Here's my summary of the key issues that affect New Zealand overnight with news of record low oil prices.
But first up today, the latest Fonterra dairy auction held overnight saw prices rise. They were up +2.4% in USD terms, up +2.5% in NZD terms. Leading the way was butter which rose +10.4%. The key wholemilk powder price rose +1.4% with SMP down -3.2%. This is the third rise in the past five auctions and over that period overall prices have flat lined. Volumes offered and sold this time were low, the lowest since June. The Kiwi dollar pipped up on the results.
However, at US$2,270/tonne WMP prices are still a long way below the US$3,000+ level they need to be to support Fonterra's 2015 payout forecast.
American building permits and housing starts in November all grew at a slower rate over October and in some cases the growth was less than a year ago. But the trends are all higher.
It was a similar story in the American manufacturing sector. Output and new orders continued to rise at a solid pace in December, but both rates of expansion eased to the smallest for 11 months.
In China, their factory activity actually shrank in December for the first time in seven months, the latest in a string of weak economic indicators that will intensify calls for more stimulus measures to head off a hard landing. Despite all this, there was actually quite a sharp rise reported in foreign direct investment into China in the year to November in data out overnight. It is up more than +20% year-on-year.
In Europe the story was a bit brighter. Eurozone business activity grew at a slightly faster rate in December, but the pace of expansion was still one of the weakest seen over the past year. But as the ECB people reminded us overnight, despite the talk, the Eurozone is not [yet] in recession.
As we reported late yesterday, the Russian central bank imposed a sudden sharp rise in official interest rates to try and halt the slide in the ruble. The rate jumped from 10.5% to 17%. Despite this, their currency fell to record lows again overnight, inducing further panic in the nation’s financial industry. They have spent US$80 bln defending the ruble and that has now stopped. They say they have no plans to institute capital controls, although that is the sort of thing you say just before imposing them.
Benchmark UST 10 year bond yields fell again overnight and is now at 2.05%. We will get the echo in local swap rates here today. Interest rate markets are now awaiting tomorrow's Fed decisions, especially how it handles its now-famous two words "considerable time".
The oil price is down again, now at US$56/barrel although it did briefly slip below $55. The price of Brent crude is now below US$60/barrel. It has not been this low since 2009. Many large exploration and development projects are now threatened.
The gold price also fell, now below US$1,200/oz and at US$1,196/oz.
Despite all this apparent turmoil, stock markets are higher with the S&P500 back over the 2000 level.
We start today at 77.9 USc, 94.8 AUc, and the TWI is at 78.3.
If you want to catch up with all the changes yesterday 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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As we reported late yesterday, the Russian central bank imposed a sudden sharp rise in official interest rates to try and halt the slide in the ruble. The rate jumped from 10.5% to 17%. Despite this, their currency fell to record lows again overnight, inducing further panic in the nation’s financial industry. They have spent US$80 bln defending the ruble and that has now stopped. They say they have no plans to institute capital controls, although that is the sort of thing you say just before imposing them.
In another life, a bank dealing room attack on the French Franc, in the lead up to the introduction of the Euro, motivated French authorities to hike the overnight rate to 1000% - they survived, as did the dealing room.
I wonder if at some point collapsing a country's economy will be classed as Treason and the perps hung, or in the french case le chop. Or maybe a simple angry mob lynching, some bankers seem to think they need protection, I think they maybe right.
May you live in interesting times....
regards
Does the sort of thing the Russians are doing ever work? They are putting up interest rates to combat capital flight, surely that is an exercise in futility and stupidity? Why would a change in interest rates stop capital flight in a panic? I assume people are trying to get their money out while they can, so they see a choice between something or nothing, not between two interest rates.
I think the BRICS did it this or last year? and not with great success.
Futility, maybe yes, stupidity no, desperation, yes. Looks at who holds the debt, private institutions? aka the 'free market" at um work. So the CEO's willingly and freely took on huge debt aiming to make a profit as their good was essential and profit guaranteed, and oh dear its all going wrong.
"so they see a choice between something or nothing, not between two interest rates."
Indeed the "free market lenders" running away from the "free market borrowers". In between we probably have the free marketer hedge funds and bank trading desks probably doing whatever they do gambling on an outcome (shorts?and maybe naked ones at that) to make money at other peoples pain and suffering.
Pretty much the free market at work, enjoy.
I sometimes wonder if when we see some of them lyched, shot or otherwise dead I should feel sorry for these dead bankers. I think life as so precious and unique, yet when you have a set of people knowingly and amorally destroying others lives, incomes and dreams just to make more pointless $s, I can but think of them as evil.
Yes, there is an element of truth to what you claim - but there is a speculator class shorting any ruble currency pair just for short term gain, because they can. Tom/Next rolling that short starts to cost real money if Ruble interest rates start to escalate - in recent days it was costing more than 4.0% to roll NZD/USD shorts in the interbank currency market due to claimed seasonal illiquidity.
or a forecast. Let’s go back to two paragraphs I wrote last week:
Texas has been home to 40% of all new jobs created since June 2009. In 2013, the city of
Houston had more housing starts than all of California. Much, though not all, of that
growth is due directly to oil. Estimates are that 35–40% of total capital expenditure growth
is related to energy. B
1. In recent years, America’s oil & gas boom has added $300–$400 billion annually to the economy – without this contribution, GDP growth would have been negative and the nation would have continued to be in recession.
2. America’s hydrocarbon revolution and its associated job creation are almost entirely the result of drilling & production by more than 20,000 small and midsize businesses, not a handful of “Big Oil” companies. In fact, the typical firm in the oil & gas industry employs fewer than 15 people. [We typically don’t think of the oil business as the place where small businesses are created, but for those of us who have been around the oil patch, we all know that it is. That tendency is becoming even more pronounced as the drilling process becomes more complicated and the need for specialists keeps rising. – John]
3. The shale oil & gas revolution has been the nation’s biggest single creator of solid, middle-class jobs – throughout the economy, from construction to services to information technology.
4. Overall, nearly 1 million Americans work directly in the oil & gas industry, and a total of 10 million jobs are associated with that industry.
http://d21uq3hx4esec9.cloudfront.net/uploads/pdf/141216_TFTF2.pdf
IS CHINA STOCKPILING OIL ???
I saw a tiny little one line note on BLOOMBERG saying the Chinese have booked out ALL the VLCC's they can get hold of .
There are now no VLCC 's to rent , usually about 20% of the worlds VLCC fleet is available at short notice
A VLCC is a Very Large Crude Carrier.
What are the these people up to now ?
For a bunch of Communists , they certainly are very commercially astute !
Yes, it was reorted on this site about 2 days ago that 93 tanker were on their way to China.
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Strange assumption on your part that being a communist should automatically be incompatible with being commercially astute.
From their point of view it makes sense, they have no own natural energy resources apart from coal, so when the price of oil has dropped to such low levels, and you have cash to spare, why would you NOT stockpile?
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Also, I wouldn't call the political party in today's China as communist, even if they call themselves that. I'd call them a totalitarian plutocracy or particracy.
Its been well commented on, they are filling their newly created strategic reserve (just like the USA has) with something like a VLCC per day while its "cheap".
Just consider for a moment they are doing this, yet the price of oil is still dropping like a brick, so when they are full, what then for the price? These ships can transport 2,000,000 barrels (320,000 m3) of oil/318 000 metric tons, (basically per ship, per day) so chienese demand is artificailly high by maybe 2mbpd. So down to $30USD seems believeable.
A VLCC is classed as a 250,000+ dead weight tonne vessels by the way to give you an idea of size. ULCC is 500,000+ I think from memory and something like 400ft long.
War waged on them?
Because the Chinese are deinitely smarter than starting a war with anybody themselves. One of the advantages of living in a country that's had the longest continuing 'history' is that you tend to take the long view on things.
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The Chinese can afford to, and have the patience, out-wait everybody. They're not in a hurry.
Back about the mid-nineties i was reading a serieies af articles.
China was threatening Tiawan and this led to an exchange of tough talk between America and China.
Basically, America told China if it attacked Tiawan it would also be at war with America.
It was then reported that China was determined to take Tiawan back, but in order to do so it must be ready and prepared to go to war with America.
China increased spending on its military and continues to do so. Presumable to take back Tiawan and stop American intervention.
Taiwan was lost to Chiang Kai Chek in the civil war of 1949. The Chinese hate losing face - same as with Tibet, they claim Taiwan as theirs and to admit that it isn't is admitting defeat. They will never do this.
They're also too crafty to go to full out war, though. As I said, they're not stupid, and they have a lot of patience.
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They just claim back these territories by different, slower means.
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The only thing which will stop China (apart from huge natural disasters) is another civil war, but China does not like to air its dirty laundry in public....see above re losing face..
Dear Client,
Please be advised that that most Western Banks have stopped pricing USD/RUB. As such, FXCM can no longer offer this instrument to our clientsand will begin closing any existing client trades in USD/RUB effective at Noon EST today, December 16th, 2014,
http://www.zerohedge.com/news/2014-12-16/russian-ruble-hereby-halted-un…
Volumes offered and sold this time were low - seems Sandy may be on to something
Q: where is volume
Rabobank Dairy Research specialist Sandy Chen told members of the Irish trade delegation visiting China this week [6 weeks ago] that it will take up to 12 months for the Chinese market to strengthen significantly. “A combination of large existing stocks and the perfect global conditions in which to produce milk have served to dampen the Chinese market for dairy products during the second half of 2014,” he said.
“And it will take until the second half of 2015 before Chinese buyers become more active in terms of purchasing enhanced levels of imported product.
The members of the trade mission were also told that safety of dairy supply is a key driver for Chinese consumers. “New Zealand has been at the centre of a number of food scares over recent years,” the Rabobank specialist pointed out. “As a consequence, Chinese importers have sought to diversify their sources of dairy product supply. And this is, potentially, good news for milk processers in the EU. New Zealand currently supplies 80 per cent of China’s imported dairy requirements. This figure could well drop over the coming years.
http://www.agriland.ie/news/growth-chinese-dairy-market-expected-quarter-3-2015/
Re Dairy Prices , they had to rise , they were reaching unsustainably low lelves , and the market always corrects or comes back somewhat after a big swing .
I also think that the OIL price has reached unsutainably low levels , and has to correct in due course .
The shocks being felt by oil producers like Russia , Nigeria ( biggest economy in Africa ) Venzuela , Mexico and Middle east will really only be felt by the West when big oil companies pay lower taxes in Eurpoe due to losses and when British pensions from BP and Shell Oil start dwindling .
Global Milk Glut Is Udder Misery for New Zealand Farmers
http://www.wsj.com/articles/global-milk-glut-is-udder-misery-for-new-ze…
Quite a different view on Russia from George Friedman than you will get from MSM.
Russians' strength is that they can endure things that would break other nations. It was also pointed out that they tend to support the government regardless of competence when Russia feels threatened. Therefore, the Russians argued, no one should expect that sanctions, no matter how harsh, would cause Moscow to capitulate.
If this is so, then the Americans and Europeans are deluding themselves on the effects of sanctions. In general, I personally have little confidence in the use of sanctions. That being said, the Russians gave me another prism to look through. Sanctions reflect European and American thresholds of pain. They are designed to cause pain that the West could not withstand. Applied to others, the effects may vary.Here is an interesting comment I picked up from zerohedge. Hard for us plebs to really know though. Keep your eyes and mind open.
Remember the basics. "The effect of the ruble falling is to increase the price of imports to Russia. And so Russia’s response has been, okay, if we have to pay more for our food, then we’re going to subsidize our own growing of food. And Russian farm output has been rising very rapidly to replace the imports that it was making from Lithuania, from France, and from other European countries. Putin was also saying, now we’re going to begin to subsidize our manufacturing. We cannot depend upon the Germans, the French, or the Europeans for their manufacturing. We’re going to depend on China, on Turkey, and most of all on our own manufacturing. And the sanctions against Russia have actually proved to be a godsend, because it enables Russia to do essentially what it would have liked to do but couldn’t do under international law: to subsidize and protect its own industry"
And this in response:
Indeed the Russian sanctions will work to slow down the velocity of money worldwide and especially in Europe, which means that NIRP interest rates and QE cannot ever stop in Europe or the US. This wil eventually destroy te currency.
A bit like saying 'being cut off from world trade when the oil price made shipping too expensive for new zealand, was actually a godsend. NZ was able to protect and support it's own industry. It even has a thriving car assembly industry turning out 2000 cars every year'
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