which set out some key measures of the risks:

https://www.bloomberg.com/news/articles/2017-06-19/moody-s-downgrade-bri...

Looks like the NZ subs have been run harder!

how can a downgrade not translate to higher borrowing costs?
even without that, I suspect the banks will use it as an reason to improve margin between borrowers and savers

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10

So oil went over US$100 pbl in 2007/8 and the pump price went over $2 a litre

Now oil is at US $44 pbl and the pump price is still $2 a litre for premium

WHY ?

There has been no massive CAPEX on the part of our refiners , and the cost of shipping is down , the Kiwi$ is stronger , and wages have barely gone up .

How is the current pump price justified ?

" just over a quarter of the pump price is the actual cost of refined petrol while 50% is tax i.e. 67.284 cents per litre in fixed". That leaves about 20% to reflect the change in crude....
http://www.aa.co.nz/cars/maintenance/fuel-prices-and-types/how-petrol-pr...

I spelled this out even more concisely to him last week.
Still, he doesn't understand.

Yes , I dont understand because it does not make sense , and I refuse to accept the platitudes offered by some that because fuel is taxed at 50-something cents a ltire the price is justified at $2 a litre .

I have looked at the breakdown of the fuel price , and I still dont understand why the price is still around $2 a litre .

Besides the Aussies also tax fuel to the same extent and over there Diesel is under $1

Another beef I have is that the price is much the same form one fuel company to the next which seems to me there is some collusion in the pricing between the boys

Someone is making a HUGE profit at the expense of each and every single one of us , and the dividends declared on those profits go largely offshore .

I accept thats how the free market works, but when there is whats looks suspiciously like evidence of price manipulation or collusion , we need to express our concerns

Okay, so, again:
All up, we pay around $0.95 in taxes on $2 of fuel.
So, the raw price of pump purchased petrol is ~$1.05.
What is pump petrol, you may ask?

Well, it is this:
- bought from delivery price point (Singapore). We have no idea of the forwards associated with this, though, so spot price could be largely irrelevant.
- dispatched from price delivery location
- transported to New Zealand
- stored in New Zealand
- refined at Marsden
- stored at Marsden/piped to Auckland
- transported within New Zealand
- retailed at the pump

Can you now see what part of this the world oil price directly influences in the short term?
It's only one stage - the first stage. If we normalise this, it's around 30% of ex tax cost (~15% of post tax cost). So, a 1% decrease in crude prices is going to result in a 1/3% decrease in raw price. On fully taxed price, a 1% decrease in crude is going to reflect a 0.15% decrease in pump price.
This also isn't considering the fact that there will be a substantial amount of forwarding associated with all stages of this process which smoothes the cost/price at all stages.

Of course this is short term and ceterus paribus, but should help to aid your understanding.

I agree, I have done some of my own research into the pricing, and based on publicly available info the message is clearly mixed.

Previous "Reasons" for price increases over the last 8 years have included.
- Increase in crude Oil price (Per barrel price)
- Increase in refined price (wholesale price)
- Decrease in purchasing power (Currency fluctuations)
- Increased costs of doing business (Effectively inflation)
- increase in taxes (the only truly transparent one)
- Discount vouchers (Not publicly mentioned, but there is a strong correlation between when certain fuel retailers signed up to provide a discount scheme and when their price increased)

Interestingly at this exact moment in time, we have record low inflation, record low Oil price, reasonably low refined price, and relatively high purchasing power.

Based on comparative increases (i.e. decreasing by the same amount as the increase for the same reason), fuel should be sitting around <$1.50L for 91. Even at that price we would still be relatively expensive globally speaking.

As for the collusion, it is impossible for it to be anything less. There is virtually no way that 3 competing entities can come to the exact (to the tenth of a cent) price calculation that changes at the exact same minute on the exact same day.

Again, you have a poor understanding of the market.
You ignore the fact that the majority of the costs are hedged, so relatively fixed in the short to medium term.

Your $1.50 estimate is purely arbitrary.
And your assertion that it is relatively high is equally unfounded - compared to which countries?

"As for the collusion, it is impossible for it to be anything less. There is virtually no way that 3 competing entities can come to the exact (to the tenth of a cent) price calculation that changes at the exact same minute on the exact same day."
As for that statement, your understanding of economics is very poor and your sample knowledge obviously as bad.

Global pump prices.
http://www.globalpetrolprices.com/gasoline_prices/
We are not near the top, or even the middle. Therefore we have relatively high prices compared to other countries.

To break it down further, most countries have differing prices across the country, region, and even suburb, they also differ by retailer.
http://www.fuelwatch.wa.gov.au/fuelwatch/pages/home.jspx
Maybe they aren't as good at pricing as us here in NZ.

Also, how does my understanding of economics fail in this instance. I think it is your understanding of analysis, modelling and probability that fail you.

The likelihood of two unrelated calculations (which they must be, unless you are telling me that all 3 are exactly the same across every aspect of business) resulting in the exact same result are statistically mind boggling. The likelihood of three doing the same thing are virtually impossible. Even more so given the timings.

So they are colluding, or they have the exact same everything.
- Wage bills,
- Overheads
- Contracted costs
- Hedging
- Distribution
- Marketing and research
- Customer base
- Modelling tools, assumptions, and methodology.
- The wholesale price as per their contract.
- etc...
The probability of that is astronomically low.

An example. Put three people in a room and tell them to pick a number between $1.40 and $1.50 (to the tenth of a cent). What do you think the probability is that all 3 answer the same number at the same time without communicating first?

Economically we would expect to see what happens with every other good/service. I.e. a range of prices, products, across a range of areas.

Don't believe me. How do you explain
- Tinned spaghetti prices?
- Deodorant prices?
- Bread prices?
- Milk prices?
- Tomato sauce?
Surely they should all be the same, you know cos of economics.

Oh wait maybe it's because they aren't regulated/taxed as much as Fuel, so lets look at
- Power Prices?
- Rates?
- Cigarettes?
- Mobile phone providers?

or maybe, just maybe, they are colluding on price.

Does it matter? We might have about 2-3 yeasr of cheap oil left and then all hell breaks loose.

If you like podcasts these are usually a good listen -

http://www.macrovoices.com/274-art-berman-crude-oil-special-part-2

Yeah it will be interesting times at the next rise.

Your first link states:
"The differences in prices across countries are due to the various taxes and subsidies for gasoline."
So, that was a completely pointless reference. Unless, of course, in your 'research' you have normalised this all out...

"The likelihood of two unrelated calculations (which they must be, unless you are telling me that all 3 are exactly the same across every aspect of business) resulting in the exact same result are statistically mind boggling. The likelihood of three doing the same thing are virtually impossible. Even more so given the timings."
...Really?
That statement proves your misunderstanding of spatial statistics and standard game theory.
If we have two (or more) retailers in some finite dimension, selling a commoditised good (or any good, in fact) their prices have spatial dependence on one another. Almost always Statisticians/Econometricians integrate spatial dependence into competitive pricing analysis.
As the finite dimension grows, spatial dependence weakens. Does that explain why you see similar prices intra and extra region?

Also, I don't know how you define collusion - given the context, it sounds like you mean it in an active, anti trust sense sense?
Perhaps if you read about Nash equilibria, you might see that stable prices does not imply anti-trust behavior.

Furthermore, what if retail price is approaching marginal cost?
Given that they are selling an undifferentiated product, and have the same cost structures, prices would be the same, no?

"An example. Put three people in a room and tell them to pick a number between $1.40 and $1.50 (to the tenth of a cent). What do you think the probability is that all 3 answer the same number at the same time without communicating first?"
Again, this is so completely arbitrary and misrepresents the problem.

"Economically we would expect to see what happens with every other good/service. I.e. a range of prices, products, across a range of areas."
Again, again...Your understanding of basic microeconomic concepts is flawed.
These products you mention are not comparable to gasoline.

"Oh wait maybe it's because they aren't regulated/taxed as much as Fuel, so lets look at
- Power Prices?"
Wait...How are power prices taxed or regulated?

All the examples, methodologies you have provided are reasonable, I don't disagree.

But, if everything you say is happening we would expect to see similar prices at similar times. But we don't. We see exact prices at exact times. The only way this level of synchronization is possible is that they are talking behind the scenes. Which would be anti-competitive behavior or collusion for want of a simpler word.

...Are their prices hidden?
No.
They are the most visible prices available in any market we have.
"Oh look, Bob next door is charging $1.98 a liter. I'll lower my prices to that".
Again, under standard hotelling models, this does not indicate active collusion at all.

"Oh look, Bob next door is charging $1.98 a liter. I'll lower my prices to that".

If they did do that it would be fine, but they are not. No one is leading with a price cut, with others following. They are all putting forward the same price at the same time.

Using your analogy...

"Wow, look at that, Me, Bob, and Steve all started charging $1.98 at midday - what a coincidence?"

I'm sorry, but you are blinded if you think that is what is happening.

So the price of petrol wouldn't go up by more than a few cents if the price of oil doubled back to the $100/barrel range - given a reasonably stable dollar and lower shipping costs? Or perhaps it's fake news that industry margins have been improving since Z Energy set out to fatten margins.
Have to go with Boatman on this one.

Boatman, the country is focused on whats important right now. The Lions are touring. You cant expect people to be worried about pesky petrol prices.

Lions? Pah a yacht race in Bermuda is far more exciting...

Try following Michael West - he has dealt with Chevron at length in a number of articles
https://www.michaelwest.com.au/chevron-parents-leave-ato-an-orphan/

Pure greed.

There have been significant petrol tax increases under national that you are not accounting for. The to-be-congested on opening water tunnel and holiday highway do not come cheap.

Also take a look on gaspy. 20c/ litre variation on prices between stations within a few k of each other.

There have been significant petrol tax increases under national that you are not accounting for. The to-be-congested on opening water tunnel and holiday highway do not come cheap.

Also take a look on gaspy. 20c/ litre variation on prices between stations within a few k of each other.

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My ROFLMAO moment this Toosday morning came when I heard on the radio that we're importing coal from Indonesia to burn in the Huntly coal fired power plant ...

... that is just so incredibly wrong on so many levels ...

Its globalisation in a nutshell... maximise the most efficient squandering of resources - the economic system demands it.

Thanks greenies. First we have to import the flooring now we have to import the coal. Global environment far better off...

The "greenies" were protesting the opening of new mines for export of coal from NZ. Economics closed the existing mines.

So Simon what is better export of coal from NZ with strict environmental laws or strip mining in Indonesia? What is better heli logging rimu 1 tree per 15ha per 15 year or clear felling Indonesian rainforest? Do greens do any homework? Sometimes actually being for development of something can make the planet a better place.Banning all and sundry and feeling smug is nonsense. A little cost benefit analysis can help.

Uneconomic or red taped out of existence?

We have coal in open caste mines ready for the taking, it is the companies that own the rights who are not doing it - Stockton could be being mined right now. And coal would not be the first thing that we have or produce but still import from overseas. And as for heli logging v clear felling, I guess that would depend what you wanted the land for afterwards, such as palm oil plantations, doesn't it. Spurious points to say the very least.

Yes that spurious point of supporting marginal oil palm conversion by importing flooring rather than producing your own flooring on a sustainable basis. You heli log so you can come back in a few years and do it again. I know where I would sooner get my wood from.

Ready fo the taking? How long and how many "environmental" challenges to take Bathhurst to get Denniston running? Stockton still waiting on OIO approval... I guess sometimes it's just easier to get your coal from Indo and stuff a bit more tropical forest.

We should not be destroying both plateaus. You appear to have a great deal of concern for Indonesian rainforest but little for NZs environment.

I support the country with the stronger environmental laws rather than being railroaded by green, clueless, virtue signallers. Think about it globally. Stating I care little for NZ environment is baseless.

Would you rather we burnt our high grade coal, instead of exporting it?

We have plenty of low grade coal too - just as low as Indo grade. Perhaps we could burn that. We could even go diverifiy and put in some HELE coal tech. "The Japanese government is moving ahead with its plans to build up to 45 new coal fired power stations.

Japan plans 45 new high-energy, low-emissions HELE coal fired power plants.

The power plants will utilise high energy, low emissions (HELE) technology that use high-quality black coal."

But he said the move to more coal fired power was because coal was cheaper than LNG, and the energy security was priority for the government. ( ABC News )
http://www.abc.net.au/news/rural/2017-01-31/japan-coal-power-plants/8224302

Highly recommended viewing;
https://www.newsroom.co.nz/2017/06/19/34825/the-politician-the-police-th...

Bill English knew of this illegal activity and did not act.

"The clandestine taping of an employee by Government MP Todd Barclay has resulted in a secret payment from former Prime Minister John Key’s leader’s budget to make the issue go away.

Current Prime Minister Bill English knew about the payment and the bugging — and National Party board members and the Parliamentary Service also knew about the secret recordings.

Barclay’s former electorate agent Glenys Dickson was paid the hush money after learning of the dictaphone left running in the Gore office and then engaging an employment lawyer."

Todd Barclay, eh. Seems like he's made of the right stuff to be the next Simon Bridges.

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Stuff Bridges - Our boy Barclay has the temperament to be the next John key with his lying and poor memory.

"English has so far managed to dodge the crossfire but will now have to explain why he failed to take any action when he had first-hand knowledge that Barclay’s employee – who used to work for English – had been secretly taped."

"MP Todd Barclay maintains he 'did nothing wrong’ "

"Newsroom has an audiotape of the AGM which reveals Barclay denied recording Dickson even though he had admitted it to English.

Barclay: "I utterly dismiss the accusation and would remind everyone it is a very serious accusation. I'm categorically telling you it didn't happen.""

"English held the Clutha-Southland seat for 24 years before moving to the party list in 2014.

He chose not to endorse Barclay at the time and is said to regret the electorate picked the former corporate affairs manager for tobacco company Philip Morris to take over from him"

He will be regretting it even more now.

Following on from Wagner's tweet ( 'Rather be out on the harbour' - National Party MP tweets from disability meetings) and the amazing chronicles of Nicky Smith we can see that Bill has some major riff raff in his team.

The Farmer is suddenly getting a bit of KEYITIS WRT to his memory of events!!!!!

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11879385

PM BE uses the dreaded I can't recall" line repeatedly over Todd Barclay - https://twitter.com/patrickgowernz/status/876925894547263488

... and the police dropped the case against Wide Boy Barclay because he would not cooperate.
Wow - is that a defence one can use in NZ ???

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11821928

Wouldn't co-operate?? WTF, police. Use your powers under the law, you're supposed to be politically independent and not spineless lickspittles to whoever's in charge.

really? news to me, the Police have a rep as one of the worst organisations politically to work for.

regards.

Legally, they're independent, so that they can't be co-opted by the government of the day and operate in an impartial and non-partisan way. Similar principle to separation of church and state in the USA. It's supposed to prevent undue government influence and corruption.

In reality, how well this works often depends on how much of a backbone the Commissioner has.

There are plenty of legal options. If you end up locking the little creep up for obstruction, then so be it. Drug dealers don't give permission for their phones to be seized or get to blow off interviews, so if they're letting this twerp run them around it's because they're choosing not to exercise their legal powers on certain people.

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Unprincipled, arrogant, self-serving. Corrupt as well? Criminal too? A staggering story.

And yet still averaging around 48% according to that Curia public poll on this site. How bizarre or are they all Teflon coated.

Also just noticed that TOP is up with Act & Maori, above UF,Mana and (are they still going?) Cons.

You only have to remember that many voters were more angry that Judith Collins, John Key, Carrick Graham, Cam Slater et al had their skullduggery exposed than at their acts themselves. Perhaps a sign of moral decline salved by the rise in one's property-based nest-egg.

https://www.conservativeparty.org.nz/

it appears so.

Interesting their mis-use of the term "alternative facts"

I wouldn't miss ? time in Parliament today - but I wonder if BE will opt out. It is very murky all he can really say is he can't remember... otherwise he has to explain who told him about the recording - and if it was Barclay himself, then Barclay would have to resign - leaving the seat vacant. Yes, criminal.

There is also the matter that the past-employee subsequently received a threatening phone call (a veiled threat against a member of her family) and the past electorate chair also suggested in the clip that he too had received threats. Those matters too should be subject to police complaints and criminal investigation.

Personally, I just don't see how the NP Board can leave BE and TB in their positions going into an election. Makes you wonder whether there is any MP in the party who is not tainted by this manner of dirty politics. Truly creepy.

From the media reports, police have really dropped the ball on doing a proper investigation, and have allowed themselves to be corrupted.

Threatening phone calls should absolutely be investigated, and if it had been Joe Public making such calls to an MP, they'd probably be looking at a prison sentence.

Is it time for a Royal Commission into government corruption yet? I think we have grounds.

I've been waiting for it - and here it is - right on time

Tape-gate - the 2017 version of Teapot-gate and Ponytail-gate

That'll take everyone's attention off the important stuff

The rating Agencies remind me of a soccer game run by 3 referee's they are all looking in different directions.

Dont forget they get paid by the teams so its always the wrong direction.