Here's our summary of key economic events overnight that affect New Zealand with news the OECD sees global growth back on track.
But first up today, there was another dairy auction overnight and this one was positive in a minor but gratifying way. Overall prices rose +1.0% in USD terms and +2.4% in NZD terms, benefiting from the -1.5% fall in the NZD since the previous auction. This time prices were led by the WMP price which was up +2.2% since last time. Volumes sold through this channel were stable, similar to the prior 15 events, but far less than the volumes offered at the year-ago event - and prices are +30% higher than then.
In China, Evergrande has come under even more pressure after ratings agency S&P said the company was likely to default (NSS). Their debts are huge and Western bond funds have lots of it on their books. But more analysts now doubt an Evergrande failure will seriously threaten the Chinese economy. The expectation of a Beijing bailout of some sort is high. Not everyone agrees: the RBA noted in minutes released yesterday that the risks to China’s outlook for growth and financial stability are rising.
In the US, August housing start data was positive, reversing the unexpected July fall which was revised up.
They had another big Treasury bond auction, this time for their 20 year maturity. This time US$27 bln was offered and the Fed took only US$ 3 bln. US$57 bln was offered for the remaining US$24 bln and the median yield was 1.74% and only marginally less than the 1.78% achieved at the month-ago equivalent event.
In something of a surprise, the coalition Canadian government led by Justin Trudeau has been re-elected, beating off a challenge from the right. Elections in Germany, Chile, and later in Japan will follow.
The Indonesian central bank reviewed its policy setting late yesterday and left everything unchanged. It is sticking to its growth forecast of 3.5% to +4.3% this year, and still hopes to keep inflation between its 2% and 4% target range. They see good recovery signs in their post-pandemic economy.
The OECD has given an optimistic assessment of where the global economy is going in 2021 and 2022, raising is forecasts for economic activity. Interestingly, it sees inflation pressures high in the US, Canada and some emerging markets, but not a concern in Europe or Asia. However, this same outlook gave Australia a sharp growth downgrade, the largest of any country assessed in this report. (New Zealand wasn't covered.)
That expansion, and the well known global supply chain troubles, are causing a continuing, if unusual problems at the main ports in California. More than 65 container ships were waiting to unload in Los Angeles yesterday at ports that handle about half of all inbound container traffic. Normally it is unusual for any ships to have to wait at these ports.
In Australia, new data shows that the number of people and small businesses receiving financial hardship assistance from banks during the latest lockdowns in NSW and Victoria has rocketed.
And staying in Australia, there were another 1022 new community cases in NSW reported yesterday with another 864 not assigned to known clusters, and these numbers are lower than recently. They now have 13,180 active locally acquired cases. Victoria reported another 603 new cases yesterday, and worse there again. Queensland is reporting zero new cases. The ACT has 16 new cases, again. Overall in Australia, more than 47% of eligible Aussies are fully vaccinated, plus 25% have now had one shot so far.
On Wall Street they haven't managed to recover any of yesterday's sharp drop in their Tuesday session so far with the S&P500 essentially unchanged. Overnight, European markets made good recoveries however, with Paris up +1.5% and trailed by London which was up +1.1%. Yesterday, Tokyo fell -2.2% and Hong Kong recovered +0.5%. Shanghai was still on holiday. The ASX200 ended its session up +0.4% while the NZX50 ended unchanged.
The UST 10yr yield opens today at just under 1.33% and marginally higher from this time yesterday. The US 2-10 rate curve is unchanged at +110 bps. Their 1-5 curve is little-changed at +76 bps, while their 3m-10 year curve is marginally steeper at +127 bps. The Australian Govt ten year benchmark rate starts today at 1.27% and recovering +2 bps. The China Govt ten year bond is at 2.89% and unchanged. The New Zealand Govt ten year is now at 1.87% and down -4 bps after yesterday's RBNZ guidance.
The price of gold will start today firmer at US$1776/oz and up another +US$13.
But oil prices have bounced around overnight but are back to yesterday's levels at this time of US$70.50/bbl in the US, while the international Brent price is still just under US$73.50/bbl.
The Kiwi dollar opens today at just on 70 USc and lower since this time yesterday. Against the Australian dollar we are lower too at just over 96.8 AUc. Against the euro we are soft at 59.7 euro cents. That means our TWI-5 starts today at 73.4 and slipping back towards the middle of the 72-74 range of the past ten months.
The bitcoin price has fallen further today, and is down at US$41,831 another -5.0% drop from this time yesterday. Volatility in the past 24 hours has been extreme too at just under +/- 4.9%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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54 Comments
No way they'll be bailed out directly, particularly as it was crossing the three red lines that got them in trouble. China saw what happened with IAG and don't want Lemon Socialism. That would undermine the "common prosperity" message that Xi Jinping is trying to promote.
If the goverment or central bank were going to bail out Evergrande i think they would have done so before last week. It has known on social media that Evergrande was in trouble this should not have been a surprise to CCP or regulators. This just makes them look weak being forced to bail out a reckless company. I think they will structure the liquidation so the CCP members and their businesses are looked after first and then enough of public to look like they care.
It looks like they are trying to downplay the default on state media.
This is property development there always the next developer wanting a go after buying the assets for cents on the dollar. Are you suggesting the central bank is going to supply liquidity to property sectors so they can pay above fire-sale prices to keep property prices up and bail out creditors? or prop up their balance sheets with cheaply purchased assets?
I think their competitors will have mostly followed a similar business model and have poor balance sheets as well. Country Garden stock and USD Bond prices have also taken a hit in the last week. I don't think any would want to overpay here.
Yep.
The other thing people need to understand though is that a lot of other big developers are in trouble too.
It may not be a 'Lehman Moment' but it's going to do some significant short to medium term damage to the Chinese economy, and it will have some international contagion.
I read an article by Ashley Church this morning describing house flippers as leeches, and he talks up long term property investors as the saviours of the property market. I really need to stop reading his "material", It's starting to have an exasperatory affect on me. I should just learn to treat it for the comedy gold that it is. It almost feels like a religious cult.
Have your ever listened to ZB's Property Hour on Saturday with the two Tim's? Pious Ashley II is a regular guest and his go too mantra is: " the last 30 years prove property only ever goes up in Godzone". The dude has a wind-up factor of maximum ... you seriously want to get out of the hammock and kick the transistor to the curb.
I think a China economic scare will tank NZ primary exports from dairy prices to seafood. On a positive side, the same might become cheaper on supermarket shelves- looking forward to a king's feast on a discount.
Black gold is coming back strong, Exxon Mobil and ConocoPhillips saves the day once again.
I don't get the comparisons between Evergrande and Lehman's. The problem with Lehman's collapse was the huge web of interconnected CDOs and CLOs they were in the middle of, meaning other institutions didn't know where the liabilities actually sat which froze the banking system - that and the gigantic secondary insurance markets on that debt which led to the huge insurance bailouts.
Evergrande looks like a run-of-the-mill bankruptcy. Yes it's big and a few institutions and bond funds will take hits, and similar companies will come under heavy scrutiny, but what's the risk for serious contagion?
Who will want to lend to or invest in a Chinese property developer if you know there is a reasonable chance they will simply default on their debts and leave nothing for shareholders?
It might become more of a confidence issue than anything.
Although there might be a lot of people with significant holes on the asset side of balance sheets if they are left to default…expecting to get you interest payment or debt repaid..yeah nah…expect to get your shareholding equity back…yeah nah. And what is the flow on impact of that? Do banks stop lending to property developers as risk is too high…or do they up the risk premium significantly to reduce the risk of another loss? Do future projects then fail because interest costs are too high and the discount rate required means a negative NPV or IRR?
You're right that there probably isn't the same counterparty risk.
But it is contributing to tanking confidence in real estate in China, which has been even more insane than in NZ. The wealth effect of Chinese real estate has been global-size. There will be some foreign investors losing the whole value of their EG bonds or equities, but no one will have been stupid enough to make it a huge part of their portfolio. The risk is a demand shock in those sectors that have benefited from the China RE boom either directly or indirectly.
Most foreign investors don't invest in China for a couple of reasons
1. The Chinese government make it quite difficult for foreigners to lend to Chinese owned companies - there are limits on who they can borrow from and the amount that can be lent.
2. Most big investment firms have been wary of CCP interference in how companies are run since 2015 - the rules change too regularly to create the certainty that investment firms need
In the case of Evergrande - only 10% of their debt is foreign owned - however a fair amount of Evergrandes debt is Hong Kong sourced (i've heardit could be as much as 30%) and this is where it may get messy for foreign investors who may be invested in the Hong Kong property and associated financing markets.
The world will be watching the contagion and how much of it dominoes into Hong Kong.
Of course the bigger issue for the globe is if this tips China into a recession and creates a fall in demand for consumer goods. If that occurs things could get very ugly for those countries and companies who export large volumes of products to China- including NZ with a 1/3 exports going to China every year.
It’s easy to underestimate just how incredibly opaque and unsophisticated the banking system is in China.
It’s shadow banking is the tip of the iceberg, massive inter-connected bank lending, murky cross-guarantees and opaque WMP - who knows what’s under the surface. Evergrande has borrowed from 120 banks. How will a default affect them? I doubt not even the CCP knows.
You are correct about the contagion effect with Lehman brothers - the issue was the toxic debt was sent throughout the entire global financial system and this is not the case with Evergrande.
1.Evergrande unlike Lehmahn brothers is a property company and as such has hard assets that can be liquidated - the value of those assets is up to market forces so they could be much less than their current book value but its likely investors will get some sort of return between 40-80% of the debt value
2. The risk of the serious contagion is as Evergrandes assets are sold off (at lower values than their book value) then it lowers the value of other property developers assets- ( this involves the concept of LVR/ negative equity issues we love in NZ) - this may mean their asset values become less than their debt values ie negative equity. Lenders and investors then will want to call in their loans for fear if those developers collapse they wont get full return on their debts and will take losses.
3. What then occurs is a property market crash- property developers cash fire sale their assets to meet the demands of lenders and investors and you get the spiral effect - which is it places more pressure on more developers etc hence the contagion effect.
the outcome will really depend on how leveraged property developers currently are, how much property is "fire-saled" and investors appetite for the decline in the property market and how much "negative equity" they are willing to accept and how long they think it will take for property assets to regain their value.
Reading on Twitter that a new narrative around Evergrande is that like COVID, the CCP want to spread contagion to the world. Why? In the longer run it will weaken the world and improve their relative strength.
Instead of a health contagion hurting other countries economies per COVID, letting a property developer fail will be a confidence and liquidity contagion that hurts other countries. Think Australia and their property bubble.
We've already got the disease. Governments publicly lamenting the housing bubble...but then do everything they can to support house prices because any slowdown could hurt growth. China wants to transition its economy away from an economy built on paper money. For political reasons communist governments can't take a punch in the same way a democracy can, when people learn successive Western governments have done the same they'll just elect the other guys but in China there are only one set of guys.
It seems like a dumb idea. The CCP has been warning their RE developers for years to reign in their leverage. The likes of Evergrande haven't listened -- and now it's turned to crap for them. For the government to bail them out now would be inviting fraud. Keep in mind that the CCP has actively been trying to discourage RE speculation. The question isn't "Why doesn't the CCP bail out Evergrande?", but "Why should they?"
No threat to economy and why should it be as the environment we are in, it is literally through the devaluation of currency and the environment that's been set up socially and politically where people are compelled into just finding any speculative vehicle no matter what it is just try to pump some cash.
Speculation alone while adding nothing to NZ wealth has become one of its largest activity and when everyone is trading from doorman to director is a sign of warning though making money as of now.
Every 40 or 50 years financial system changes, last was in 1971 and is now due for a change in next few year.
Yip Dalio thinks long debt cycles last on average 75 years. This one started at Bretton Woods so is now 75 years..anything from here is beyond historical averages…everyone ready for debt defaults/deleveraging?
Having high amounts of debt has been extraordinary beneficial since 1971…but would you want to be holding it at the end of a long debt cycle? If history repeats, then that is a no.
f you've any doubts about how business is being slaughtered throughout this country, read this. My grandaughter, and her hubby are in Franz Josef this morning, on a stunning west Coast day. They went to 2 helicopter companies, to book a glacier flight, but in both cases there were not enough customers, to make it worthwhile. They then went to a 3rd company, and their office was closed. They said they appeared to be the only people in town. There has been no covid in the South Island for over 300 days. This has to stop. The monkeys are running the zoo!
Yip I've been down the West Coast a few times in the last year - it's been dead. You used to have to be worried crossing the road in places like Franz and Fox and getting hit by a tourist in a campervan. Now you can literally walk down the centre of the road, right through town and you might only see one car on the way.
Good.
Flying helicopters around our beautiful isolated areas so people can pretend they have had a wilderness experience is exactly the opposite purpose of why these areas exist.
They exist for the preservation of our natural world, not for noisy, idle carbon consuming sight seer's.
Yeah, Melbourne of all places. I have a remote workmate there who said she felt it and at first had no idea what it was (never felt a quake before) and was surprised how long it went for.
I expect the CCP have invented a secret Earth Quake weapon and were aiming at Canberra. There, I said it first.
Is this a sign of increasing malaise in the property development sector?
https://www.nzherald.co.nz/business/union-green-apartment-developer-los…
This can't be happening !! .......Sheeple, sheeple, sheeple .....don't worry, this is just a "minor blip" in transmission on the local scene , not helped by a world wide pandemic, nothing to see there, move along ......the PPP (property ponzi party) must stride onwards and upwards ! .......we are all salivating for our favorite TV show and those upcoming property auctions of "The Block" just to show how "resilient" these current prices are ! .........that flood of "cashed up" buyers overseas, all lined up waiting for a spot in MIQ to buy $$$ buy $$$ buy $$$ in your neighborhood ......the PPP must continue this "party" at all "costs" ......don't worry about increasing interest rates - just cut back on that Ciabatta BLT with AVO at your nearest overpriced cafe ....... any questions or concerns, just have a chat with Uncle Ashley and he will calm your furrowed brow with all the positive news and outcomes that are in store for YOU ! .....whilst Auntie Annie at "mother herald" will delight you with property stories like "how a poor refugee from a stricken war torn country arrived in New Zealand with nothing but his cattle herding stick and built a property portfolio in 5 months now worth $6,000,000" .....just relax ....breathe ......nothing will stop this "gravy train" to happiness and ultimate riches !
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