90 seconds at 9 am with BNZ: Moody's warns on US credit rating; S&P warns on potential 75% fall in commodity prices; Groupon seeks US$750m

90 seconds at 9 am with BNZ: Moody's warns on US credit rating; S&P warns on potential 75% fall in commodity prices; Groupon seeks US$750m

Gareth Vaughan, sitting in for Bernard Hickey, details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including news credit rating agency Moody’s Investors Service has warned it will place the US govt’s AAA credit rating under review for possible downgrade if no progress is made on increasing the country’s statutory debt limit by the middle of July.

Moody’s said heightened polarisation over the debt limit had increased the odds of a short-lived default.

A bill that would raise the US$14.3 trillion limit by US$2.4 trillion failed to secure sufficient support in the House of Representatives on May 31 with Democrats claiming the vote was rigged to ensure its defeat. Republicans who control the House, say they don’t support lifting the limit unless President Barack Obama’s administration agrees to significant spending cuts.

US Treasuries fell on the Moody’s news, sending yields up from their lowest levels of the year, and the US dollar dropped.

The Moody's warning follows a similar one from fellow credit rating agency Standard & Poor's (S&P) in April.

S&P is now warning a sudden slowdown in China may lead commodity prices to fall by up to 75% from current levels. Unexpected changes to govt policies or problems in the banking sector could trigger such a drop, S&P says.

The S&P index of 24 commodities dropped 6.8% last month, its first fall since August, as inflation rose in China leading to suggestions economic growth will slow. China’s equivalent of the Reserve Bank has raised benchmark interest rates four times and increased banks’ reserve capital requirement ratios by three percentage points since September. See a recent interview here with S&P China banking analyst Ryan Tsang.

According to a Bloomberg survey of analysts, China’s gross domestic product may grow 9.5% this year, down from 10.3% last year.

And in the latest move by an internet company to tap keen investor demand, Groupon, a Chicago-based provider of online coupons, wants to raise US$750 million in an initial public offering.

Groupon’s float follows the recent one of social networking site LinkedIn which is now valued at US$7.4 billion, or 31 times last year’s sales.

Groupon had revenue of US$644.7 million in the first quarter but made a US$113.9 million net loss.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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24 Comments

the and Greeks got a downgrade, Its the falling demand thats hurting China. 

 

 

The three-notch-downgrade takes Greece from B1 to Caa1, giving the country a worse credit rating than Montenegro.

Moody's said it was very concerned about Greece's "highly uncertain growth prospects" and warned that the embattled country is "increasingly likely to fail to stabilise its debt ratios" by the deadline set by its previous €110bn (£96.7bn) bailout.

 

jonlivesey

43 minutes ago

Recommended by 
8 people

 

I try not to be too extreme in prediction, and so far it looks like I am succeeding since about everything I have predicted over the past two years has come true.   Greek crisis, Irish, Portuguese ditto.   Failed ECB policies, falling US and UK interest rates, and even the collapse of that idiotic silver bubble.   I just have to take enough ignorant abuse on a given topic and I know I am probably on to something.

So here is another one.   I think that the ECB is on the verge of making a mistake that historians will one day call colossal, and which they will compare to the Great Depression.

We know that the European economy is now completely unbalanced.    At one extreme we have Germany with 7% unemployment, about the same as the UK, and at the other extreme we have Spain with 21%.     At one extreme Germany is in a period of fairly strong export led growth, while at the other, countries like Greece and Ireland have shrunk by about 15%.     Ireland's collapse is now so serious that it is leading to renewed emigration to the UK.

In a situation like this, what do you do?   Well, one thing you don't do is anything that will make the whole thing worse.

But that looks like being what the ECB is about to do.   It has two problems that in some sense conflict with one another - economic decline and rising unemployment among the PIIGS, but rising inflation in Germany.

I think a sane person would say that inflation is an inconvenience, but getting people back to work is much more urgent.   But we have Germany's weird neurosis about inflation to deal with.   To a German, one whiff of inflation and it's 1923 all over again.

And it looks like the ECB is going to do exactly the wrong thing.  The current Euro exchange rate suggest that the markets fully expect the ECB to raise rates sometime pretty soon.

That will reassure Germans who think they live in the Wiemar Republic, jolly good.

It's what else it will do that is the problem.   Rising rates will kill recovery in Greece, Ireland and Portugal.   That will delay their return to the markets even longer and cost the Euro area taxpayer even more for new bailouts.   Rate rises will tip Italy, already at zero growth, into recession.   They will make Spain's urgent recapitalization of its Banks that much more expensive.   They will even widen the already looming gap between German and French economic performance.

Yet I think the ECB will do it.   For the sake of an essentially meaningless metric, inflation, in one country, they will risk setting off what will look like a full-blown Depression in Southern Europe.

And then, I suppose, they will sit back full of self-satisfaction and ask why the Anglo-Saxons didn't follow their example.

All the while watching the Depression spread around the world and wonder why....

Then before they can get their fat asses out of their executive chairs they will fill their underwear as Greece defaults and pushes the German and French  banks to their knees.....Round 2 will be, once there Ireland and Portugal will go at the very least...and probably Spain as the spanish banks and pension funds hold so much eu debt...then its game over...financial freeze time for months as the entire system locks up....forget eftpos....etc...

Then American GOP etc will "rejoice" because for the next few decadess they will say it was all the EU's fault.....as they also sink into Depression....

regards

 

 

 

I'm sure these are all variables that our treasury have factored into their forecasts..!!!!! 

    Ah...Nothing like a treasury forecast to make me feel safe and sure..!!!

The fact that China is slowing down is what is going to cause the 75% downturn in commodity prices...Yeah Right!

3 years ago China hardly slowed...Yet oil collapsed from $147 to $35....35/147 =23.8% of its peak value.......100-23.8%  is pretty close to 75% in my book and it could easily be worse this time...so its not without precident.

ie China in best socialist fashion is doing make work to make its GDP look good....think on 10% annual gdp growth is a doubling of the chinese economy every 7 years....where does a China twice as big, sell its goods to? hence why its doing make believe GDP....I think its real economy is in a bad way....

Once China slows and Im convinced it will, Oz's mining boom is over....the chinese will stop buying over-night....ship loads of iron ore at sea wont be paid for....the oz mining corps will stagger....they wont be buying our milk formula either.....

This wont be a small event....when it happens.....

regards....

 

<Start ROTFLOL>

You think that because China slowed a tad in 08’ that is why oil collapsed from $147 to $35/bbl? If I recall I’m sure you were part of the “sky is falling peak oil” argument in June of 08’. And I was making the argument that speculation was driving the price up. But now it’s not peak oil it’s China’s fault!! Are you seriously going to keep a straight face and simultaneously keep that train of thought? If so you’re suffering from cognitive dissonance.

Fact: The only commodity that China is hording is Copper. A 75% drop in commodities prices across the board has absolutely NOTHING to do with China and everything to do with a rigged finical market and speculators gaming the roll dates. I implore you to disregard China, peak anything, or (insert flavor of the month here) and look very carefully at how the futures market really operates.  

I do agree with you that China slow down = OZ slow down = OZ banking crisis = OZ lowering rates = NZ lowering rates = rinse/repeat.

<END ROTFLOL>

No I didnt say that....I said China didnt slow significantly last time, this time its more than likely IMHO therefore the price collapse across all commodities if china slows will be significant and fast. 

If I was China with lots of worthless USD and I accepted that we were in the time of peak everything, I'd give the commodity producers as much USD I could for raw materials and stock pile as much as I could as a buffer....so if Chinese govn decides its going to stop buying its going to be very quickk I think....we'll wake up on a Monday morning and by Friday be in deep doo doo.

Sure specualtion paid a part in the 08 price rise and sure when the specualtors ran it started to correct....and then the real economy's lack or demand finished it off....speculators can only make $ when there is a restriction in the supply of something and more demand than can be forefilled....

regards

Actually Troy a whole range of Goods are being hoarded in China, cotton, copper, rare earth metals, even salt and tomatoes. Their government has had to crackdown on hoarders of coal and diesel because it would jeopardise growth prospects.

Troy - actually, the discussion acknowledged that investment magnified the effect, but that it was all about a price at the margin, and about demand destruction.

I was also pointing out, that trying to 'value' the real underwriting of everything - energy - using a secondary construct - money - was flawed. Fatally so.

I suggested using Boolian algebra, 

But I've been suggesting for years, that the only value worth relating to, is the work potential of something.

 

 

I find it interesting that last time the Saudi's were claiming that it was all speculation and that we were awash with oil and they had many mbpd spare.....yet if that was so all they had to do was open the spigots and let more in, and that would have wiped out the speculators, they never did.  this time despite the price they are not pumping more but have "decided" to reduce output...I certainly dont recall them commenting on it being the speculators again.....They must grok that a too high a price is counter-productive and collapse the developed world's economies at teh very least and that with a highly in-elastic market even s slight mis-judgement will cause a huge price spike.....

regards

Colin Riden posted this on a Rural thread but I think its worth reading. Makes one wonder about the depth to the market

 

by Colin Riden | 02 Jun 11, 11:10pm New

0

 

I have come under pressure from those I sometimes provide with analysis of dairy prices to correct misleading information about Fonterra's prices in today's auction. While that risks stirring up this site's trolls the issue does have relevance to my questioning of the accuracy of ANZ's commodity price index.

This morning Bernard ran a headline that included the statement: "Fonterra auction price up 4.5%". That is factually incorrect.

Fonterra's own data shows a weighted average price for all products of USD 4,306 per tonne, down from the previous auction at USD 4,443 per tonne.

There was an all products gDT-TWI that was up 4.5% but it is an index. Why does just about everyone believe dairy commodity prices rose 4.5% today when they actually fell? How did the index rise 4.5% when Fonterra's published weighted average price fell approx 3%?

To answer that you need to understand what is behind the index. Fonterra's index, while much cleaner than the ANZ's in that its methodology is open and prices are based on real sales and not spot prices, still needs to be treated with caution.

Fonterra's all products index is based on three products: WMP, SMP and AMF currently weighted 52:40:8. That represents the ratio of world trade for the three products.

Todays auction sold product in a ratio likely to be 72:9:19 – we can't tell exactly because Fonterra has a three month delay in releasing the precise volumes sold. Volumes on offer today were down from the last auction for SMP and AMF but up for WMP. It is surprising any volume offered was down as at this time of the year we are talking delivery times mostly across peak milk production.

The volume of WMP offered today is in line with last year's volume – 12,000-12,500 tonnes versus 20,250-21,500 last June (then monthly rather than bimonthly auctions). The USD price today is identical to that 12 months ago, but down USD 840 per tonne from March 1st (contracts 1 and 2 are down 24%, and contract 3 is down 14%). All contracts appear to be converging around USD 3,750 per tonne. NZD:USD at June 2010 was though approx 0.70 compared to 0.80 today so in NZD terms there is an additional 12.5% fall in value from changes in the exchange rate.

The quantity of WMP offered today was approx 1.2% of NZ's WMP exports over the past 12 months. Across all WMP contracts the price is down 3% from the last auction (contracts 1 and 2 are down approx 6%, contract 3 is nearly flat).

SMP is however where it gets interesting. Today's average price across all SMP contracts is up 12.9% from the last auction, but against a volume of between 1,450 and 1,750 tonnes compared to June 2010 where volume offered was 9,700-10,000 tonnes. Taking bimonthly auctions into account, today's auction offered less than a third of the volume at the same period last year. Tday's volume offered is less than 0.5% of NZ's SMP exports for the last 12 months. The price though is USD 4,372 compared to 3,067 last June when SMP auction prices were in something of a hole. Today's price is also up USD 900 per tonne from March 1st.

Todays SMP price reflects a very restricted volume on offer (only making 9% of todays WMP+SMP+AMF volume) but it still made up 40% of the gDT-TWI index. AMF prices were up 6.2% on decreased volume, but those AMF prices were under represented in the gDT-TWI index. WMP made up 72% of today's auction volume but only made up 52% of the index.

WMP is what matters most (exports for the last 12 months have been 1.068 billion Kg) but WMP prices have suffered a hit that has not been compensated by higher SMP prices because annual SMP export volumes are less than a third of those for WMP, and currently on globalDairyTrade are at less than half of that ratio.

Beware both indexes and averages, and particularly of press releases spinning either.

 

 

Very convincing analysis. So is Colin inferring that a payout of $7.80/kgms is no longer realistic? Maybe we won't see all that rural debt being retired like so many are predicting...

Yesterday's auction was for delivery 2-8 months forward - August 2011 to February 2012. Prices now will have almost no impact on the 2010-2011 payout but will on the 2011-2012 payout which is why that has been set around the $7.00 mark. Nothing I set out was telling Fonterra anything they don't already know better than I do. It is just the rest of us that does not know it.

The more important question is why such a concerted campaign to obscure reality and talk up the performance of Fonterra and the dairy industry is needed. Both Fonterra and most milk producers have had a very good year without any need to spin it further. Perhaps the industry doesn't know any other Modus Operandi.

Next year and the year after aren't though going to be nearly so good. Knowing that now would allow better business planning and sounder assessment of risk, but unfortunately that is not the way NZ agriculture works.

sounds like the powers that be think, 'as they believe so shall it be'.  Looks to me that we are nearing the top of the commodity super cycle and about to decend. However some believe they can can alter the future with positive thoughts even though the knowledge they are spreading may be harmful to their shareholders. We appear to believe in commodity cycles when we are on the upside but not on the downside.

sounds like the powers that be think, 'as they believe so shall it be'.

So true - great examples of that thinking are provided by one author of a couple of today's articles on this site.

why such a concerted campaign to obscure reality and talk up the performance of Fonterra and the dairy industry is needed...

- so that we are led to believe there will be significant flow-on effects to the rest of the economy

- so that we are led to believe that the exposure of banks to rural debt is less risky than it is

- so that we are led to believe that it is a good thing the the dairy industry gets unimpeded access to the nations's water resources

- so that we are led to believe that there is no necessity to deviate from the status quo (...and will forever remain a low wage commodity-based economy)

and so on and so on.

What always puzzles me is that talking up agri-commodities is a good way of talking up the NZD, a bit like shooting yourself in the foot (...and knee-capping non-commodity exporters in the process)

Friday Market Update is suggesting Fonterra, CRA International (the auction manager), and perhaps NZX, should sort out what happened.

The results for SMP should raise a question about whether they really reflect current supply and demand for that product. They are actual prices, which is one requirement of New Zealand’s commodities exchange, NZX, for using them to cash-settle futures contracts and options that were established as risk management tools to help industry participants manage price volatility. Because the prices are published they also satisfy the transparency objective. But the small amount of total SMP volume available for purchase, and the related futures securities, makes one mindful of concerns about the thinness of CME’s spot markets, and complaints about their vulnerability to price manipulation. Just one month ago, on May 4th, NZX reported all settlement prices for WMP from May through August to be higher than those of SMP, about in line with the auction’s winning prices for those products. Today, NZX reports all settlement prices for WMP from June through next February to be lower than those for SMP.

The pattern of winning prices for AMF and WMP seem to reflect consensus views on current and future international supply and demand. Because they are so contrary to industry data, for SMP’s winning prices to be considered a reflection of fair value for international buyers and sellers it’s almost needed to assume the only SMP supply source for the winning bidders is the auction – or to chalk it up to a huge speculative move. The winning average price for SMP on May 17th was $.038 per lb lower than the winning price two weeks earlier. Two weeks later something made some bidders for SMP to keep their bid volumes in play much longer than usual. It is up to Fonterra, CRA International (the auction manager), and perhaps NZX, to sort out what happened.

Meanwhile, NZX continues spinning this line:
The average price of milk powder rose 4.5 per cent to US$4,306 per metric tonne in Fonterra Cooperative Group's latest online auction. That comes after the ANZ Commodity Price Index showed New Zealand commodity prices edged up to a new record in May.

The E.coli strain issue is an excuse to protect local growers. The world is slowly going to protectionism as the deck of cards falls.

Very good analysis of dairy reporting Colin.....I have always believed the ANZ commodities index as gospel......should have known better with a bank is involved.

Maybe the dairy job will need to be a liitle cautious over the next 12 months.

Hard to believe that China is going to cause a 75% drop in commodity prices?

Where do these guys get their figures from?    .........guess   scaremongering?

Hi Realist, one month or so ago some lady/analyst came up saying that the Canadian housing market was headed for a 95% drop in prices. Talking about mongering,.. Can a house be that overvalued ?... and who would be so stupid as to pay that price ?.

Believe it or not.....

 For profit colleges in the usa that are taxpayer funded....sign up mug students to bloated debt...for a course of study leading to a degree in Culinary Arts........and include burger-flipping as a required skill and area of study.

http://globaleconomicanalysis.blogspot.com/2011/06/inane-department-of-education-ruling.html

 

Wolly, look what happens if you don't pay up on time

 

Im telling you, our goose is cooked.

The other day my bank shut-down after 30 years in business without any sign they were in trouble.
Whoa. You talk about shattered confidence; that'll do it every time. There I was in a long line of nervous-looking 50-somethings chewing on their lower lips and scowling while they made their way through the front door of the bank.

"Er, Mr. Bank Teller, could you tell me; do I have any money left?"

Don't kid yourself, when your bank goes under, it changes your world view. And it changes your feelings about America, too. Forget about security; it doesn't exist anymore. They'll fleece you out of your life's savings without batting an eye. Bankers are all crooks, every last one of them. And we're all just chickens for-the-plucking.

There was an article in USA Today that really sums up how bad things have gotten. The article is titled "Feds chase more student loan defaults". Here's a clip:

"The government increasingly is threatening to sue people who've defaulted on their student loans to get the money back. The number of loan defaults that the Education Department has referred to Justice Department lawyers for possible legal action has risen dramatically since before the recession and nearly doubled from 2009 to last year....

If the government does sue, it can go after wages and bank accounts, put liens on people's property and hold parents responsible for their children's debt if they co-signed the education loans. "The most important thing to remember is we want the loans repaid," says Jane Glickman, Education Department spokeswoman.

Can you see how sick this is? Since when has the Justice Department become a collection agency for private industry? Let the banks hire their own goons for Chrissake. They'd probably like that better that anyway.

And why is the DOJ shaking down our kids when the guys on Wall Street who created this mess are still slurping Bordeaux and figuring out new ways to ripoff Uncle Sugar? The whole thing is backasswards.

Any country that preys on its kids to make a few bucks is on it's last legs.

America has lost its way. Sooner or later we going to wind up in the same dustbin as the Soviet Union. 

Mike Whitney

FYI, separate story up now on the S&P commodities report complete with the full report attached - http://www.interest.co.nz/rural-news/53761/standard-and-poors-raises-spe...

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