Cheap money, high equity prices; France slaps SUVs; Shanghai office vacancies soar; yuan shunned; capital flight in Hong Kong; gold fraud conviction; Aussie water stress; UST 10yr 1.92%; oil and gold down; NZ$1 = 66 USc; TWI-5 = 71.2

Cheap money, high equity prices; France slaps SUVs; Shanghai office vacancies soar; yuan shunned; capital flight in Hong Kong; gold fraud conviction; Aussie water stress; UST 10yr 1.92%; oil and gold down; NZ$1 = 66 USc; TWI-5 = 71.2

Here's our summary of key events overnight that affect New Zealand, with news of extremes wherever you look

Wall Street is ending the week on a firmish note, up +0.6% on the day and that accumulates to a +1.3% gain on the week. For the year, it looks like the S&P500 will have risen a very impressive +28%, proving cheap money drives asset prices. The benchmark US Treasury 10 year yield has fallen from 2.70% to about 1.90% in the same period.

Today's rise was bolstered by good consumer income and spending data for November. The same data set reveals that inflation as measured by the Fed's preferred metric, PCE, slipped to 1.6% pa.

American consumer sentiment is also holding in the latest survey although unchanged from the previous month. It is also very little changed from this time last year.

European markets were even more bullish overnight that their American counterparts, with most up nearly +1%. The exception was London with finished with virtually no gain. Of the three main EU equity market indexes, London (FTSE100) is going to end the year up about +12%, The German DAX30 is on target for a +26% rise in 2019, and the winner is the French CAC40 which is headed for an annual gain of +28%.

In France, they are tackling the pollution problems of diesel SUVs with a NZ$34,000 tax on them in 2020, raising it from NZ$21,000 presently. This is on top of tough new European rules being phased in next year to lower car emissions. At the same time, the French are reducing cash incentives for the purchase of electric cars.

In China, the Shanghai equity market slipped yesterday by -0.4% after a string of very strong gains. They are heading for an annual +22% gain in 2019.

Enthusiasm for building new office buildings in their main financial centre has seen a spectacular overshoot. Office vacancy rates in Shanghai are now expected to exceed 25% in 2020 and prime rents are falling. The situation is not helped by a rush to sell by some listed companies. Chinese commercial property is a wild-west at the moment.

China continues to be embarrassed by the lack of acceptance of its currency. New data shows that the yuan's share as an international payments currency is only up to +1.2%. That is a gain, but almost an insignificant one. It even trails the Aussie dollar. Even th e US dollar had a larger market share gain in 2019 while retaining and enhancing its dominant position. And don't forget, payments are the easy bit to change. It is the pricing basis where the greenback shines, and even those meager yuan transactions are probably priced originally in US dollars.

In Hong Kong, their Q3 current account data release revealed that capital flight from the City is underway. More than NZ$30 bln flowed out in Q3, more than four times the flow in the second quarter, and there was an inflow of capital in the first quarter of 2019.

In Australia, their tax authorities have won a huge case against gold miners involving rorting their GST refund scheme. More than AU$¼ bln is involved and it attracted crime networks. Gold bullion was exempt from GST as it was considered a form of currency. However, if the bullion was defaced, melted or turned into jewelry and sold as scrap it was subject to GST. This enabled criminals to fiddle the system by buying GST-free bullion then on-selling it to refiners as scrap to collect the GST. Instead of remitting the tax payments to the ATO, they pocketed it. The refiners who bought the scrap later claimed the GST back from the ATO, which is legal. But of course the ATO only brought its case against the legitimate players in the system - the crims got away with it.

In Sydney, fires, droughts and low water supplies are challenging everyone with extremes. As water supplies get very low, evaporation in existing supplies is becoming a critical issue.

The UST 10yr yield is at 1.92% and, although unchanged from yesterday, it is up +9 bps from this time last week. Their 2-10 curve is little-changed overnight at +29 bps. Their 1-5 curve is at +21 bps. Their 3m-10yr curve is at +36 bps. The Aussie Govt 10yr is up another +3 bps overnight taking the weekly rise to +14 bps where it has risen to 1.31%. The China Govt 10yr is virtually unchanged at 3.24% and up only +2 bps for the week. The NZ Govt 10 yr however is now at 1.64% and up +4 bps overnight and +6 bps for the week.

Gold is down -US$1 from this time yesterday to US$1,478/oz and up +US$4 for the week.

The VIX volatility index is just over 12, and a similar level to this time last week. Its average over the past year is 16. The Fear & Greed index we follow has moved from mid 'extreme greed' levels to near maximum greed levels.

US oil prices are down sharply today but just to levels we had at the start of the week, of just on US$60/bbl and the Brent benchmark is now just under US$66/bbl. The US rig count unexpectedly rose last week with a healthy +1.7% increase..

The Kiwi dollar is at 66 USc and little-changed over the week. On the cross rates we are also similar at 95.7 AUc. Against the euro we are marginally firmer at 59.6 euro cents. That puts our TWI-5 at just on 71.2 and a little stronger for the week.

Bitcoin is little-changed from this time yesterday, now at US$7,123. 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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47 Comments

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Highlight new comments in the last hr(s).

Re the gold arbitrage:
"The (Tax Department) took action separately against the gold traders that were failing to remit the GST collected. "
Good luck with that! Any gold trader will just claim"We were sticking to the Law. It's the Law that was at fault, not us!"

Merry Christmas.

Money out of China thru HK, plus the shifting sands of money in.
https://youtu.be/DuFqI0NoR74
CCP has & does rely on the flows in. To keep party wheels rolling and folk content.

Does China need Hong Kong any more? Pretty easy to transfer economic activities at the press of a key...
https://www.nytimes.com/2019/12/18/world/asia/macau-china-hong-kong-prot...

Macau today, like Hong Kong, is a political experiment that began in the late 1990s, when China reclaimed both territories from Western colonial powers and promised that civil liberties could coexist with its brand of authoritarian rule. Now, as Hong Kong’s political unrest continues, China’s ruling Communist Party has become increasingly explicit about how much it will tolerate under that formula — and holds Macau up as a shining example of obedience.

Needs access to capital equity and debt markets.
Usually through HK, basis Cayman Islands, deal in US $.
That's why switch flick not been, been able to be done.

Does China need Hong Kong...
Here is Joey Siu offering context.

https://youtu.be/QbjsytKKSIQ

And has never heard of genless#
Our political leaders are doing our youngsters a disservice.

Oh they need it alright. There would be loss of face and loss of Taiwan, they could not continue on that quest if they let go of Hong Kong. This is a dangerous situation

I think they will be happy to see Hong Kong return to being a fishing village. Everything of value can be transferred to Mainland China. It's dangerous only for the people of Hong Kong.

The textbook explanation for the dollar’s behavior consistently falls short from each and every angle.

The key reason why is that there is no appreciation for how the world is short the dollar. I don’t mean short as in financial firms all over the world betting against it, hoping to profit by its falling value in the same way they would shorting a stock. The dollar short is instead a funding gap, and an enormous one that no one has yet sufficiently studied anywhere close to enough in order to make a decent guess as to how big it might be.

It stems from the requirements forced on it by being the reserve currency. Hardly anyone takes them into account. A reserve currency isn’t just the privilege of pricing primary commodities in your own denomination. It sure isn’t the petrodollar.

A reserve currency means that there has to be enough of it in all corners of the world such that vastly different systems can talk to each other, trade with each other, and connect with each other in vital ways (such as “capital flows”). They do so by virtue of the dollar being made available to everyone everywhere.

You can easily, fluidly translate local currency, finance, and trade by first turning them into dollars. And then whomever is on the other end, they do the same thing. The dollar sits in the middle of everything because it is universal.

This doesn’t just happen, though, it requires enormous financial resources to make it happen. The reason is as simple as the methods complex: neither the United States government nor the Federal Reserve prints the “dollars” that are used as this reserve. No, it is a credit-based system which means that banks create virtual liabilities which accomplish the same tasks as physical currency once did a very long time ago.

So long as banks are willing and able, they will and have supplied sufficient monetary resources to this vast offshore marketplace – the eurodollar space – to keep trade advancing, globalization a net positive, and the global economy full of so-called miracles.

When they aren’t so willing nor able, they tend to supply insufficient levels (which doesn’t necessarily mean contraction or declines; this is an important if tangential point to the discussion here; rate of change is what matters, which means that if the world demands, hypothetically, 10% more “dollars” this year than last year and banks are only willing to supply 5% more, that’s a big problem which still leads to all the negative results associated with textbook tight money conditions).

If the world requires so many of these offshore intermediating “dollars” and then traders from all over it can no longer easily get their hands on them, it’s really easy to work out what might happen to the price therefore exchange value of the dollar in that situation. Link

Everything Comes Down To Which Way The Dollar Is Leaning

It won't be long before the Chinese authorities clamp down again on Hong Kong's capital flight, as they have for main land Chinese outflows. Also not surprising that the popular Western real estate locations for hot Chinese money had all reported a surge in property sales since last November.

It couldnt be the coincidence of lower interest rates or the demand cycle hotting up?

The Progressives Ten Commandments:
Do as I say, not do as I do.
How quick can we match our friends in California

https:https://youtu.be/n8QCrTT0CJ0/youtu.be/n8QCrTT0CJ0

1. Climate Change
2. Education, how to use schools
3. Guns / use & control
4. Illegal immigration/ Open borders
5. Local politics
6. Diversity
7. Identity, security ID.
8. Environment
9. Universities, costs and casualisation of work.
10. Affirmative action, identity politics and equality of outcome.

It's about power and feeling good.
Methodologies that let some progressives gain and grab power.
With redistribution being the side valve.

Humm point 3) Guns / use & control. Did you know that more than 56,000 weapons have been handed to authorities in New Zealand during a six-month amnesty. Bet you wouldn't see that in America, no of course not you need to defend yourselves in case the King of England invades. Oh but wait a minute haven't the Americans already appointed their own monarchy through Mr Trump?
BBC article: New Zealand: 56,000 guns handed over during amnesty. https://www.bbc.com/news/world-asia-50878862

Many people used the generous compensation money to buy new now compliant weapons.

Think more of it as a weapons upgrade.

Are they ones that can kill 50+ with one or two shots?

Not here in New Zealand. And upgrade to what, semi-automatics including semi-automatic shotguns are thankfully banned here. :)

But, but, shiny

When did it become okay to have more than 2 cartridges for duckshooting?
They really do show their true colours when they lament not being able to poison the water/ground with lead any more. Boo hoo.

When were you last off duck shooting?

At least 40 years, didn't pursue it as the taste of them left me retching

Sounds like it's time to try again.

First step back could be small bore indoor targets, to get your eye in.

No thanks, these days just the smell of poultry is enough to put me off

Leave the ducks ...quack quake Henry

Nahh that hasn't impressed me Henry. And it would get stopped quite easily at customs, you can't even get a apple through with NZ strict customs and import controls. :)

It's all local, you can drive over.
What's your nearest city centre you can go there.

You'll be surprised how resourceful people can be defending themselves without guns. BBC article: London Bridge attack: Darryn Frost on using a narwhal tusk to stop knifeman. https://www.bbc.com/news/uk-50870309

!Police Minister Stuart Nash blamed the government’s inability to enforce its buyback scheme on a lack of gun registration. “The problem is we just don’t know exactly how many guns are out in the community, this is why we need a register, to enable Police to better track firearms,” he said, according to 1 News.

https://dailycaller.com/2019/12/20/new-zealand-gun-buy-back-fails/

The whole process has exposed the outlaw mentality in much of this country, aided and abetted by one David Seymour, who gets bloody praise heaped on him for doing so.

I'm just going to leave this thought with you about the changes in our gun laws
Perhaps if Australia hadn't changed theirs after Port Arthur, it could have been them dealing with a mass murder at a mosque

I handed in my guns, I didn't need them anyway. Currently I am working with government to decide what other items people don't need and looking at ways to get rid of them as well. Top of my list is cows and plastic.

Add air to the list - problem solved.

$ 100 million wasted ... pouring taxpayers' money down the toilet .... 56 000 guns from good honest owners who would've never dreamed of using them in violence . ...

... another 110 000 or so noncompliant guns remain out there .. . What a joke ... what a shambles ... and did we expect any different from this government ...

Oh ... and lest we let the facts get some light ... the few times that guns are used in violence in NZ each year , its 90 % or more chance to be a common old shotgun or 22 ... still freely available ...

.... and not to mention someone weaponizing ricin or creating a bomb from freely available chemicals

https://emergency.cdc.gov/agent/ricin/facts.asp

Conservatives mantra from history
"Stay in the trees, you'll never amount to anything trying to get around on two legs".

Labour mantra from history
" Stay in the trees , we'll give you UB , DPB , WFF , AS , IFSL , FYFF , and a foliage allowance . "

As long as we're rocking out the stereotyping, also Conservative mantra from history: redistribution bad, unless it's to me and my mates. And I'll take the profits, you guys absorb the losses for me.

Hypocrisy abounds on both the left and right - but neither side wishes to acknowledge it.

Conservatives ..how often are they proved wrong in history...

I'm not sure if this a serious or vacuous comment, but I'll play - how about the GFC, WMD in Iraq.

Henry_Tull,

1. Climate Change. What does this have to do with progressives or Conservatives? The science is neither left nor Right, just science and sadly, it points only in one direction(not the boy band), but at us, the human race.

Slightly off topic, but if any of you want to have grandchildren you might want to think twice before giving your little ones cheap toys at Christmas. This has already been picked up in the UK and chances are they may have been shipped here too, apparently toxic chemicals have been found in cheap dolls putting children exposed to them at risk of long-term fertility problems.
The dolls contain high levels of phthalates, These potentially harmful chemicals are used to toughen plastic in the Chinese-made dolls. BBC article: 'Toxic' Christmas dolls prompt UK-wide trading standards alert. https://www.bbc.com/news/uk-england-nottinghamshire-50873819

Beyond Lego, which seems unavoidable, our family spurns plastic, and even with the Lego, if it has been passed on from another, that is preferable

Ah yes good idea. :)

We try and do experience over gifts.
Last month our thoughts were a trip to whaakari.
Ok back to the drawing board there.

...we have now had 30+ years of ever-looser monetary policy accompanied by lower rates. This created a series of asset bubbles whose demises wreaked economic havoc. Artificially low rates created the housing bubble, exacerbated by regulatory failure and reinforced by a morally bankrupt financial system.

And with the system completely aflame, we asked the arsonist to put out the fire, with very few observers acknowledging the irony. Yes, we did indeed need the Federal Reserve to provide liquidity during the initial crisis. But after that, the Fed kept rates too low for too long, reinforcing the wealth and income disparities and creating new bubbles we will have to deal with...We hear different theories. The most frightening one is that the repo market itself is actually fine, but a bank is wobbly and the billions in daily liquidity are preventing its collapse. Who might it be? I have been told, by well-connected sources, that it could be a mid-sized Japanese bank. I was dubious because it would be hard to keep such a thing hidden for months. But then this week, Bloomberg reported some Japanese banks, badly hurt by the BOJ’s negative rate policy, have turned to riskier debt to survive...It will be really interesting to see what happens in 2020 to the repo market when the Fed tries to end its injections and how markets respond when its balance sheet stops increasing in size. It's so easy to get involved and so difficult to leave.

https://ggc-mauldin-images.s3.amazonaws.com/uploads/pdf/TFTF_Dec_20_2019...

Why no mention of the NZX 50 which as of yesterday, had registered a gain of 31.50% this year-from 8732 to 11,482?