Attack on Saudi oil; US freight activity falling; US retail sales buoyed by cars; movement on China:US trade talks; Aussie call to protect ag provenance; UST 10yr yield at 1.90%; oil and gold uncertain; NZ$1 = 63.8 USc; TWI-5 = 68.9

Attack on Saudi oil; US freight activity falling; US retail sales buoyed by cars; movement on China:US trade talks; Aussie call to protect ag provenance; UST 10yr yield at 1.90%; oil and gold uncertain; NZ$1 = 63.8 USc; TWI-5 = 68.9

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Here's our summary of key events over the weekend that affect New Zealand, with news benchmark bond yields are rising suddenly in the US. But complicating matters, we are now on tenterhooks for how markets will react to the latest Middle-East oil crisis.

Drone missile attacks on the core Saudi oil system are likely to impact markets. Crude oil prices are expected to jump when markets open today on the uncertainty. More than half of Saudi output has been knocked out and it may take days to restore. Saudi officials say it will be back to normal export levels tomorrow but insiders aren't so sure, and much of the price reaction may be down to who the US points its finger at.

In the US, the Cass Freight Index, a monthly measure of rail, trucking and airfreight volume, dropped -3% in August from a year earlier, the ninth consecutive month of declines. Their report blamed tariffs for stalling trade volumes.

But solid American retail sales data for August did calm some concerns about the US economy. Those retail sales rose +4.2% from a year ago but that was slower than the +4.9% gain in July. A surprisingly good rise in vehicle sales kept the data robust, otherwise it would have been lackluster.

US consumer sentiment as measured in one widely-watched survey stopped falling and posted a small rise, even though it remains -8% lower than this time last year.

The oil tensions will probably set this week's market direction. But at the end of last week the US bond markets were turbocharged with prices falling sharply and yields jumping. Growing doubt about the usefulness of lower interest rates has traders thinking the US Fed may use other means to prop up American economic growth. Those bond yield shifts will have echos in our markets too.

Asian equity market gains on Friday seemed to be on the back of the US President saying he would be open to an "interim deal" on trade issues, something the Chinese have been pushing for. The iron ore price stopped falling and turned up on the remarks. China suggested that it would exempt some American ag products from its retaliatory tariffs, like soybeans. The sign that the Americans are coming to understand that a compromise will be needed, buoyed Asian sentiment.

In Hong Kong, the protests continue. Beijing is marshaling its own 'crowds' to confront huge demonstrations.

In Europe, Google has been ordered to pay nearly €1 bln to the French government over allegations of tax fraud. The court ruling comes as European authorities are exploring new ways to clamp down on digital tax evasion.

In Australia, the impact of detailed prescriptive regulation is being felt by newly credit-shy bankers not wanting to end up in court. The resulting credit squeeze has ASIC squirming at an Australian parliamentary oversight committee hearing and claiming it is not to blame "but bankers are". ASIC is fighting court ruling losses that block its ability to prescribe how banks assess borrowers credit situations.

And staying in Australia, the governing Liberal Party's coalition partner, the Nationals, have called for a law change to protect the provenance of milk, meat and seafood, saying fake replicas shouldn't be allowed to claim they are equivalents.

The UST 10yr yield leapt on Saturday, up +12 bps from the day before, now at 1.90% and that is +34 bps higher than this time last week. Their 2-10 curve more positive now at +10 bps. Their negative 1-5 curve is fading fast, and now at just -12 bps whereas a week ago at was -33 bps. Their 3m-10yr curve is even narrower at -8 bps down from -50 bps a week ago. The Aussie Govt 10yr is up sharply at 1.23%, a weekly gain of +16 bps. The China Govt 10yr is now at 3.09% and in a week it has risen +7 bps. The NZ Govt 10 yr is now at 1.35%,a +17 bps gain for the week and that was on top of the +8 bps gain last week.

Gold was sharply lower at US$1,486 and a drop of -US$13 in a day and -US$22 in a week. But it is likely to recover much of that on the oil tension news.

US oil prices ended last week softer at just under US$54.50/bbl. The Brent benchmark was just on US$60.50. Watch today when markets open, they won't be at that level then.

The Kiwi dollar opens much weaker today, now down to 63.8 USc which is more than a -½c fall since this time last week. On the cross rates we are softer too at 92.7 AUc as the Aussie jumps and that is the lowest level since November 2018. Against the euro we are at 57.6 euro cents. That puts the TWI-5 back down to just on 68.9 and taking the overall devaluation of the Kiwi dollar since the beginning of July to -3.8%.

Bitcoin is now at US$10,300. 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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66 Comments

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Highlight new comments in the last hr(s).

BBC article: David Cameron: Boris Johnson backed Leave to 'help career'.

"The former Tory leader adds: "The conclusion I am left with is that he [Boris Johnson] risked an outcome he didn't believe in because it would help his political career."
He also says during the Leave campaign Mr Johnson, who has repeatedly said the UK must exit the EU on 31 October, privately raised the possibility of holding another referendum after fresh negotiations with the EU.

He criticises Mr Johnson's use of the Vote Leave campaign bus emblazoned by the much-criticised claim that leaving would mean £350m a week extra for the NHS.

"Boris rode the bus round the country, he left the truth at home," writes the former prime minister.
https://www.bbc.com/news/uk-politics-49705213

Bloomie mentions Interest.co.nz in an article on Chinese influence in Australasian politics.

"Sensitivities over China aren’t confined to Australia. In New Zealand, opposition leader Simon Bridges was criticized by some media (https://www.interest.co.nz/opinion/101617/eyebrows-raised-simon-bridges-...) this week for meeting with senior Communist Party figure Guo Shengkun during a recent visit to the country and for lauding China’s economic growth."

Source: https://www.bloomberg.com/news/articles/2019-09-12/attacks-on-chinese-au...

JL that is false news as our fire starter rag the Herald hasn't mentioned it.

11
up

Any minute now Hosking & Hawkesby will take a moment off from lambasting Ardern and talking up Bridges to cover this issue, surely.

@RickStrauss.... nah that would need some serious journalistic talent with maybe some critical thinking thrown in which sadly neither seem capable of. Much like the rest of the NZ press (except Interest). Which is why many of us now go overseas for our financial and business news.

"NZ is one of the least corrupt countries..... " - surely that requires an unbiased press, not the smalltown rag we have that are used as attack dogs by National?

If you compare the current imbroglio to what went down in Clueless Southland with farmer Bill, his relationship to the electorate manager, the lies told to the police, the lack of investigation by said police even when they had the PM of the time admitting Todd had told lies, the role of the ex police heavy sent down to sort it all out, the role of the nat president, the 1000 texts between farmer and the lady late at night, the payout to the lady - and then try and find any real criticism of the Nats in the firestarter at the time.

Kiwis so dumb lah

The drone attack on the Saudi oil facilities seems very odd to me. Ten small drones seemed to do more damage than a wave of flying fortresses. No information on the type of drone and warhead seem to be available and no video footage of the strike.

... that is of no consequence to us ... we're transitioning to EVs , a completely oil free future ... pah to fossil fuels .... only question is , what to do with the 500 kg of batteries after 8 years use , when they're knackered ?

Same as you do with the rest of the car, send it to recycling.. And likely to be far more than 8 years life in them.

... these are not simple lead acid batteries which can easily be broken up and recycled ... EVs have differing battery types , some of which contain toxic metals , such as nickel hydride ... lithium ion batts require a different form of recycling or repurposing .

Yes, different recycling methods, but still recycling.

Who is recycling the toxic gases ICE cars emit on a daily basis in the billions?

Ummm...Plants?

... pasture is plants ... and cows eat that ... they milk cows , dont they ...

Who knew that driving my wee Toyota around was supporting the NZ dairy industry .... Wow !

wonder how many litres of diesel it takes to produce and transport an EV to NZ?

A bit more than making and shipping an ICE car to NZ? But less than making and shipping an ICE car and supplying it with fuel and consumables for its useful life?
Back of the envelope calc, my car has burned ~16,000 litres of gas directly, plus what was used to build it, and all the ancillaries like brakes, tyres, oil changes.

EVs still rely on normal tyres and lubricants or are these different?

Tyres yes, lubricants.. Nope, they have lubricants, but you don't need an oil change every 10,000kms.. maybe one change every 10 years, maybe none. No byproducts of burning fuel leaking past piston rings into the oil to contaminate it and turn it acidic.
Tesla warranty on their drivetrain doesn't require the car is serviced unless a fault is detected.

If I choose not to service my Tesla vehicle, will this void my warranty?
We recommended that you service your vehicle as listed in your Owner’s Manual, but it will not affect your New Vehicle Limited Warranty if you do not.

Man thats crazy they would provide a warranty without requiring proper servicing. Over time, surely the greases or lubricants use would degrade and causes extra friction or damage to the moving bits?

About 1/20th of the moving parts, not much thermal breakdown and a 8 or 10 year warranty. So no. And lots of ICE are coming out with sealed for 'life' transmissions, but you can't do that with IC engines because of all the heat and contamination from gases.

Sounds good in those respects. Be nice if the price of EVs could match a petrol car and maybe some more practical options e.g. utes,. Maybe in a few more years

Yep, nursing the current ICE along till it drops dead, then hopefully getting a decent and affordable EV. A friend has a shiny new Telsa Model 3 with all the options ticked, but i don't have $100k to drop on one.

Pretty much no one has 100k to drop on a vehicle. If someone brought out an EV ute or suv or van that had decent range and power for ~50k, then we would see an uptake of EVs. Its not that people don't like the idea or concept of EVs, its just they cant afford them. 60k for a new Leaf? what a joke

what about the 18% of electricity that is produced by burning coal/gas in NZ and every EV is just adding addition demand to coal/gas production so pretty much 100% powered by coal/gas...

Yep, but still better to burn gas in a CCGT to charge an EV than burn petrol in an ICE.

DP

they are already ramping up recycling the batteries to extract the minerals to be used in new batteries, so unlike burning oil you can reuse some of it again and again
https://news.yahoo.com/basf-strikes-french-alliance-recycle-electric-car...

Probably the same amount they get out of existing battery recycling 4-5%, yeah that will make a difference.

Plenty of 8 year old Leafs on trademe with plenty of life left in them. Old Leafs are the worst case scenario - no thermal management and larger % discharges due to small pack size means the faster depletion of all electric car batteries. Yet these Leafs have about a total 15 years worth of driving in them followed by another 10+ years as a solar backup battery (at 50% capacity, the smallest Leaf battery holds about the same charge as a new Tesla PowerWall).

After that, all metals are 100% recyclable. As not many packs have reached end of life yet (see above) then not many facilities exist yet.

Note: metal hydride batteries are only used in older hybrids

A Leaf may be practical for the few that dont need much space, towing capacity or range. But until there is an affordable EV that can tick of these 3 main factors, the majority will stick with petrol/diesel

Entirely possible Zac. Think of it as an ultra-precision attack. With the right knowledge, and skills to either program or fly the drone to a very specific target area within the plant and a relatively small charge, significant damage can be achieved, and possibly even cause a cascade impact.

Read John Robb - Global Guerillas - it's the notion of what he terms a 'systempunkt' - a point which if pressured, yields a return (usually negative) wildly out of proportion with its apparent importance in the overall system. The points at Wellywood rail station, foobarred by a derailed freight consist, are a local example. Took out entire train services for days....

Yup, oil processing plants are almost impossible to harden against this kind of attack, so can be considered a somewhat soft target. The question is consequences. we can figure the global economic consequences, but what is probably just as important here or the consequences for the attackers. The Yemeni Houti are rejoicing and possibly taking ownership (I've not seen any reports that say they have, but who supplied the drones and explosives? If it was Iran - what consequences are fitting? They may actually be another group who wants a war between Islam and everyone else, if only because prophesies say Islam wins, so any response if it is them stirring the pot is critical.

This is of course becoming a world problem. We don't want or need Trump to lead any response because his thinking is largely too shallow and superficial to be effective, and the US just doesn't have that good a reputation in the Middle East, but the US does need to be a part of the response if only because they have the resources to be able to drive it. The whole world needs to be a part of this. We also need to understand that the regime in Iran would like to see the Al Saud monarchy on Saudi over thrown, and that too would cause a whole raft of it's own problems.

Speaking of consequences, what are the consequences for the Saudis invading Yemen, blockading and bombing the Houthis cities daily?
https://en.wikipedia.org/wiki/Blockade_of_Yemen

What is the role of oil traders in pushing up prices on such bad news, despite there being enough reserves floating around to take care of any production shortage for a short time ?

The sceptic in me could say it is an easy way to raise the cost of oil and blame an innocent country with no proof !

But, but, but, fake replicas shouldn't be allowed to claim they are equivalents.

This is a huge point. This falsehood is at the root of much of the problems of modern society.

JP Morgan used to make the distinction between physical gold as money, and debt, saying they are totally different in nature. It is similar to owning your house outright or having a mortgage, it is different, not equivalent.

Chemically synthesised compounds are not necessarily the same as natural ones. If you can't tell the difference it may be because they are the same, or because the tests you chose can't tell the difference, intentionally or otherwise. For instance, the chemically synthesised ones may be a mix of left and right handed molecules, whereas the natural ones may only be left handed. You cannot prove the null hypothesis. It is a fundamental logical problem.

In all that gobblegook are you saying that Almond Milk cannot be called Milk only cows milk?

Almond milk is great, if it is actually made from almonds. If you look at the labels on commercial products though, you will find most are mainly soy milk, some have as little as 1% almonds in. Similarly, milk chocolate is mainly sugar and milk, not chocolate at all. Something deeply wrong there, yet we put up with it everywhere.

My question is ..what can be called Milk?

I guess I'm happy with common usage, so cow's milk, goat milk and almond milk are all fine by me, provided they are what they say they are.

Agree

Speaking of usage, the word milk has had plenty of usage not limited to these:

In English, the word "milk" has been used to refer to "milk-like plant juices" since 1200 AD. Traditionally a variety of non-diary products have been described with the word milk, including the traditional digestive remedies milk of magnesia and milk of bismuth. Latex, the complex inedible emulsion that exudes from the stems of certain plants, is generally described as milky and is often sold as "rubber milk" because of its white appearance. The word latex itself is deducted from the Spanish word for milk.

... hmmmm , best idea is we get Taxcinda to set up a working group to look into that ...

.shouldn't milk be something out of a titty? The rest are just pretenders. I couldn't get excited about snuggling up to a soy bean..

But you would a cow...crikey?

I'm a bull!

... cow , goat , sheep , horse , beaver and rat all qualify as milk ...

Soy , rice , almonds do not ...

... coconut milk on the other hand .... ummmm ?

THE CHEMISTRY OF MILK. The principal constituents of milk are water, fat, proteins, lactose (milk sugar) and minerals (salts). Milk also contains trace amounts of other substances such as pigments, enzymes, vitamins, phospholipids (substances with fatlike properties), and gases.

... if we accept lactose as a key ingredient , that rules out any plant based " milks " ... so , my beloved coconut milk and cream will need new labeling...

Fair enough - Coconut Mylk (Thats how kiwis pronounce it anyway)

... and " coconut crim "...

I think we've milked this subject for all its worth !

It was starting to get a bit cheesy..

... I butter moove on , then ...

It is the very heart of maths & physics let alone chemistry that if two points are in the same place at the same time moving at the same speed in the same direction then they are only one point. A synthetic chemical is the real chemical - Friedrich Wöhler creating urea in 1828 was the first proof that organic chemistry was a subset of chemistry (no such thing as a chemical 'life force'). Happy to admit that making artificial milk or meat is not easy - stereoisomers being one problem.

Saudi Arabia was the last swing-producer - the last with excess capacity.

And it's just proven vulnerable. So the price of the marginal barrel has just gone up, and the global 'economy' was already on life-support and failing.

All as predicted. We are too late to morph to all-electric and it was never going to support BAU.

https://www.theautomaticearth.com/2019/09/its-a-new-world-order-alright/

Yawn. Bloomberg already reporting that Saudi will have half the output lost restored in a day:
https://www.bloomberg.com/news/articles/2019-09-15/saudis-race-to-restor...?

...for now.

So ASIC changes the rules on borrowing and then is surprised that banks change who they lend to. I wouldn't even it call an effect of the "law of unintended consequences". ASIC wanted the banks to take less risk and to lend less - it is the policy working as it was intended. ASIC should be claiming a win! And remember, our deal little FMA wants the same powers and do the exact same thing.

So I presume The Saudi buy US military hardware. This surely rates as a pretty big hole in their defence. A bunch of rebels from one of the poorest most downtrodden countries on Earth is able to penetrate to the centre of one of the richest protected by one of the most powerful.

I think the question to ask is what does Iran have to gain from this attack, if they are to blame.? They are probably the only player to not profit form a rise in the oil market, I doubt Russia and China are going to pay more for thier oil because of this.

Time to update the BEFU....TWI - 71.22, Treasury BEFU assumption 'The trade-weighted exchange rate index rises from 73.7 in the June quarter of 2019 to 74.1 in the 2022/23 fiscal year.'
WTI - 61.13 Treasury BEFU assumption 'The price of West Texas Intermediate (WTI) oil is stable at US$60 per barrel across the forecast period.'

WTI crude has risen around $6/bbl or 11-12%, range being 60.10 to 63.34 as of 11am NZ time.