Here's my summary of the key events overnight that affect New Zealand, with news the EU has caved in to local pressure and is increasing its subsidies to farmers again.
First up, we should note that Wall Street is closed today for a public holiday.
China released its August data on its foreign exchange reserves overnight and that showed it burning through its huge stockpile at the fastest pace yet as it seeks to prop up its currency and stem a rising tide of money flowing out of the country. But even with this record outflow of NZ$145 bln it still has the world’s largest foreign reserves, about NZ$5.5 tln at the end of August, their data shows.
However, if China starts selling its large holdings of US Treasury paper, that will have the effect of putting up pressure on American interest rates.
And we have just heard that the country's top economic planner, the NDRC, has just given approval for another NZ$20 bln worth of highway and bridge projects, the latest of its emergency stimulus moves - and presumably paid for by using their reserves.
In Europe, subsidies for farmers are back especially for dairy farmers. The irony is, farmers say they are "drowning in milk" but don't think cutting back on production is an option; they just want taxpayers to pay them what the market won't. The EU has no credibility in trade liberalisation.
In New York, markets are closed and the UST 10yr yield benchmark remains at 2.13%. Yesterday we saw local swap rates move marginally higher but within their recent ranges.
The US benchmark oil price is dipping again today, now at US$44/barrel and the Brent benchmark is at US$48/barrel.
The gold price is also down, now to US$1,118/oz.
The New Zealand dollar starts today lower against nearly every pair, at 62.6 US¢, at 90.3 AU¢, and 56 euro cents. The TWI-5 is now at 67.4.
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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5 Comments
If anyone thought the US shale oil industry could take on the Saudi's and win, it is time to think again:
http://www.ft.com/intl/cms/s/0/5a8c9a4c-54b0-11e5-8642-453585f2cfcd.htm…
''US shale producers reported a cash outflow of more than $30bn in the first half of
the year, in a sign of the challenges facing the US’s once-booming industry as the slump in oil prices begins to take effect.
The shortfall points to a rise in bankruptcies and restructurings in the US shale oil industry, which has expanded rapidly in the past seven years but has never covered its capital expenditure from its cash flow.''
US oil production has plummeted by over 300,000bpd in the past few months and is heading downwards rapidly. But the real fun will come as all those shale oil bonds start to default en masse in the last quarter....
"China released its August data on its foreign exchange reserves overnight and that showed it burning through its huge stockpile at the fastest pace yet as it seeks to prop up its currency and stem a rising tide of money flowing out of the country."
hmmm... so now it is being admitted openly that the Chinese govt is going to extreme effort and expense to stop money leaving China. So why is it reporters such as Bernard Hickey and Greg Ninness have repeatedly reported that soon QDII2 will begin and allow billions of dollars to leave China and enter New Zealand's property market?
It sounds to me like these reporters are deliberately scaring readers into thinking property prices in Auckland will see further upward pressure due to QDII2. However the reality appears quite the opposite. China does not want dollars leaving their country, so surely QDII2 is looking less likely every day.
And we have just heard that the country's top economic planner, the NDRC, has just given approval for another NZ$20 bln worth of highway and bridge projects, the latest of its emergency stimulus moves - and presumably paid for by using their reserves.
Hmmmm - the jangling coins in the pocket theory again
So what does happen to with the money China receives from unloading U.S. Treasurys? A common misconception is that China is using the proceeds from selling U.S. Treasurys to prop up its own slowing economy — by funding infrastructure projects, for instance, or bailing out troubled banks. It’s true that after Japan’s bubble burst in the early 1990s, many Japanese companies sold off overseas assets and brought the money back to plug holes in their balance sheets. But selling private assets and selling central bank assets are two entirely different things. If a Chinese company sells a building it owns the United States, it trades the dollars it receives with China’s central bank (the People’s Bank of China, or PBOC) for yuan. By issuing more yuan, the PBOC adds to China’s money supply and credit.
But when the PBOC sells U.S. Treasurys, the opposite occurs. It can’t spend the dollars it receives in the Chinese economy, and if it exchanges them for yuan, it’s in effect taking money out of the Chinese economy. The PBOC can counter this tightening effect by injecting more yuan, on its own, but selling U.S. Treasurys does nothing to channel more funds into the domestic Chinese economy. Quite the contrary — it is buying reserves that expands a country’s money supply and credit; selling those reserves is (other things being equal) contractionary. Read more
One gets the impression that the Chinese are trying to defy the reality of their economy by brute force intervention, and have been doing so for a long time. How many more un and underused assets do they need. A high % of unoccupied apartments, empty cities, ships idle at anchor, heavily subsidised exports (how can they sell us products for less than the cost of the materials that we sell them) They may be able to defy gravity for a while but this cant go on forever. Their share market is a sideshow but it is a canary in the mine shaft. Unfortunately they are a significant part of the world economy so the consequences of their inevitable crash will be very significant.
China dumping treasuries ?? follow the money
http://sprottglobal.com/thoughts/articles/jim-rickards-the-system-is-hi…
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