90 seconds at 9 am: China stronger

China targets rural links, ends price controls; China service sector strength; Shanghai housing recovers; Wall Street ups risk appetite; oil up, gold down; NZ$1 = 68.2 US¢, TWI-5 = 72.3

19th Oct 15, 7:28am by David Chaston

Here's my summary of the key events over the weekend that affect New Zealand, with news that China may not be struggling as much as many believe.

But first, China has announced a major effort to link rural China and its products to the cities. Their government said it will partner with the State Post Bureau to get e-commerce companies and express delivery firms to expand into rural regions to directly link farmers with consumers, reducing the role of middlemen. The goal is to drive rural growth.

China also said it is getting rid of virtually all price controls. They will all be gone by 2017.

What is interesting about all this is that analysts are starting to fully understand the size of China's service economy and it may be much larger than thought. Most focus to date has been its factory economy, but the service sector continues to show none of the stagnation of its manufacturing sector which answers why the long-reported slowdown isn't happening locally.

Meanwhile in Shanghai, their housing market is in full recovery. Home sales from January to August rose +19% from a year ago, rebounding from a sharp -20% drop in January and February. Mortgage lending is also up strongly.

In Europe, while the company itself is trying to blame "fewer than 10" workers, the size of the VW diesel car recall just got enormous with more than 8.5 million cars ordered to be fixed, 11+ million worldwide. Whether the vehicles will meet emissions standards after removing what is now more than three defeat devices, is unknown. Blaming-the-workers seems an odd response from VW; the company is governed through a unique structure, involving a hybrid of control by members of the Porsche and Piëch families, the state government of Lower Saxony, and their labour unions.

In New York, the UST 10yr yield benchmark inched higher on Friday and is currently at 2.04%. Investor appetite for risk remained firm at the end of last week, pushing the S&P500 up +0.5% to a two-month high. And this was despite a small slip in American industrial production in September. This was probably less worrying because their August data was revised higher.

The US benchmark oil price is marginally higher at just over US$47/barrel, and the Brent benchmark is just on US$50/barrel.

The gold price was lower at the end of trading in London and New York, now at US$1,185/oz.

The New Zealand dollar starts holding the gains of last week. It will open at 68.2 US¢, at 93.7 AU¢, and 60 euro cents. The TWI-5 is at 72.3 and now at a twenty week high.

If you want to catch up with all the local changes on Friday, 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

by Roger Witherspoon | 19th Oct 15, 7:44am 1445193880

"Rogue software engineers" at VW is purely to distract from EU wide corruption at the highest levels ala FIFA. Why has diesel been the poster child for EU sponsorship? As the lawyers say - Who benefits? We now know ultra small carbon particles from diesel is a major killer, why has this not been addressed? Who benefits? The whole EU structure is a corrupt cartel breeding ground of secret agreements behind closed doors.

by steven | 19th Oct 15, 10:46am 1445204793

Having worked as an engineer for 35 years the one over-riding thing about this is blaming the engineers is absolute crap. Every time I have been asked to do dodgy engineering has been at the insistence of line management because of teh cost, time or losses. I pity the poor sods if they have not written letters pointing out such action was un-ethical if not illegal. Me I write emails now and keep copies, of course that tends to mean you are in line to be one of the first out the door if that eventuates.

by Chris-M | 19th Oct 15, 11:46am 1445208418

I have some sympathy for your position. Management tend to want everything, for next to nothing and yesterday. To a certain degree that is understandable, it is natural to push for these objectives as in a narrow focussed view these things are equated to maximising profit, and to be fair without some tension and targets some engineers could get a bit out of control. We all need to work within some constraints. What I grew to appreciate however was that it is in every bodies long term interest not to be forced into bad engineering solutions and it is your responsibility to advocate for what is right and that if compromises are to be made, everybody understands them and they are chosen so that they can be remedied in future with minimum consequences. With maturity I found that instead of asking how many $ can we save, one of the best questions to ask was if I spend a few more $ what extra value can we get.
If these poor fellows have been pressured into cutting corners, it is entirely possible and inconceivable that the company hierarchy were not aware of it. Having a lot of respect for German engineering it is inconceivable that a group of German engineers would set out to do something wrong, especially this wrong, it is totally contrary to their national psyche, they are totally anal about doing everything correctly.
More likely they have been paid off very handsomely for life as a sacrifice in an attempt to save the company. It will be very interesting to see if VW can keep the lid on things this way or whether truth leeks out through official and media pressure.

by Stephen Hulme | 19th Oct 15, 9:53am 1445201582

Investor appetite for risk remained firm at the end of last week, pushing the S&P500 up +0.5% to a two-month high.

Hmmm - not a believer.

By repeatedly intervening to arrest market downside momentum, the Fed and central banks nurtured a backdrop conducive to powerful short squeezes. The current exceptionally speculative marketplace plays right into this dynamic. After all, few (if any) market themes offer the quick trading profit opportunities as squeezing the shorts. And with the faltering global Bubble and elevated risk generally, short positions and bearish hedges had been mounting in recent months. Read more

Goldman Sachs had this to say.

... the Fed may have developed a credibility problem by failing to follow through on guidance that it never actually provided!

A more likely reason for the difference is that some market participants have developed a view that the FOMC is just “constitutionally dovish” and will abandon its current guidance even if the economy does fine in the next two months. Read more

by KH | 19th Oct 15, 12:58pm 1445212708

There will be 8.5 millions reprogrammed to remove the devious software. No mention however that there will be any modification of the cars to lower their actual real emissions. Probably that is not even possible.