Oil price remains in free fall; Chinese trade surprise; Carney sees potential for deflation; Will the ECB's QE actually work? NZ$1 = US77.22c, TWI =77.17

Oil price remains in free fall; Chinese trade surprise; Carney sees potential for deflation; Will the ECB's QE actually work? NZ$1 = US77.22c, TWI =77.17

Here's our summary of the key overnight news.

The ongoing theme of falling oil prices continues, with both Brent crude and US crude touching levels not seen since March-April 2009 of below US$46 and US$45 a barrel, respectively. According to Reuters, prices have tanked 60% in the past six months, with Brent down 8% and US crude down 6% this week alone. Bloomberg reports speculation US oil stockpiles will be increased thus compounding a global supply glut, is helping push prices down.

Against this backdrop, US shares fell again and US$21 billion of 10-year US Treasuries notes were sold at a yield of 1.93%, the lowest since May 2013.

Meanwhile, Chinese export growth beat economists' forecasts in December, rising 9.7% to US$227.5 billion, and a drop in imports was also narrower than expected. Economists’ had forecast an exports rise of 6%. Imports fell 2.4% to US$178 billion, versus the expected 6.2% fall. China's December trade surplus was US$49.5 billion.

Here's what ANZ's economists had to say about the Chinese trade data.

China’s December trade data made for interesting reading with record high iron ore and oil imports as lower prices prompted stockpiling. China oil imports rose by 19.6% month-on-month in December and 13.5% on an annual basis. Brent oil prices plunged 23% in December, supporting strategic and commercial buying. With oil prices at 5½ year lows, two new storage projects for emergency stockpiles could see China place as much as 5-10 million tonnes of crude into strategic reserves by the middle of this year.

Iron ore imports jumped 30% month-on-month to 86.9 million tonnes in December – the highest on record. Seasonal dynamics explain part of the restocking demand, with December and January imports usually quite high. A 7.5 million tonne drop in iron ore port stocks to below 100 million tonnes for the first time since February 2014, together with the rise in imports, suggests underlying demand has also improved.

One of the surprising factors in dairy markets is the drop in prices hasn’t as yet stimulated more purchases from China and other emerging (lower income) markets. What this does highlight, however, is that stockpiling can’t occur to the same extent as in hard commodity markets because of shelf-life and quality constraints. China already made a large number of purchases of milk powder through the first half of 2014 time and this still needs to be worked through.

With seasonally fresh domestic milk supply lifts into the second quarter, this suggests limited near-term need for milk powder imports. But once we get beyond this and into the second half of 2015 the stockpiles from 2014 should be clear and this is likely to lead to an increase in import demand. This won’t save the 2014/15 milk price, but does offer some hope of a decent rebound for 2015/16.

In European news British inflation fell to its equal lowest level on record in December, - 0.5%. Bank of England Governor Mark Carney says deflation is possible in coming months. On the continent Germany has a balanced federal budget for the first time since 1969, and Greece's finance minister says if the leftist party Syriza wins the January 25 snap election the country may have to return €11.4 billion of bank bailout funds. Syriza wants to renegotiate Greece's international bailout and ask Europe to write off a big chunk of the country's debt. The party is consistently ahead in opinion polls.

With the European Central Bank (ECB) expected to announce a massive quantitative easing (QE), or money printing programme on January 22, the Wall Street Journal is questioning the ECB's prospects of breathing life into the eurozone economy.

Here's the Wall Street Journal;

To achieve large results in a bond-purchase program, the ECB has little choice but to opt for buying from a vast array of government bonds. But borrowing costs in these markets are already low, which could limit the program’s effectiveness. Germany’s 10-year bond yield is just 0.5%, and Spanish and Italian yields are under 2%, despite high debt levels in southern Europe.

In short, while quantitative easing might help overburdened governments, it isn’t clear the efforts will filter through to the broader European economy.

“QE is good for the finance ministries and banks in highly indebted countries, but it will not change the medium outlook for economic growth,” said Jörg Krämer, chief economist at Commerzbank.

A related problem in Europe is that, unlike central banks in the U.S., U.K. and Japan, there is no single, federal asset to buy. Because the euro area remains a fragmented financial web, the ECB must pick through 19 different public bond markets, each with varying degrees of riskiness, from triple-A German bonds to junk-rated Greek debt. That could dilute the effectiveness of a program.

“It’s quite different from doing QE in the U.S.,” said Harvard University professor Ken Rogoff. “It would be like Fed buying California or Illinois bonds when they’re in trouble.”

Economists cite other roadblocks that will hold back the European economy even after a program is launched. That includes the need for governments in France, Italy and other struggling economies to make politically unpopular changes to their labor markets that might encourage employers to hire. Moreover, large government debt burdens in many euro-area economies have led to restrictive tax and spending policies that are holding back growth.

“There is some concern that QE and a cheaper euro will take pressure off to do structural reform,” said Timothy Adams, president of the Institute for International Finance and former U.S. Treasury undersecretary for international affairs.

 

The New Zealand dollar is at about US77.22 cents this morning, about A94.69c, and the Trade Weighted Index (TWI) is at 77.17.

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13 Comments

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Highlight new comments in the last hr(s).

Taxpayers may also have contributed via NZTA subsidies so we can all have a good laugh at our own expense (literally)

So what will deflation look like in NZ and Australia?  
We can't say we haven't been warned.  
Foreign buying of our property, farms and businesses is the only thing propping up prices now.  

I even wonder how much of it is legally aquired wealth (ppl hiding kicks backs and bribes offshore).
The Q is as prices collapse and our NZ ppl go bankrupt and get sold out will foreigners be buying up even faster?
Time me thinks for a NZ owned only policy. It will come IMHO, its just a Q of when enough voters vote for it, 3 years from now? 6?
 
 
 

"Americans will save $120 billion on gasoline this year, as fuel prices keep falling with fewer indications they will rise anytime soon, a top analyst said on Tuesday."
http://www.cnbc.com/id/102334694

I guess the associated capex cutbacks/suspension and actions affecting employment will impact upon integrated industry S&P valuations to offset those projected in pocket gains and then some.

Agreed. Oil makes up 30% of the US capex spending and the knock on effect of this being curtailed far outweighs the cost savings. Add in the losses to share values (and Americans pension funds as a result) and the fuel saving is just a drop in the tank.

Yet the job losses...are ouch.  I wonder how much of teh "recovery" teh US has seen is due to the oil and associated jobs created from the shale boom it must be significant.
http://www.cnbc.com/id/102318531
"Growth of jobs in the oil and gas industry greatly outpaced the private sector from 2007 to 2012, according to the U.S. Bureau of Labor Statistics. There was 40 percent growth in jobs in oil and gas, with 162,000 new jobs created, compared to 1 percent job growth in the private sector. By November 2014, 215,200 people worked in oil and gas extraction alone. And with job-related fields such as mining and quarrying factored in, employment in the industry hit 869,000, the BLS found"
 
 
 

Filled up today in the Bay area at $2.20 a gallon so I guess other States are below $2.  Its going to make the USA super competitive.

Well that is the Bay, in Spokane, Washington state last week, 1.79, the masses up there love it given the amount of long distance driving those on the west coast do. The mass effect will offset the oil industry, understood from a very connected guy that the key stakeholders in oil  were being helped by the US Government . The low price is been seen as a active means to screw Russia..kick them and then it will go up is the expectation..free markets... appears not

Gareth - To answer your first question yes there are some Whangarei ratepayers out here but most are making the most of our amazing weather and awesome coastline so probably not showing much interest in current news. From the little I know this one has MADE IN CHINA printed underneath.
All things are relative and while being a ratepayer in Whangarei can cause a shake of the head on occasion being a ratepayer in the Kaipara District can definitely lead to tears.
Local council members are elected based on public popularity, family connections and generally being a good bugger. I mean how many councillors get elected because they have the governence skills to oversee medium to large infrastructure purchases? And yet we pay them to keep trying - who's the mug?

Someone, somewhere, out there is acting as a counterparty to oil futures derivatives priced over $100 p/b.    

Yep, the market makers that wrote the hedging puts - they have actively sold outrights to hedge themselves and more.