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China markets 'bounce' on support, but still very uncertain; screws tighten on Greece; economic data positive but drowned; UST 10yr yield 2.32%; oil sinks; NZ$1 = 66.9 US¢, TWI-5 = 71.2

China markets 'bounce' on support, but still very uncertain; screws tighten on Greece; economic data positive but drowned; UST 10yr yield 2.32%; oil sinks; NZ$1 = 66.9 US¢, TWI-5 = 71.2

Here's my summary of the key issues overnight that affect New Zealand, with news 'game theory' and brinkmanship is still playing out in Europe.

But first, Chinese stocks rose yesterday as its Government threw the 'kitchen sink' of support measures at markets and that brought some relief from the severe downdraft to their economic sentiment over the past few weeks. But not every investor is convinced the worst is over. One reason is that trouble is leaking into the Hong Kong markets which is also spooked by Greece.

In Europe, the ECB has tightened the screws by keeping its level of emergency funding of Greek banks unchanged, but raising the level of assets pledged for it. Those banks will stay shut until at least Thursday now.

The EU has said it wants a more realistic offer of reform from Greece. Everyone is saying they want Greece to stay in the euro zone, but no compromise is evident yet to allow that to happen - apart from the dumping of the lightening-rod Greek finance minister, someone who called the EU 'terrorists'.

Greece is on the edge of 'ugly' this week, especially if the banks don't reopen soon.

China and Greece are dominating the news right now. Most economic data releases seem dated by comparison, but they are generally positive. European retail numbers, American services data, British car buying, Swiss consumer prices, Chinese consumer prices, the Japanese leading index - they have all come in as expected or slightly better.

We get important data in New Zealand today as well. The NZIER quarterly survey of business opinion (QSBO) will be released at 10am. It is a widely respected benchmark.

In New York the UST 10yr yield benchmark is falling and is now at 2.32%. Local swap rates also sank across the board - its been three years since the NZ 2yr swap rate has been this low.

US oil markets are also down sharply. In fact, they are down about -8% on the Chinese trouble affecting demand, and the Iranians signaling a new surge in supply. The US benchmark price now under US$53/barrel, and Brent crude under US$57/barrel.

The gold price is marginally higher at US$1,172/oz.

The Kiwi dollar opens today virtually unchanged from this time yesterday at 66.9 US¢, at 89.2 AU¢, and 60.5 euro cents. The TWI-5 is at 71.2, and still a three year low.

If you want to catch up with all the local changes yesterday, we have an update here.

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

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27 Comments

Game theory? If the game is called 'chicken' :) Welcome to modern negotiation, nobody will compromise on anything.

Well it is like arguing about whether it is right to be a thief or not, what is to negotiate?

Will 3 OCR cuts by Christmas be enough stimulus, or will the NZ Govt need to loosen the purse strings for hospitals, schools, universities, roads etc and other 'good' spending?

OCR cuts wont do it, as more wages than ever are spent on mortgages most sane people will take the opportunity to reduce debt. second a high proportion of mortgages are fixed so no short term benefit.
the government will need to spend but what to spend on is the question and they need to make sure it has future economic benefit

why not simply burst the bubble so the correction benefits investment in productive economy and young people so they have more spare cash to spend?

The concept of productive investment is lost on these guys.

Because the problem may be far more than just a stock market bubble.... Private sector debt is over 200% of GDP and the growth of that debt has been more than 60% in the last 5 yrs...
These are the ingredients for the possibility of a severe Financial crisis ... spilling into the real economy... big time..

http://debt-economics.org/pdf/how_to_predict_the_next_financial_crsis.pdf

So the solution is to keep the Ponzie scheme going? That always works?

Well if you are a politician you don't want everything falling down on your watch.

agree

Because we (as in the global economy) are so overloaded with debt of unbelievable proportions that to pop the ponzi scheme would bring our entire global financial system down flat on its face.

and these days with no banks we don't get to eat.

On top of that such a "pop" couldnt be contained/directed even if Govn's decided to do a controlled pop.

This doesnt mean it wont pop, it will. For me without cheap and abundant fossil energy allowing perpetual growth it will pop, the only Q is is it happening to day or when in the next 5 at most 20 years. At that point just about all pensions would be gone. Company shares would be all but worthless and most investments (commercial property etc) ditto. Now as far as the financial parasites holding these are concerned I wouldnt care but for ordinary ppl I very much do.

its a dead cat bounce I would stay well clear all they have done is slow it down for now. when you have the central bank supporting buying of stocks that can only end well,
as the saying to goes "Those Who Do Not Learn History Are Doomed To Repeat It.
" http://finance.yahoo.com/news/chinas-stock-market-crashing-chinese-09590...

Peak Desperation: China Bans Selling Of Stocks By Pension Funds

http://www.zerohedge.com/news/2015-07-06/peak-desperation-china-bans-sel...

Thats why China is unique..??? The Govt can do whatever it likes.... It can print money till the cows come home... It can order its Banks to do whatever.... It can behave like a dictatorship..
Its going to be interesting to see how everything unfolds in China...
Its still a creditor Nation.....I think they will weather the storm .... NZ aint...

maybe they are trying to rescue a situation where they have encouraged their people to margin invest in stocks and now they have lost a lot of money

I dont think so on China, its one huge empty bubble inside IMHO.

Well the PBOC is sitting on the largest stockpile of US sovereign IOUs - so you might just be right in this case. TIC stats

China bans stock selling?! So by definition, it has also banned stock buying! If stock on issue can't be sold, they can't be bought either. All that can be bought will be new issues, IPOs, that were 'banned' by the China authorities a couple of days ago "waiting for the market to calm, first'.
So what's left? A mass of frightened sellers and no buyers. Now there's a recipe for stability!
(Yes, I know it's only a prescribed Pension Funds etc. But the point remains. Ban one thing; it will impact on another)

Just means the big carnivores can't scoop everything up. (like they did with our power companies or Fonterra). the result is wealth spread out, rather than a few isolated "permafrost" corporations getting the best feed/income.

OIS pricing now indicating a 100% certainty of an OCR cut for July.
The last CPI Quarter in March was minus .3 (quarter only).
What is the June CPI Quarter likely to come out as?
There may also be a chance of an overshoot on a 2.5% OCR endpoint.(Westpac)

Greece: This is old but telling news: Der Spiegel labels Merkel 'Die Trümmerfrau' - the Rubble Woman....http://www.spiegel.de/international/europe/merkel-s-leadership-has-faile...

But it also acknowledges that she leads the most powerful nation in the EU:

"Left behind is a confused EU that doesn't know what the most powerful woman on the Continent actually wants"

This is the nub of the issue: the EU policies are what suits Germany, EUR = DM, and none of this policy or pragma suits Mediterranean countries.

A flashpoint....

The unification of Germany is the cause I think. The Ostmark was combined with the Deutschmark at 1:1 whereas it was something like 4:1 previously. This was all wrapped into the Euro which was created as the price for unification and interest rates kept far too low for 15 years whilst East and West Germany integrated. The resultant tsunami of money meant real estate in Ireland, Portugal, Spain, Italy and Greece went ballistic. Probably Auckland too, it was a world scale process.

I'd like to understand more about the German states pre unification. It seems to my very limited knowledge that West Germany was dominated by Bavarian thoughts and ideas, whereas now it is Prussian (ie East German) ideas that dominate. People talk about Scotland and England and their differences, but not so much about Bavaria and Prussia.

It appears the European Union was doomed to be a failure from the very beginning.

"The crisis has required strong financial support measures, but in particular it has revealed the deficiencies of the Stability and Growth Pact (the Pact) in terms of either controlling disorderly budget processes or tackling economic disruption originating in the private sector....The project of monetary union was open to countries of the EU whose economic structures were highly diverse. According to economic literature of the 1960s, in particular the work of Mundell, a monetary area can scarcely be ‘optimal’ (ie, ‘feasible’) in such conditions, because the limits of tolerance to tensions imposed by the discipline of a single currency would be very different in heterogeneous economies.\

For years, this reflection inspired the German caution in respect of the project. It was obvious that German public opinion would never agree to getting rid of a stable and solid currency if the project could entail the risks of fiscal and monetary disorder which for many years had characterised the economic policies of France and Italy, not to mention countries like Spain and Portugal, which initially did not even appear to be candidates with possibilities. Consequently, Chancellor Kohl made his agreement conditional upon the creation of a European Central Bank in the likeness of the Bundesbank, and upon compliance with a series of economic policy criteria, first during the access phase and later during the project’s lifetime.

Furthermore, it was thought that monetary stability and the increase in intra-EMU trade flows would bring significant improvements in productivity in the weaker economies and would therefore boost their process of real convergence (it is hardly necessary to highlight how ill-founded that optimism was)...

.Secondly, surrendering to (amply justified) German fears of the fiscal excesses of some candidates, the Pact did not take into account the possibility that budget deficit and growing debt might be a consequence of economic crises triggered by the excesses of private-sector investors (or unpredictable external shocks such as a global financial crash). The academic debate, at the time, focused on the mechanical aspects of the Pact, ascertaining, for example, that a debt of 60% is sustainable with recurring deficits of 3% provided that the economy is growing at a nominal 5%...

And the opposite is also true: although public accounts might be orderly, the private sector could be unwinding savings and incurring a sizeable external debt. The negative current account balance will reflect this difference in performance, but the Pact’s warning systems would not be triggered despite the serious macro-economic threat posed to the country. That is what happened with Spain and Ireland’s property-market bubbles: neither of the two countries had breached the 3% deficit criterion since the Eurozone’s creation in 1999. However, the Pact’s alarm sensors were set to detect excesses in the public sector, so they were not triggered by the accumulation of deficits and external financing in a private sector that was immersed in a euphoric frenzy of investment."
http://www.realinstitutoelcano.org/wps/portal/web/rielcano_en/contenido?...

The EU has been a startling success. Given they had been killing each other from the mists of time. And now 70 years and no war. No deaths.
Seems like a cause for celebration to me.

China: Seems to me that crashes don't just happen all in a day. What happens there are a series of wobbles, (they laughed, they cried) for quite a while, before the serious downslide bites. Seems they are in the wobbly stage.

Why blame Germany for the Greeks. Who was it had the (modern) Olympic Games at no expense spared.

FT labelled the Chinese market a confidence trick yesterday. http://www.ft.com/intl/fastft/355221/china-aims-restore-confidence-fails

For every blue chip state owned share that went up, two others fell. Blue chips that went 10% limit up in China fell by 2-4% in neighboring Hong Kong. How does that happen in a well ordered market? As per the NY times article posted in the article already a lot of these blue chips have "close ties to some of the country’s leading political families" so public money is being used to bail out private individuals. http://www.nytimes.com/2015/07/07/business/international/chinese-share-s...

Market opened down 3% this morning but here comes the calvary.

Days to the General Election: 26
See Party Policies here. Party Lists here.