90 seconds at 9 am: Growing credit risks

China cuts rates; Australia faces more risk; US targets merchant banking; ECB and EU plan more stimulus; UST 10yr 2.31%; gold and oil up; NZ$1 = 78.8 USc, TWI = 78.5

24th Nov 14, 7:15am by David Chaston

Here's my summary of the key news over the weekend with big news about credit risks from around the world.

In a surprise move on Saturday, the Chinese central bank cut its benchmark interest rates. The cut is part of a wide effort by China to support their economy as its long running expansion slows.

The move also represents a change of strategy by the bank which until now had resisted rate cuts fearing they would make their debt problems worse. But the slowing growth situation clearly means they need to take the risks involved. Tougher credit access for smaller businesses may be a casualty, although they are saying they will address that risk.

In Australia, AMP Capital is warning that their banks could face a larger than expected capital call during a housing crisis than official stress tests predict. They say official stress tests did not account for the impact on mortgages that did not default, and that a severe fall in house prices could push more than half of borrowers there into negative equity.

And in the US, both lawmakers and regulators are starting to think seriously about unwinding a decades-old 'reform' that lets banks run merchant-banking operations. Both a very senior Federal Reserve governor and the head of the Senate banking committee have started discussing the rollback. Rorting of some commodities markets has prompted the rethink.

And finally over the weekend, ECB boss Mario Draghi signaled the ECB is preparing a new round of monetary stimulus to jolt the flagging eurozone economy. Their big concern is the deflation risk that is both a symptom and cause of the eurozone's inability to achieve any meaningful growth. Draghi said they would "do what we must to raise inflation and inflation expectations as fast as possible." And the EU itself is also planning a big fiscal stimulus package.

In New York, UST 10yr bond yields ended last week unchanged at 2.31%.

The oil price starts today slightly higher. It is now just under US$77/barrel and the Brent price is now just below US$81/barrel. Apparently Iran has proposed a 1 mln barrel/day cut off OPEC's production in an effort to get the cartel to respond meaningfully to the supply surge and demand leveling.

The gold price rose as well and is now at US$1,200/oz.

The NZ dollar starts the week a little stronger yet again when it opens this morning. We are starting at 78.8 USc, 91 AUc, and the TWI is at 78.5.

If you want to catch up with all the changes from Friday we have an update here.

The easiest place to stay up with today's event risk is by following our Economic Calendar here »

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11 Comments

by Stephen Hulme | 24th Nov 14, 8:26am 1416770797

RE: AMP Capital

"The standard stress tests don't require additional capital for those mortgages that don't default but change dramatically in loan-to-value terms because of that stress event, and I continue to worry that international investors would have a different view and require more capital to be generated in the system."

Thankfully, this situation is a non-event in New Zealand, since the local uninformed investors (depositors) stand ready to backstop any negative equity developments with the very money they collectively put up to buy the properties in the first instance. The foreign wholesale lenders sit back and smirk that their exposure is preemptively protected by cross currency basis swapped capital retention. How else could it be the case that bank loans to domestic deposits have stood as high as 140% in recent times? Note my demands that depositors get higher not lower risk adjusted returns for their stoic defence of indefensible lending practices.

by steven | 24th Nov 14, 9:45am 1416775505

Wow, fancy words. However isnt it the case that there is a lot of local money (too much) sitting in deposits because us locals (ie OAPs) are too petrified after the finance company debacle to move it out?

Would it also be fair to say that in a credit event of the size triggering an OBR event wouldnt this have by then destroyed the finance company sector (again) first?

So in effect deposits are probably least risk? and hence attract the lowest return?

In any event, simple, if you dont like the returns v risk profile, remove your money.

regards

by Stephen Hulme | 25th Nov 14, 7:53am 1416855200

In any event, simple, if you dont like the returns v risk profile, remove your money.

Exactly, and leave the costs at the poorer end of town.

There has been a slowdown in non-market

funding growth since the start of 2014. Larger deposits

of more than $50 million have been a key contributor to

this slowdown (figure 5.5). Read more page 39

Demand is certainly picking up for short end sovereign debt alternatives.

.....today's 2 Year auction, which just priced at a hot 0.542%, or 1.1 bps through the 0.553% When Issued, indicating more than ample demand for Treasury paper. Further confirming the demand was the surging Bid to Cover, which at 3.714 was the highest of 2014, and the most since December's 3.767.The internals too showed demand across all buyer classes, with Directs taking down 16.2%, Indirects getting 35.83% of the auction and Dealers left with 48%, or just a fraction below the 12 month average. Read more

I can recommend today's NZDMO's domestic tender of TBills- check it out and place your bids before lunch time, others will - details here - and the taxpayer cannot wriggle out of paying the investor back, unlike the banks.

by Roger Witherspoon | 25th Nov 14, 9:14am 1416860079

Good idea. Who do you use to buy them through, Direct Broking?

by Stephen Hulme | 25th Nov 14, 10:28am 1416864539

ANZ Treasury and I have a NZDMO repository A/C @ computershare.

by Roger Witherspoon | 25th Nov 14, 10:37am 1416865044

Thanks Stephen.

by steven | 25th Nov 14, 10:50am 1416865850

"cash and cash like things" cash or short term Govn bonds. Though the Govn can by defaulting? somewhat extreme I'll admit, very Greece like. Company bonds? some OAPS ran out of finance comapnies into them, oh boy will that be one to watch.

It is interesting that "Demand is certainly picking up for short end sovereign debt alternatives." this would be expected if deflation and a serious recession was expected?

regards

by Andrewj | 24th Nov 14, 11:09am 1416780553

and so many of the best loans have been used to secure covered bonds , exposing depositors even more.

http://www.interest.co.nz/bonds/70065/fitch-says-nearly-quarter-covered…

http://www.interest.co.nz/bonds/70460/westpac-borrows-%E2%82%AC750-mln-…

by Henry_Tull | 24th Nov 14, 3:09pm 1416794991

and with a little lesser blue sky

We’ve seen several competing views as to whether the Australian agreement will be good or bad for New Zealand, which signed an FTA with China back in 2008 – the first developed country to do so. Our view is that the simplest answer is the best: to the extent that we will lose some of our ‘specialness’ in the Chinese market, the Australian FTA is a negative for New Zealand on balance. But that balance includes a range of smaller positives that could partially counteract the main negatives. The main effect for New Zealand will be that Australian exports of agricultural products, particularly dairy and meat, will become more price-competitive in the Chinese market as the tariffs are phased out over the next several years. That in turn will put downward pressure on the prices that New Zealand exporters can garner in China. http://www.westpac.co.nz/assets/Business/Economic-Updates/2014/Fortnightly-Files-2014/NZ-Fortnightly-Agri-Update-19-November-2014.pdf perhaps a trip to the The Centre for Value Chain Research is in order. https://www.youtube.com/watch?v=mu9TWlcjNKk but how to right the balance taken by the supers - other than adding giant sized serves of sugar to the flavoured milk (its a shame the supers only + responding to such). - any wonder the milk is at the far end back of the super store, Australians now spend 10 per cent of the nation's annual grocery bill on tobacco products, and one in every five dollars spent at supermarkets goes on cigarettes or junk food, according to confidential industry data.

Of the $85 billion spent on supermarket groceries each year, raw meat, fresh fruit and vegetables contribute an estimated $28 billion. But the fastest growth rates are coming from tobacco and junk foods, which now top $17 billion of combined sales.

by Boatman | 24th Nov 14, 10:51am 1416779494

Unintended Consequences of unorthodox monetary policies .

I was wondering when the effects of lax monetray policies everywhere would eventually turn around and bite us on the backside, and now just when we thought we were out fhe woods we see all sorts of things we did not anticipate

Nouiel Roubini called it kicking the can down the road , and a dictionary of new acronyms and names were invented to describe this phenomenon of reducung the value of money to zero by printing , a test in these unorthodox , some would say ...... looney, ideas

QE , Eurobonds , Japan's Abenomics , even the Aussie dished out cash to its ctizens and reduced rates to such low levels it destroyed elderly savers nest eggs everywhere.

The state wanted you to spend, spend, spend and do it on credit if you did not have the cash .

Instead the printed money fueled stock markets , house prices and other passive income assets , none was used for real productive growth .

In Japan the stimulus did just the opposite to what they expected , the people saved the new printed money or bought passive income assets (or saved it in NZ) , and did just the opposite to what the state wanted

Now Japan is back in recession , Europe is a shambles , China is slowing , Aussie has seen commodity income fall , and IT WILL AFFECT US TOO .

Simply , we need to sit on our hands while this mess unravels itself , keep paying down or stay out of debt and long term obligations which we may not be able to afford if things go wrong

by J.C. | 24th Nov 14, 12:11pm 1416784260

That is not entirely correct. For example, Japanese foreign direct investment in SEA is booming as Japanese companies invest in massive infastructure projects and shift their manufacturing bases from China or Japan. Secondly, Japanese private investors have not been investing in "passive income assets" and it was never the intention of the Japanese government in the first place.