Dairy market volatility exposes Fonterra's vulnerability; General Motors and Boeing results show signs of strength in global economy; Anxiety grows over potential US debt default; UST 10yr yield 2.04%; NZ$1 = 67.3 US¢, TWI-5 = 71.6

Dairy market volatility exposes Fonterra's vulnerability; General Motors and Boeing results show signs of strength in global economy; Anxiety grows over potential US debt default; UST 10yr yield 2.04%; NZ$1 = 67.3 US¢, TWI-5 = 71.6

Here's my summary of the key events overnight that affect New Zealand, with news Fonterra's credit rating has been downgraded by another rating agency.

Fitch has downgraded the co-operative's long-term rating from 'AA-' to 'A', following Standard and Poor's making a downgrade last week. It says volatile global dairy prices have exposed Fonterra's vulnerability to adverse conditions.

Fitch says Fonterra's financial flexibility has been reduced by two things. One, by it not cutting its advance rate payments in line with the sharp decline in milk prices, rather opting to fund payments to farmer shareholders with debt. And two, by it giving farmer shareholders loans in the wake of low dairy prices. Fitch believes Fonterra will maintain its Stable rating for the next few years.

General Motors and Boeing have reported strong financial results - a sign China's slowdown hasn't removed all buoyancy from the global economy. 

General Motors has reported record quarterly earnings for the third quarter, as cheap gas has fuelled demand for large pickup trucks and sport utility vehicles in the US. It's also sold more expensive sport utility and luxury cars in China. As for Boeing, it's reported a 25% increase in quarterly profit, off the back of higher commercial aircraft deliveries. 

The Bank of Canada has left its benchmark interest rate unchanged at 0.5%. It's also downgraded its 2016 GDP growth forecast to 2.0%, citing weaker global growth and low oil prices. It's noted that investment in the energy sector is likely to decline by 20% next year, as firms scale back their investment intentions.

Anxiety's growing in the bond market over a potentially catastrophic US debt default. The US risks breaching its US$18 trillion debt ceiling on November 3 and can only avert a default if Congress raises or suspends the debt limit. So far neither the House nor the Senate have announced bills that would do so without carrying controversial conditions.

In New York, the UST 10yr yield benchmark is down slightly today to 2.04%.

The US benchmark oil price remains unchanged in it's slump at US$45/barrel. The Brent benchmark is at US$48/barrel. 

Low oil prices have seen BP and Z Energy drop their national price of 91 octane petrol four times in the past week, to $1.96 a litre. 

The gold price is down to US$1,167/oz.

The New Zealand dollar remains weak following dairy prices falling at yesterday morning's GlobalDairyTrade auction. It's at 67.3 US¢, 93.2AU¢, and 59.4 euro cents. The TWI-5 is at 71.6.

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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3 Comments

Fitch says Fonterra's financial flexibility has been reduced by two things. One, by it not cutting its advance rate payments in line with the sharp decline in milk prices, rather opting to fund payments to farmer shareholders with debt.

A damning indictment that will inevitably further the sale of equity along the road to public ownership.

Anxiety's growing in the bond market over a potentially catastrophic US debt default. The US risks breaching its US$18 trillion debt ceiling on November 3 and can only avert a default if Congress raises or suspends the debt limit.

The UST debt issue best reflecting the perceived concern has experienced a late bout of buying, thus unwinding the fears of the petrified. View graphic detail

Nonetheless, energy prices present clues of another type of stress. Read more

and a consequence:

CAPITAL NOTES INTEREST RATE CHANGE IN MARGIN NOTICE

As previously announced, Standard & Poor’s Rating Services revised the rating of Fonterra Co-operative Group Limited’s unsecured subordinated perpetual Capital Notes (FCGHA ISIN: NZFCGD0001S9) from ‘A-’ to ‘BBB+’ on 14 October 2015. In accordance with the terms on which the Capital Notes are issued, the margin component of the interest rate must be adjusted to reflect any change in rating, with effect from the next interest payment date following the change in rating.

Accordingly, for the interest period 10 January 2016 to 10 April 2016, the new interest rate for the Fonterra Capital Notes is 4.94%, comprising the existing base rate of 2.74% and a new margin component of 2.20% (up from 1.95%). The base interest rate of 2.74% will continue to apply until 10 July 2016, when it will be reset.

https://www.nzx.com/files/attachments/222774.pdf

Q: about this interest margin
A: large as you like...

According to this site the $18 trillion U.S. debt ceiling has already been breached.
http://www.usdebtclock.org/