90 seconds at 9 am: Fear in gold markets

Banks need more capital in the US and Aust; Russian bond worries; China house prices weak; UST 10yr yield 2.37%; gold prices tumble; NZ$1 = 65.7 US¢, TWI-5 = 70.7

21st Jul 15, 7:32am by David Chaston

Here's my summary of the key issues overnight that affect New Zealand, with news the price of gold just took another large fall today.

But first, the move to get banks to hold more capital, at least for the largest institutions, is gathering steam.

In the US the Fed has just adopted tougher rules on minimum capital levels which will cost about US$20 bln over the few that need to raise extra, and in Australia they are about to do the same at a cost of about AU$12 bln in extra capital. It appears these new higher levels are still lower than levels large banks operating in New Zealand already maintain.

In 2012, the Russian president issued a decree to his government to raise social spending. Regional government took him at his word, but did so by borrowing vast amounts, amounts they seem unlikely to be able to repay. Investors in the bonds issued are worried, so much so they may shun central government bond issues as well as the regional issues. Russia is also facing a debt crisis.

In China, the falls in house prices may be stabilising. Of the 70 large and medium-sized cities surveyed in June, new home prices climbed in 27, up from the 20 in the previous month, while 34 reporting month-on-month price declines, down from May's 43, according to data released by their National Bureau of Statistics.

New Zealand's stresses seem more manageable and center around housing affordability. Migration data for June is due out today and that will no doubt feed into the housing debate.

In New York, the UST 10yr yield benchmark is slightly higher today and now at 2.37%.

Oil markets are basically unchanged although slightly lower in the US. The US benchmark price is now just on US$50/barrel, and Brent crude is just above US$57/barrel. News that a big innovative drilling program is about to start in previously drilled US shale fields is keeping prices low.

The gold price is also down sharply yet again, now at only US$1,108/oz. That is another -4% plunge and a new five year low. Chinese investors are the latest to offload the metal, doing so with some aggressive selling.

The Kiwi dollar showed a little strength overnight, perhaps on better local data yesterday and the move was certainly triggered by upbeat comments by the Prime Minister. We are start today at 65.7 US¢, at 89.1 AU¢, and at 60.7 euro cents. The TWI-5 is at 70.7.

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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24 Comments

by King of the whiners | 21st Jul 15, 8:11am 1437423102

Warmest June on record globally and 2015 will be warmest year as El Nino just builds and builds:

http://thinkprogress.org/climate/2015/07/17/3681260/june-2015-hottest-y…

''NASA reported Wednesday that this was the hottest June on record (tied with 1998). And it’s now all but certain 2015 will be the hottest year on record, probably by a wide margin — as what increasingly appears to be one of the strongest El Niños in 50 years boosts the underlying global warming trend.''

For those who are unaware - strong El Nino years do not generally benefit NZ agriculture.......(hmmm ultra low payout coupled with El Nino inspired drought - things might get a tad unpleasant).

by King of the whiners | 21st Jul 15, 1:03pm 1437440591

More detail on that:
http://www.stuff.co.nz/science/70410345/el-nino-climate-change-fuel-hot…

''As NOAA highlighted, four of the first six months have set new warmth records, and last month was also the fourth-biggest departure from a monthly average for any month on record. The two highest monthly departures from average occurred earlier this year in February and March, the agency said.

February, March, May and now June are all records for the month, while four of the previous half year were also records for that month. With so many record months, the rolling 12-month period has been the hottest for the past 10 months, NOAA said.''

by steven | 21st Jul 15, 1:27pm 1437442028

yes its looking 'good',

"NOAA reports that the current “strengthening El Niño” has a better than 90 percent chance of lasting through the winter and “around an 80 percent chance it will last into early spring 2016.” So 2015 is almost certain to smash the global temperature record set in 2014 — and it is entirely possible if not likely that 2016 will break whatever records 2015 sets. It bears repeating we now appear to be in the early stages of the long-awaited jump in global warming."

So a hot and dry summer for NZ?

by Stephen Hulme | 21st Jul 15, 9:01am 1437426070

New Zealand's stresses seem more manageable and center around housing affordability.

Hmmm - US has emerging issues.

Bidding wars return to home market
This time, the battles are prompted by too few homes offered for sale, not easy-to-get mortgages Read more

by Andrewj | 21st Jul 15, 9:27am 1437427668

There’s always an ebb and flow to markets. Greed and Fear are such powerful emotions. It’s also inherent to over-liquefied securities markets to “overshoot” – for excesses that mount on the euphoric upside to be inevitably rectified on the depressing downside. As such, there are serious issues when securities markets inflate to multiples of real economies. Recognizing that Credit is inherently unstable, there are extremely serious problems when market-based Credit comes to dominate a nation’s financial system - and then the world. It was previously unthinkable that central banks would perpetuate ultra-loose monetary policies for years specifically to spur asset price inflation and market-based Credit expansion.

A few years back the world had already passed the point where a bout of de-risking/de-leveraging would have major consequences for markets and economies. And this gets to the serious issues I have with central bankers “pushing back against a tightening of financial conditions.” Such language basically signals that central bankers will not tolerate market “ebbing” – for any semblance of market self-regulation and adjustment. And it was a similar dynamic in the late-twenties that nurtured a historic Bubble that crashed fatefully in 1929.
http://creditbubblebulletin.blogspot.co.uk/2015/07/weekly-commentary-le…

by PeterPen | 21st Jul 15, 9:09am 1437426561

"In 2012, the Russian president issued a decree to his government to raise social spending. Regional government took him at his word, but did so by borrowing vast amounts, amounts they seem unlikely to be able to repay."

So when Greece does it, or any other country it is modern Krugboy miracle economics - but in Russia's case just utter folly. Glad about the objective and evenhanded stance today's journalism is taking :-)

by Stephen Hulme | 21st Jul 15, 10:01am 1437429692

Fear not. Putin's so-called enemies are close by and willing to spread their wealth.

Even after a few weeks have passed, the unexpected visit of the Saudi Deputy Crown Prince to the St. Petersburg Economic Forum still has a lot of people scratching their heads. The news is full of widespread and contradictory theories, while questions abound.

Why had the Saudis accepted an invitation from a country sanctioned by the U.S., its oldest and strongest ally? Had the Saudis chosen to abandon the U.S.? Were the crafty Saudis playing Russia off against the U.S.?

To confound matters more, why was the desert country proposing a $10 billion investment in Russian agriculture and infrastructure? Rattling everyone’s brain was the Saudi proposal to purchase some 16 nuclear plants to be developed by Russia’s state-owned nuclear monopoly, Rosatom, in a deal that, if concluded, could be worth more than $100 billion. Then there was the matter of the Saudis and Russia announcing the formation of an energy partnership between two of the largest global energy producers. Read more

Of course there is another factor. Certain far flung journalists are not yet in possession of the new song book.

by Anarkist | 21st Jul 15, 11:32am 1437435146

"To confound matters more, why was the desert country proposing a $10 billion investment in Russian agriculture and infrastructure"

It's a sensible regional pivot for Saudi Arabia, whose growing populace faces insufficient food production from domestic sources. Until recently the Kingdom was a foodstuffs exporter, because the royal family had allowed wealthy landowners to tap into a large aquifer beneath the deserts, and irrigate vast swathes of land, allowing the desert to bloom. Unfortunately in just 35 years they have largely drained the water by their reckless, wasteful practices. The government's recent bribe of establishing a dry climate agricultural research station for the Saudi businessmen is nothing more than a wasteful, pointless White Elephant. They don't have water! Nothing is more fundamental than water for agriculture.
https://www.revealnews.org/article/what-california-can-learn-from-saudi…

The Saudis likely already have a nuclear arsenal, because after all they provided Pakistan significant funds for their nuclear weapon development programme in the 1970s and received ballistic missiles capable of launching a nuclear payload back in the late 1980s. They have also acquired updated missiles from China just last year.

http://thediplomat.com/2014/01/china-secretly-sold-saudi-arabia-df-21-m…

by Stephen Hulme | 21st Jul 15, 11:43am 1437435818

Others are also expressing enthusiasm

“Our models are telling us to buy Russia. There is a very strong turnaround potential” Read more

by OnwardsUpwards | 21st Jul 15, 10:23am 1437431001

I guess gold isn't real money after all. Looks like it's not a store of wealth either. Insurance perhaps? Nope. Perhaps it's mostly used to extract fiat currency from fools?

by Stephen Hulme | 21st Jul 15, 10:42am 1437432174

It acts as fantastic collateral to pursue other leveraged endeavours. The fiat pricing risks are easily hedged. And reserve currency central banks (potential or otherwise) maintain significant holdings.

by Anarkist | 21st Jul 15, 10:49am 1437432544

I've been saying this for ages.

by Colt 45 | 21st Jul 15, 11:49am 1437436157

I think we'll see who the fools are quite soon.

Greed and excess are not a long term strategy for human survival !

by tim12 | 21st Jul 15, 12:19pm 1437437960

In China because of the sharemarket controls are people trying to sell paper gold and move to physical assets? Shares that are frozen are illiquid and therefore what is there value?

by Triple | 21st Jul 15, 2:33pm 1437446025

Many bloggers on this site predict a tough financial road ahead for the world economy. If they are correct then gold will have it's day again. Right now US dollars are favoured but that could easily change. Lets wait and see what gold does next time the US share market tanks. A lot of successful investors hold gold - there must be good reason.

Time will tell....

by Ergophobia | 21st Jul 15, 12:08pm 1437437323

Riveting opinion here by Robert Peston, http://www.bbc.com/news/business-33595861 , Greek banks are effectively nationalized and the Greek State is a vassal of Frankfurt. Interesting too that it is now illegal in Greece to use deposits to repay debts - I am sure the RBNZ will be looking to add this into their OBR (if it is not already there in a secret clause).

by King of the whiners | 21st Jul 15, 12:20pm 1437438051

''b) there is a ban on using deposits to repay loans early (because many Greeks would rather repay debts than risk seeing their savings wiped out in a bank crash or in a so-called bail-in which would see savings converted to bank shares of dubious value)''

That is simply extraordinary. I had not realized that....

by OnwardsUpwards | 21st Jul 15, 1:02pm 1437440525

Scary stuff. What's really amazing is that there hasn't been a violent revolution in Greece.

by Kate | 21st Jul 15, 1:45pm 1437443102

The dark forces of globalization (the globalist 'elite') know no bounds.

by steven | 21st Jul 15, 1:34pm 1437442487

Indeed! how the heck do you make / justify that as legal? So your debt remains you cannot clear it early with your own $s WTF?

by Anarkist | 21st Jul 15, 1:46pm 1437443210

Actually, Ergophobia, the banks haven't been nationalized, they have been appropriated by the Troika, under the "bailout" deal they "offered" to the Greeks

"One of the preconditions imposed on Greece for a deal is that it signs into law European rules that would put euro zone authorities at the ECB and in Brussels, rather than Athens, in charge of identifying and closing or breaking up sick banks.

This in turn could lead to a shake-up of the sector that could see some banks close, with losses pushed onto bondholders and possibly even large depositors. In such circumstances, there would be little that Athens could do to prevent this.
http://uk.reuters.com/article/2015/07/13/eurozone-greece-ecb-idUKL5N0ZS…

by steven | 21st Jul 15, 1:30pm 1437442223

This just looks more and more ugly by the day. I just wonder how long their present Govn has.

by Anarkist | 21st Jul 15, 1:46pm 1437443162

George Saravelos, head of Deutsche Bank's European foreign exchange division is predicting Syriza will face elections by September. He was correct about the Cabinet reshuffle and the toppling of Syriza's more militant Cabinet Ministers.

" George Saravelos at Deutsche Bank now expects new elections to be called by September at the earliest in Greece as Mr Tsipras is faced with the near-impossible task of pushing through tough legislation in just two days time.

From George:

Quote Greek PM Tsipras lost his parliamentary majority over the weekend, and his first order of business upon returning to Athens will be a change in the Greek government. We consider a minority or national unity government as the most likely outcome, before a new election is called in September.

A minority government would involve a major cabinet reshuffle by the Prime Minister with the departure of dissenting cabinet ministers (most notably energy minister Lafazanis) and the replacement by more politically-neutral member."
http://www.telegraph.co.uk/finance/economics/11735609/Greece-news-live-…

by steven | 21st Jul 15, 2:49pm 1437446956

[ Ugly sterotyping deleted. You know the standards. You are [surely] better than this. Ed. ]