What happened Friday

A review of things you need to know before you go home on Friday; no rate changes, fewer foreign buyers, Synlait goes retail, yuan shunned, Aussie directors gloomy, swaps lower, NZD soft, & more

25th Oct 19, 3:59pm by David Chaston

Here are the key things you need to know before you leave work today.

MORTGAGE RATE CHANGES
No changes to report today.

TERM DEPOSIT RATE CHANGES
None here either.

NET SELLERS
The level of overseas buyer activity is now sharply lower than a year ago and in fact overseas owners sold 66% more NZ dwellings than they purchased in Q3 this year.

GOING RETAIL
Synlait said it will buy Dairyworks from Bruce Irvine and Peter and Margaret Cross.for about $112 mln. Dairyworks sells Alpine, Dairyworks, and Rolling Meadow brands to supermarkets in New Zealand and Australia, and is a key beneficiary of the DIRA law that forces Fonterra to sell milk to competitors. Synlait bought Talbot Forest Cheese in August.

WEAK ACCEPTANCE
The Chinese yuan still isn't making significant inroads as a global trade currency. In September is only garnered a 1.3% market share, up from 1.2% two years earlier. It trails the Aussie dollar, the Canadian dollar, and the Swiss franc. The big gainer was the US Dollar which rose from 42.4% share to 46.3% share. The Euro fell back from 35.5% to 31.0% share.

ANTI STAMP DUTY MOOD GROWS
In Australia, one State is challenging the revenue reliance on their Stamp Duty, a situation imposed on them by Canberra. If they succeed in winning change it is likely to have a major impact on how Australians view property ownership.

GLOOM IN THE BOARDROOM
Aussie company directs are a particularly gloomy lot. Director sentiment dropped to a three year low as over 60% of them expect weaker economic conditions over the next 12 months.

AMAZON LOST IN PROFIT JUNGLE
Giant online retailer Amazon reported -26% lower profits for the first time in more than two years in their September quarter, and the company expects another earnings decline in the holiday-shopping season. Their shares fell more than -7% on the news in off-market trading and might fall even more when US markets open again tomorrow. And that is despite revenues rising +24% in Q3-2019 compared to Q3-2018.

TREADING WATER
The S&P500 went nowhere on Wall Street in earlier trading as the earnings season rolled on with come confusing trends. Today Asian markets have opened decidedly lower, while the ASX200 is up +0.6% in afternoon trade. The NZX50 is still in its funk, treading water like Wall Street.

SWAP RATES DOWN AGAIN
Wholesale swap rates have fallen back again today and at a faster rate. The two year is down -3 bps, the five year is down -4 bps, and the ten year is down -4 bps. The 90-day bank bill rate is unchanged at 1.05%. Australian swap rates are down -2 or -3 bps today. The Aussie Govt 10yr is down -4 bps to 1.06%. The China Govt 10yr is unchanged at 3.24%. The NZ Govt 10 yr is down -4 bps at 1.22%. The UST 10yr yield is unchanged at 1.76%.

NZ DOLLAR SOFT
The Kiwi dollar is at 63.8 USc, down from this time yesterday but unchanged since this morning. Against the Aussie we are unchanged at 93.6 AU cents. Against the euro we are little-changed at 57.4 euro cents. That means the TWI-5 is back at 68.9

BITCOIN HOLDS LOWER
Bitcoin is little-changed at US$7,436 after yesterday's sharp fall. The bitcoin price is charted in the currency set below.

This chart is animated here.

Daily exchange rates

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Source: RBNZ

Source: CoinDesk

Daily swap rates

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Source: NZFMA

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13 Comments

by Advisor | 25th Oct 19, 4:08pm 1571972939

Synlait said it will buy Dairyworks from Bruce Irvine and Peter and Margaret Cross.for about $112 mln

I browsed the Companies Office directory to understand Synlait's ownership structure and my search went cold on a Cayman Island-domiciled company that owns 40% of its shares.

by Advisor | 25th Oct 19, 4:15pm 1571973353

Nearly 60% of banks need to make changes or they'll struggle during the next downturn since return on equity is too low relative to their costs , McKinsey & Company said in a new report.

We should be thankful for our foreign-owned banks, courtesy of whom the average ROE in the NZ banking industry is at 14.5%.

For reference, average ROE across emerging markets is 14.1% and 8.9% in developed markets.

Who knew there were upsides to our Aussie-owned banks fleecing us.

by Audaxes | 25th Oct 19, 5:40pm 1571978429

Oops:

If money dealers are shy in repo, where else might they be reluctant to willingly add their resources (balance sheet capacities)? Whether we fully appreciate it or not, we count on them to step in during good times and bad in many other places. Other key parts of the fixed income system – Eurobonds included.

Liquid asset markets, as separate from liquid money markets, are those where any significant increase in selling or buying pressures don’t push prices too far in any direction. The reason is simply those dealers, or in this case market makers. Flush with capacity, they’ll attempt to pick up a spread on either the bid and ask so as to keep the bid/ask to an easy, fluid minimum.

Market participants act very differently when they believe they can sell, if necessary, on a moment’s notice should the need ever arise. Pure risk-on/risk-off type stuff which depends upon the dealers to make sure the exits are as wide and dependable as possible.

And those exits are not static; which means if there is a perceptible increase in selling pressures, they have to be met by a comparable step up in dealer presence. That’s liquidity. The absence of it, in extreme cases, creates all kinds of self-reinforcing negatives and feedback loops.

I wrote about it not long ago when diagramming the links between these credit markets and repo collateral:

" …you can’t just sell the asset because if you do sell into an illiquid market you take an enormous loss which might confirm to the rest of the world that you really are a troubled bank. It may not have been 22 cents on the dollar for Merrill in July 2008, but those ABS CDO’s produced billions upon billions of impairment losses (and another $4.4 billion which were booked in Q3 2008 after the sale).

That’s the real risk of illiquid assets being used in liquidity functions. At some point, they can just return to type."

It is what economists call procyclical behavior. Since the global eurodollar system is incestuous by its design, that is, the dealers are the dealers everywhere, in markets as well as among themselves, shyness in repo liquidity very likely means shyness in credit market activity, too. And vice versa. Link

by antonymouse | 25th Oct 19, 5:55pm 1571979345

Fed Ups Its Wall Street Bailout to $690 Billion a Week as Media Snoozes

Yesterday the Federal Reserve Bank of New York (New York Fed) announced that the giant money spigot it turned on for Wall Street on September 17 would be growing exponentially beginning today.

The New York Fed will now be lavishing up to $120 billion a day in cheap overnight loans to Wall Street securities trading firms, a daily increase of $45 billion from its previously announced $75 billion a day. In addition, it is increasing its 14-day term loans to Wall Street, a program which also came out of the blue in September, to $45 billion. Those term loans since September have been occurring twice a week, meaning another $90 billion a week will be offered, bringing the total weekly offering to an astounding $690 billion. It should be noted that if the same Wall Street firms are getting these loans continuously rolled over, they are effectively permanent loans. (That’s exactly what happened during the 2007-2010 Wall Street collapse: some teetering Wall Street casinos received, individually, $2 trillion in cumulative loans that were rolled over for two and one-half years – without the authorization or even awareness of Congress or the American people. One bank, Citigroup, received over $2.5 trillion in Fed loans, much of them at an interest rate below 1 percent, at a time when it was insolvent and couldn’t have obtained loans in the open market at even high double-digit interest rates.)

https://wallstreetonparade.com/2019/10/fed-ups-its-wall-street-bailout-…

by Audaxes | 25th Oct 19, 6:44pm 1571982268

As of last night, the outstanding O/N and term net repo add stood at $219.48 billion, plus $18.001 billion net permanent purchases of Treasury secs and sales of MBS since the new not-QE outright purchase program was initiated.

The accumulating nonsense has to be dismissed when it comes to O/N and term repo. They are temporary operations (TOMO) and expire O/N and bi weekly, hence they do not accumulate, unlike the permanent operations (POMO). One can keep an eye on them here and here and collectively here during their daylight hours.

by Audaxes | 25th Oct 19, 7:24pm 1571984674

Fed Ups Its Wall Street Bailout to $690 Billion a Week as Media Snoozes [my bold]

It's a common problem (fake news by omission), I came across this today from a UK Daily Mail columnist:

How strange. A major UN watchdog, the OPCW, is publicly criticised over a key report on alleged atrocitie sin Syria by its own former boss. But so far only wikileaks https://wikileaks.org/opcw-douma/ reports on it. Reuters, AFP, PA, BBC, where are you? Link

How do we know what we don't know?

by a watchman | 25th Oct 19, 4:46pm 1571975179

Here we go again. Selling off more of our silverware to the Chinese. Way to go Dairyworks.

by Audaxes | 25th Oct 19, 5:42pm 1571978523

I thought the current account deficit was around $5.6 billion, year to date. All those NZD created, and exchanged for offshore currencies, to import foreign goods in excess of what we sell back to them are sitting around in NZ correspondent deposit accounts waiting for a foreign asset buyer to soak them up.

by Audaxes | 25th Oct 19, 5:52pm 1571979171

The level of overseas buyer activity is now sharply lower than a year ago and in fact overseas owners sold 66% more NZ dwellings than they purchased in Q3 this year.

Will OCR cuts be enough to cause locals to soak up this supply without valuation hiccups?

by CJ099 | 25th Oct 19, 7:37pm 1571985427

Wow Trump is digging himself in deeper and dragging down those around him. BBC Mueller report: Criminal probe into Russia inquiry begins. https://www.bbc.com/news/world-us-canada-50178197

by bw | 25th Oct 19, 7:58pm 1571986682

I think you'll find that its Obama /Clinton 'story' that Durham is now investigating...The 'Dodgy Dossier" etc...Brennan ex(CIA), Steele(exMI6), Comey(exFBI) are now in the spotlight....

Mr Durham was tasked with determining whether the collection of intelligence on the Trump campaign in 2016 was lawful. He is known for investigating links between FBI agents and organised crime, and investigating the destruction of CIA interrogation videos.

by Wrong John | 25th Oct 19, 7:45pm 1571985958

We live in a weird world for sure.

by Gummy Bear Hero | 25th Oct 19, 10:51pm 1571997064

. . yep ... if you made a TV series about it all , no one would watch it ...

They'd complain that it's too far fetched ....