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US bank stress tests clear; US PMIs weak; US house sales rise; Japan PMIs contract; UST 10yr yield at 2.06%; oil and gold up; NZ$1 = 65.8 USc; TWI-5 = 70.4, BIS warns on cryptos

US bank stress tests clear; US PMIs weak; US house sales rise; Japan PMIs contract; UST 10yr yield at 2.06%; oil and gold up; NZ$1 = 65.8 USc; TWI-5 = 70.4, BIS warns on cryptos

Here's our summary of key events over the weekend that affect New Zealand, with news equity markets are at or near their highs but the rest of us are looking at some very average underlying economic data. And this is a week during which Chinese President Xi and American President Trump will take centre stage.

But first in the US, the Federal Reserve has stress tested their 18 largest banks, institutions that hold roughly 70% of all American bank assets. That includes all the most well-known brands, as well as Deutsche Bank and HSBC, both of whom would suffer the most under these tests. But they all passed the "severe recession" scenario. That is obviously good, but it also opens the door to large dividend payouts and share buyback schemes now they have been declared safe enough.

But the productive economy isn't as strong. The early June PMI surveys for the US came in quite weak. The factory PMI is now at almost a ten year low and this sector's expansion is dead in the water (index = 50.1). The service sector is at a three-year low and its reliable expansion is buckling now. New order growth is weak and weakening.

Meanwhile data for American existing home sales turned up in May and by more than was expected. But year-on-year they are still lower and by -1.1%. But higher short-term demand is pushing up prices and year-on-year they are up +4.8%. Still, mortgage rates are falling. The average Amorican housing interest rate for a 30-year, conventional, fixed-rate mortgage decreased to 4.07% in May, down from 4.14% in April. The average rate in all of 2018 was 4.54%.

Canada has reported very weak retail sales growth in April, and far below what was expected. In fact, if it wasn't for higher petrol prices, food and booze, they would have reported a decline.

In the trade war, the US has blacklisted more Chinese tech companies.

In China, banking stress is widening to another set of institutions. One member of the 'home team' (Bank of Beijing) has stepped in to rescue another (Citic Guoan Group).

In Japan, their factory PMI edged lower and further into contraction. They are having their fastest drop in new orders since June 2016.

Later this week, the G20 will meet in Japan. But it might be one of the last such meetings because the Americans are likely to try and hijack the agenda as part of their trade war with China. US leadership is no longer respected at these types of summits.

In Europe, the pace of eurozone economic growth as measured by their PMIs remained subdued in June but actually edged up for a second successive month to reach a seven-month high. Growth was driven by an expanding service sector, which helped offset an ongoing manufacturing downturn. The eurozone's services sector is now expanding faster than the American one. Optimism about the future meanwhile dipped lower, running at its lowest since late-2014, suggesting growth will remain weak in coming months.

Last week ended with the S&P500 making a run at a record, all-time high. But it slipped in the final session and ended Friday lower. But for the whole week, it booked a +2.1% gain. Since the start of June, the gain is +7.2%. The expectation of renewed stimulus from the US Fed is behind these gains. And markets expect President Trump to make some headway to get the Fed to juice the US economy to aid his re-election prospects.

The Shanghai's equity market closed up +0.5% on Friday, capping a flat weekly performance. Since the start of June, this market is up +3.6%. Chinese stimulus expectations are behind this rise as well. The ASX200 is up +4.0% so far in June, the NZX50 is up +2.0%. When the June KiwiSaver results are revealed, it seems likely that there will be both strong equity gains, plus strong bond price gains (that is, yields fell). The KiwiSaver wealth effect is becoming a 'thing' with almost $60 bln now in these funds.

In Australia, their central bank has been modeling the potential impact on the country if the Chinese economy suffers a sharp setback. It is not great for the 'lucky country', but it not all doom-and-gloom either.

The UST 10yr yield is starting the week at 2.06% and where it was seven days ago. In between, it fell below 2% but the recovery was strong in the final session last week. Their 2-10 curve is now at +29 bps an their negative 1-5 curve is narrower at -15 bps. The Aussie Govt 10yr is at 1.28% and an -10 bps fall over the week. The China Govt 10yr is down -3 bps over the week to 3.25%, while the NZ Govt 10 yr is down -13 bps this week, now at 1.54%.

Gold rose strongly last week, especially at the end and is now at US$1,399. That is a gain of +4.2% in a week, and takes it to a six year high.

US oil prices are a little firmer, mainly because a major US refinery is closed due to a fire. It is so bad, that facility may never reopen. Prices are now just over US$57.50/bbl. The Brent benchmark is now at US$65.

The Kiwi dollar is up almost +1c from this time last week and now at 65.9 USc. On the cross rates we are also firmer at 95.3 AUc. Against the euro we are similar to last week at 57.9 euro cents. That all pushes the TWI-5 up to just under 70.5.

Bitcoin has surged on up over US$10,000. This morning it is at US$10,739, up more than +18% in a week. In fact it is now just over NZ$16,000 for the first time in eighteen months. The international anti-money laundering organisation sees cryptos increasingly used to launder the proceeds of crime and is moving to rein in the risks. Now exchanges and custodians will have to carry out detailed checks on customers and report suspicious transactions. "Know-Your-Customer" rules that apply to banks will now apply to cryptos and their transactions. And the global central banking institution, the BIS, says politicians need to quickly coordinate regulatory responses to new risks from technology companies like Facebook moving into finance. The bitcoin rate is charted in the exchange rate set below.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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17 Comments

The answer to a credit fueled asset bubble? More credit of course!

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What is this: "KiwiSaver wealth effect"?

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I think it infers that there is more going into Kiwisaver that what the market can handle.

However what is happening is that many US investors cashed out a proportion of their portfolios to put them in USD and US financial instruments. Now they are realising the USD is at risk and money has been flowing back out of the US. It feels like the managed funds are the dumb money.

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Partly, it reflects paying above par for bonds which, inevitably, will be redeemed at par down the road. But they have since risen further in price on a marked to market basis while realising the annual coupon which is probably twice the inflation rate for a yield that is the same.These bonds have to be liquidated before redemption to return any real inflation adjusted value.Then there is the dilemma of what to replace them with to inherit a realistic pension annuity further down the track. A good example.

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Same with term deposits.
I have a couple of 5 year 5.75% term deposits which are about to mature, to be replaced with.... Oh, no!
The "wealth effect" normally refers to housing where people use the increased "value" of their house to increase their mortgage to spend money on buying useless stuff....
Can't really do that with Kiwisaver except for those who take some out to buy their first property.

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Bitcoin breaks 11k. A bit cleaner than when it did so over the weekend

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Canada's retail sales for April, saw a increase of 0.1 percent,which was below forecasts of 0.2 percent. Given that March provided stellar numbers and have been revised upwards, it's hard to equate with the commentary of being well below forecasts. With the exception of Norway, Canada appears to be one of few countries where there appears no urgent call for their central bank to cut rates. Interest rate differentials between Canada and the Australian counterparts are becoming more lopsided.

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ANZ Casual arrogance indeed
https://www.stuff.co.nz/business/opinion-analysis/113712883/how-did-anz…
ANZ buy a house in 2011 for $7,500,00. Do it up in 2017 with new bathrooms, security and roofing, then sell it to Hisco's wife for $6,900,000. At the time it had a ratings value of $10,750,000. All this after the greatest bull market in housing in our time."House prices in the broader St Heliers area roughly doubled between 2011 and 2017 according to real estate agents Barfoot and Thompson."

The deal was done by Arawata Assets Limited, a wholly owned subsidiary of ANZ NZ.It gets worse - Hisco's replacement, now-acting chief executive Antonia Watson, was a director of Arawata Assets at the time of the sale.And so the casual arrogance continues.....

Some questions:
The "immediate questionable tax free gain" should be of interest to the IRD. Will they do anything??? Soccer player "bungs" are generally illegal, does it apply to the movers and shakers too?
The "immediate capital gain loss" to the ANZ books should be of interest to the ANZ shareholders. Will they do anything?

Kiwis so dumb lah!

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Sir Chon & casual arrogance?
surely not

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I wonder how many eyeballs are (or should be) going over every property transaction in the last decade involving anyone at board level at the Aussie banks.

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Hi smalltown,
I assume that the property may have been part of an employment contract when Hisco was appointed and transferred from Australia.
Temporary accommodation would have been provided by ANZ, with ANZ buying a house as accommodation for Hisco of his choosing which he would have right to later buy at an pre-agreed sum as a condition of his employment contract .
This would seem a common provision in such a situation for an expat. Hisco would be making the transfer to NZ without having to make the risky personal commitment of buying a house if the appointment proved to be short term only.
Look at the situation this way: ANZ provided Hisco accommodation as part of his employment contract by way of a 100% interest free loan on a property with the house as security. This would have been done through their nominee company Arawata Assets Limited.
The cost for ANZ in providing accommodation was the cost of loss of interest on the "loan". Hisco was always going to have the option to buy.
For us menials we don't get such generous accommodation benefits as part of our employment packages - but we are menials and not CEOs.

Nothing surprisingly smelly here - but there is somethings we are not being told about but this is not part of it.

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One of the more intelligent comments on this...
One thing which was soooo obvious to me was the "press release" by John Key: The story about how he now thinks he should just have changed the flag by decree! OMG The arrogance! But of course the main reason to make this press release now was to divert attention away from more dubious topics.
Personally I blame the process whereby the black flag was elected ahead of the red flag which was so much nicer looking. Plus the timing of black flags were not so good given all the media coverage of the ISIS one.

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I saw that comment by him - totally odd - never thought it might have been made to divert attention away from his current troubles.

I use the NZ flag referendum as an example of an attempt to manufacture consent - i.e., a costly exercise in pick my favourite by John Key.

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And to get the union jack off the flag because of Key's allegiances.

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Bernanke said all was fine in summer of 2007 too.
Stress test NEVER includes liquidity freeze, counter-party risk and co-co bonds does it.

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@MikeKirk29 - Do they include the off balance sheet derivatives exposure! Probably not! So these stress tests are proving nothing! Citi bank comes to mind!

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