90 seconds at 9 am: China's confidence turns to fear

Oil under US$29/bbl; UST 10yr yield 2.04%; gold up; Wall Street takes big hit; China's 'National Team' can't halt slide; EMs look at money printing; NZ$1 = 64.7 US¢, TWI-5 = 70.4

18th Jan 16, 7:27am by David Chaston

Here's my summary of the key events over the weekend that affect New Zealand, with news fear gripped markets on Saturday as the trading week came to an end.

The price of oil is now US$29/barrel, mainly on concerns about an impending surge in supplies from Iraq and Iran. In fact, right now the Brent benchmark is below US$29/barrel. Oil companies are under severe pressure.

The gold price is up US$15/oz to US$1,089, although that is actually only a minor rise in the circumstances.

There was and is a rush to the safety of bonds with the benchmark UST 10yr down sharply and now yielding just 2.04%.

On Wall Street, the Dow was down -2.6%, the S&P500 down -2.5% and the NASDAQ was down more than -3%. This followed the realisation that the Chinese government's campaign to restore confidence in that country's volatile stock markets appeared to be in tatters as on Friday the benchmark Shanghai index wiped out all the gains made since the depths of last year's crash.

Policy makers everywhere are on high alert. In fact, emerging markets may become the next group to use 'unconventional measures' to tackle any new crisis. Money printing could go mainstream.

The Kiwi dollar has actually held up fairly well through all of this although it starts today lower, but just back to the levels we last saw in October. It starts at 64.7 US¢, at 94.3 AU¢, and at 59.3 euro cents. The TWI-5 is pretty much unchanged at 70.4.

But falling currencies don't hurt everyone.

And finally, there are some grunty data releases this week. At some point the REINZ will issued its December results - maybe tomorrow, the NZIER will release its QSBO tomorrow too. Wednesday will start with a dairy auction (and WMP signs are not overly encouraging), followed by the Q4 CPI data (Westpac sees a 'fresh low of +0.2% annual rate). This will be followed by some consumer confidence data on Thursday and the November Crown accounts on Friday. And the big overseas economic data will come from China who will publish their Q4 GDP data mid afternoon Tuesday. Analysts are always sceptical of this data but all the same the signals will be important.

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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37 Comments

by sharetrader | 18th Jan 16, 7:56am 1453057002

how long before we see petrol prices down I wonder? should hopefully fuel more consumer spending

by David Chaston | 18th Jan 16, 8:05am 1453057558

NZ discounted pump price now down to $1.76/liter - incidentally the same pump price we had in August 2006.

by sharetrader | 18th Jan 16, 8:44am 1453059885

1.64 and diesel 82 on the weekend out south, papakura takanini was great filling up, round my way still 1.76 and 99

by Chris-M | 18th Jan 16, 9:31am 1453062706

Even these prices are far too expensive as it should be about $1.37/litre based on the long term historical profit margins that prevailed prior to 2009/2010 (when they really started cranking them up). At $1.64/litre the profit margins are close to twice what they used to be.
Indecently as oil gets cheaper it's price becomes increasingly irrelevant. If oil was free, petrol should still cost over $1.05 per litre to cover taxes, margins and all the other costs.

by KH | 18th Jan 16, 10:21am 1453065663

Keep these observations coming Chris M. It reminds us that New Zealand is not a market economy. It's a rigged economy, and not rigged in the interest of the inhabitants.

by Chris-M | 18th Jan 16, 11:04am 1453068258

Thanks KH. Interesting you should say that because I was reading an article in the 5th Dec edition of The Economist. It described how the Chileans and a bunch of other Latin American countries are finally waking up to the fact they have been ripped off for years by cartels, corrupt cronyisim, monopolistic and anticompetitive industries. Fortunately for them, their governments are addressing the issues. Unfortunately for us ours is not. It is a bit grim when countries that one would have previously viewed as banana republics are doing a better on these issues than us.
Apart from the oil industry, councils, super markets, the building industry and building material suppliers need to be torn apart and placed in a far more competitive and open free market. Something like the1987 shake up is required again.

by KH | 18th Jan 16, 11:49am 1453070969

Chris M. There are some studies of management. One view expressed there is that while companies talk about making money from efficiency when there is a choice between achieving efficiency and achieving control they will choose control every time.
We are constantly preached to about being efficient, (work harder and smarter etc) but that's not the effective way to make money actually. If you look at the market valuations (and advice from the likes of Brian Gaynor) it's clear the valuable companies are those with control. Have market dominance - have barriers to others entering etc.
The last thing big companies want is competition. Currently they supress and exploit New Zealanders and small business alike. I don't see they are efficient or productive either, they just utilise control. We do need a shake up.
Where will our next Roger Douglas come from though ?

by JB | 18th Jan 16, 11:24am 1453069456

Have a look at Z Energy's latest six month Cash Flow from Operations and tell me you think their margins are inflated. Negative $ 15 million. Very strange !

Needs input and analysis from someone more enlightened than me.

by Chris-M | 18th Jan 16, 1:17pm 1453076272

Surprising, but on the other hand perhaps not. Z/Shell was sold by Shell oil and you would have to unravel how their purchasing of oil is structured. I suspect that this is where the profits are transferred overseas by the oil coys. As a pointer I am very suspicious about the fact that all our oil is exported overseas and how much profit from it accrues in NZ, and all the oil we use is imported and what do we pay for it c.f. the Brent crude price. If we were processing and consuming our own oil we would have a more simple and clearer view of the costs and profits, ( not to mention lower costs due to transport savings) The transparent view of the costs and profits that this would give may well be the reason why the oil companies do not do this.

by Afewknowthetruth | 18th Jan 16, 9:26am 1453062415

'should hopefully fuel more consumer spending'

Since every action in an industrial society corresponds with generation of CO2, consumer spending is a major driver of climate change. Therefore, a desire to see more consumer spending equates with wanting faster climate change: more severe drought, more severe flooding, more severe infrastructure damage and higher insurance premiums etc..

Strongly reinforced cultural memes cannot be altered, whatever facts are presented, it seems. .

'Annual mean carbon dioxide level measured at Mauna Loa, Hawaii, grew by 3.17 ppm (parts per million) in 2015, a higher growth rate than in any year since the record started in 1959.'

http://arctic-news.blogspot.co.nz/2016/01/greenhouse-gas-levels-and-tem…

by profile | 18th Jan 16, 2:24pm 1453080295

Yeah check out that correlation - frightening! I hope someone thinks of the children.

http://www.climate4you.com/images/MSU%20RSS%20GlobalMonthlyTempSince197…

by Stephen Hulme | 18th Jan 16, 8:19am 1453058388

Money printing could go mainstream.

Apple shareholders may regret the day the Fed embarked upon monetary debasement aimed at a redistribution of wealth. The blowback is not a pretty sight to behold.

Shares of the gadget maker closed down another $2.47, or 2.5%, to $97.05 Friday — capping off what's been a breathtaking 28% decline from the stock's high last year. Apple's fall will go down as one of the biggest wealth destroyers in recent market history - shredding $218 billion in market value from the market's high on May 21, 2015 adjusted for stock buybacks. That's more than the entire market value of roughly 485 stocks individually in the Standard & Poor's 500. Read more

Middle Eastern exchanges also feeling the heat of mean reversion.

Saudi Arabia’s Tadawul All Share Index dropped 5.4 percent to its lowest level since March 2011. Abu Dhabi’s ADX General Index fell into a so-called bear market. The Bloomberg GCC 200 Index, which tracks 200 of the six-nation Gulf Cooperation Council’s biggest companies, traded at 9.5 times estimated 12-month earnings, the lowest in almost seven years. Read more

by iconoclast | 18th Jan 16, 9:03am 1453061009

What is more interesting is - at the nadir of the GFC the NYSE Dow Jones index hit a low of 6000, the FED erected the first of 5 safety net programs. In 2015 at the culmination of those programs, the Dow Jones hit 18000 a never-before heard of rise of 300% in the bell-weather index

This is a time when much value was shoved into the laundromat, sloshed around, rinsed, re-washed and now they start taking the washing out of the washing machine we will see how much damage the laundry has sustained and who holds the garments and whether the stitching holds together.

The Dow Jones Index is currently at 16000. A lot of potential give-back still to go before anyone can claim a rout is on

All that has happened is the froth has been blown off the top

The question is - who will be the main beneficiaries still standing - The FED can and will stand back and claim that its actions saved the world - but from what - the precipice is still there

by Stephen Hulme | 18th Jan 16, 9:08am 1453061298

The FED can and will stand back and claim that its action saved the world - but from what - when the precipice is still there

Erroneously from my perspective.

The eurodollar and various money markets that developed through the last decades of the 20th century were treated as a singular, monolithic process with the Federal Reserve's ephemeral "windows" standing in for a monetary anchor. It was no such thing, a fact revealed starting August 9, 2007. Paradoxically, the Fed then acted as though what was really the error was instead the goal, and that the means in process of revealing that weakness were instead the error. In other words, the Fed sought to recreate the eurodollar system as if it were a stable state worthy of being the permanent monetary baseline when in fact it was the definition of instability due to the lack of perception about systemic inefficiencies it had created all along (it was nothing like an efficient sphere, but without a true monetary anchor along the way there was no way to prove it, though many, many people contemporarily warned about it long before 2007). Read more

by murray86 | 18th Jan 16, 10:30am 1453066240

I agree but from a slightly different perspective; the Fed may have acted to prevent the crisis from developing it's full negative potential, but they did not (and could not) solve the problem by ensuring that banks the world over cannot again create a mess like the one that caused this crisis. So the fed didn't actually save the world, they put a sticking plaster over a leak in the dam (or if you're Dutch - stuck a finger in the hole). How long until capitalistic greed finds another way to dupe the general public and Governments to create another crisis?

by steven | 18th Jan 16, 10:42am 1453066924

Agree.

"another crisis?" and again the free marketers will blame the fed/central govn/keynes/sun spots etc anyone else but actually their own greed.

What really gob smacks me however is the voting public accepts this crap...

by Stephen Hulme | 18th Jan 16, 11:24am 1453069443

Recommended practice courtesy of Bernanke.

Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy. Read more

by Henry_Tull | 18th Jan 16, 8:56am 1453060577

Shares of the gadget maker

A gadget is a small tool such as a machine that has a particular function, but is often thought of as a novelty.
https://en.wikipedia.org/wiki/Gadget

if so ...... - that novelty phone maker
mood change on FANG?

by bender | 18th Jan 16, 11:01am 1453068066

In the WWII Manhattan Project, they called the nuclear bomb, "the gadget."

by Alter Ego | 18th Jan 16, 12:15pm 1453072547

The World may regret the re-charging needs for Apple and other devices. Never mind the cost factor.

http://www.bloomberg.com/news/articles/2016-01-12/charging-a-smartphone…

by The best statu… | 18th Jan 16, 8:46am 1453059979

On petrol prices, the average in Sydney is AUD1.116 per litre. The exchange rate is 0.9455 at 0830 today. So based on this and GST at 10% in AU & 15% in NZ:
1. 1.116 converted to NZD = 1.180.
2. Add extra 5% GST = NZD1.239.
3. Based on the discounted price of NZD1.76/litre the NZ cost is 42% higher than the average Sydney price.
Reference: http://www.mynrma.com.au/motoring-services/petrol-watch/fuel-prices.htm

Tax will explain some of the difference but the petrol companies are taking a much higher margin than previous.

In early 2009 when oil was $35/bl and NZD1.00 =USD0.50 petrol was $1.40/litre (USD0.70/litre). GST has increased 2.5% and 10c/litre extra tax. This makes the $1.40/litre price $1.54/litre (USD1.00/litre based on todays NZD1.00=USD0.65). 1.76/litre is USD 1.144/litre.

Hope this is understanable but the petrol companies have taken higher margin over the past 7 years.

One footnote is that the petrol companies are trying to claw maoney back from the IRD after the high retrospective tax imposed last year.

by dtcarter | 18th Jan 16, 10:59am 1453067964

They have already charted all this for you, see 'oil company component' 'petrol taxes/l' etc.

http://www.interest.co.nz/charts/commodities/oil-and-petrol

by MortgageBelt | 18th Jan 16, 9:37am 1453063038

CPI about to come out at .2% or .3 for Dec Quarter.
So the RBNZ misses their target of inflation at 2% again, and probably for the next few years.

As petrol keeps falling the the March CPI quarter could be in negative territory.

by Stephen Hulme | 18th Jan 16, 10:08am 1453064880

The real cost of debt service payments (5.48%) is wreaking havoc on those hobbled by low growth prospects, real or otherwise. RIsing credit risk signals will cause lenders to reassess the situation. Read more TED Spread

New Zealand's dairy debt debacle places our own banks in their own firing line in respect of which lender has adequately declared bad debt provisions.

by Roger Witherspoon | 18th Jan 16, 10:33am 1453066428

I've been reading Michael Hudson recently. He points out that indebting the population makes the country uncompetitive. Wages have to be higher in order to service the mortgage debt as compared to a low debt economy. So productive capacity is progressively destroyed until the country is crippled and the currency collapses. This restores competitiveness in the short term but merely perpetuates the downward spiral.

Sounds like our current account disaster zone that no one talks about because it's not a problem until it's a disaster.
http://www.rbnz.govt.nz/statistics/key_graphs/current_account/

This is why we keep having to resell the country to the next wave of buyers from overseas. Production increases wealth and services distribute it (overseas in our case).

by Andrewj | 18th Jan 16, 10:31am 1453066298

It just goes from bad to worse. The dairy industry woes won't help.

Meanwhile, the world is still awash in milk. Dairy product prices in Europe are slipping and manufacturers are offering SMP into intervention storage at an accelerated rate. European output of skim milk powder (SMP) in January through October was up 8% from 2014. Butter production over the same period was 3.3% greater than the year before. Milk collections remain high. Irish milk output totaled 362.6 thousand metric tons (nearly 800 million pounds) in October, up 48.1% from the year before. The Dutch managed to grow output by 13.8% from a year ago in October and by 16.6% in November. New Zealand milk collections dropped 2.1% on a year-over-year basis in November, putting season-to-date collections down 3.1% from a year ago. Ireland and the Netherlands more than offset year-overyear production deficits in New Zealand and California, augmenting a continued global surplus amidst lackluster demand.
I

by Roger Witherspoon | 18th Jan 16, 10:37am 1453066662

Galbraith pointed out that farming is only profitable in the rare instance that you have a good season and everyone else has a bad one. If everyone has a good season the price will collapse.

by skudiv | 18th Jan 16, 12:47pm 1453074463

I suspect dairy has further to fall before all is said and done. Just like oil bounced before finding even lower lows. It's sad, heaps of depressed dairy farmers out there right now.

by steven | 18th Jan 16, 10:45am 1453067117

Agree, this is where the "free market" fails ie ppl doing perfectly sound economic actions for themselves that make sense for them short term but actually damage the national economy longer term. But "oh no we cant have regulation" These same ppl seem to be whining a lot about the OBR etc yet its teh very same ppl whos actions will cause teh OBR, especially if they get their way and raise the OCR!

by Roger Witherspoon | 18th Jan 16, 11:50am 1453071015

Yes well, Hudson says that "free market" used to mean free of rentier interests in Adam Smith's usage. In this age of doublespeak it has come to mean free to rape and pillage for financial interests.

The fault is ours in that we have fallen for the baited trap that the way to wealth is by borrowing more.

by MikeM | 18th Jan 16, 1:55pm 1453078548

Very well said Roger (referring to your first comment). This scenario never gains any traction because the neoclassical crowd refuse to acknowledge its existence. Plus there's no political gain to acknowledge it, nor any gain from those who do well from the status quo.

The result is more of the same until it breaks. Then we might see some vindication.

by scarfie | 18th Jan 16, 9:50pm 1453107022

Well I hope you are clear that it isn't the debt, but the interest on the debt that is the problem.

by Neven911 | 18th Jan 16, 9:43am 1453063391

The consequences of EROEI of oil production (particularly shale) is being felt in reverse! Rather than low oil prices boosting the US economy it is now a drag on it, Note the comment "The collapse in oil prices and in the demands for pipe and metals pieces in the oil industry weighs on US manufacturing"
Neven

by steven | 18th Jan 16, 10:39am 1453066792

I suppose the thing is the net effect of all the variables, eg Appreciating USD.

Interesting that analysts predicted a low oil price would boost the American economy, but it seems not much sign of it yet V a noticeable impact from the above, this seems to be a classic case of using too simple an economics model in making predictions, or maybe just opening one's mouth, surely "pros" should know better?

by Neven911 | 18th Jan 16, 3:51pm 1453085509

Steven, I think the thing is that EROEI has been so high that it has not entered into conventional economic thinking, ergo "cheap energy" had little or no inputs impact, for shale this is not the case.

by Matthew Aislabie | 18th Jan 16, 12:52pm 1453074751

We pay 1.15 aud for a litre of diesel in Perth. Thats 1.22 nzd current exchange rates.
No other road user charges or taxes or anything...
Milk is 2 dollar for two litres and has been for many years, floating mortgage is 4%...
Kiwi consumers getting milked is the standard default position. Free market price discovery, ha, ha..

by waymad | 18th Jan 16, 3:06pm 1453082776

Free market price discovery, ha, ha"

When food, FMCG and core building materials are supplied by 'opolies', ranging from mono to duo, there is by definition no 'free market', just cosy cartels.....and high fences against new entrants. All other activity is, again by definition, marginal.