Global banking jitters; yields on Japanese bonds drop to zero; US wholesale inventories dip; UST 10yr yield 1.74%, oil sinks, gold up; NZ$1 = 66.5 US¢, TWI-5 = 71.0

Global banking jitters; yields on Japanese bonds drop to zero; US wholesale inventories dip; UST 10yr yield 1.74%, oil sinks, gold up; NZ$1 = 66.5 US¢, TWI-5 = 71.0

Here's my summary of the key events overnight that affect New Zealand.

The yield on Japanese 10-year bonds, the benchmark of government borrowing, has dropped to zero for the first time, following the Bank of Japan introducing negative interest rates nearly two weeks ago. Investors are essentially buying bonds despite knowing that if they hold them until maturity, they would come away with less money than they paid.

A former central bank official says the reversal in bond yields was bound to follow the negative interest rate policy, yet it happened faster than expected. He explains a rush by global investors to buy the yen - a currency seen as safe during a time of economic uncertainty - has strengthened the currency. This has hurt the Japanese stock market and darkened the outlook for inflation, cancelling much of the central bank's efforts. 

Investors around the world are getting nervous about the world's biggest banks, with banking giants' shares plunging. Deutsche Bank shares fell nearly 10% earlier this week, while Standard Chartered's fell 6% and stock in Citigroup declined more than 5%.

The New York Times explains that when investors sell bank shares or bet against the banks in credit markets, it can be a signal that a period of financial turbulence has entered a more serious phase. It suggests that banks, which are meant to act as the gears of an economy, transmitting credit to firms and households, are becoming more vulnerable to market volatility and economic weaknesses.

Businesses in the US are continuing to reduce their stockpiles of unsold merchandise. Wholesale inventories dipped by 0.1% in December - a weaker result than the Government had expected, meaning its fourth quarter GDP estimate could be revised down. 

With wholesale inventories slipping in December for a third straight month, some economists are optimistic the US's inventory cutbacks are nearing an end, and businesses will soon begin to restock empty shelves.

In New York, the UST benchmark 10yr yield has continued to drop today, sinking to 1.74%. 

The New Zealand 10-year swap rate closed down 10 basis points yesterday, finishing at 3.2%. Even though this is a historic low, New Zealand bonds are still relatively attractive on the global stage. Portugal and Greece are the only countries in the OECD offering higher yields.  

The US Crude oil price has taken a dive over the last 24 hours, falling a couple of dollars to US$28.60 a barrel. The price of Brent crude has taken a similar turn, sitting just below US$31 a barrel.  

Meanwhile, the gold price has continued to rise to US$1,197/oz.

The NZ dollar remains pretty much unchanged against the US, at 66.5 US¢. It's comfortably up to 94.0 AU¢, and down to 58.8 euro cents. The TWI-5 is at 71.0.

If you want to catch up with all the local changes from 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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11 Comments

I think the commodity markets show that this recession is not like the last one. Well heck, prices have already crashed lower, and for longer then they ever were in '08-09. Meanwhile we aren't even in a recession. The people who make stuff have to be able to make a profit, otherwise they don't have a business, and I know we can all pretend that twitter et al, will make a profit one day soon. For those however without the backing of price insensitive investors, if you can't make a profit you go bust, and the jobs that were available, no longer exist. Thats the process that is now underway, throughout the world. The profits never materialised and capital has been drawndown through equity finance, the only thing still supporting the economy are the high equity values. Which however are unlikely to remain high as more and more sellers enter the market, and in this game he who sells first, sells best.

"The New Zealand 10-year swap rate closed down 10 basis points yesterday, finishing at 3.2%. Even though this is a historic low, New Zealand bonds are still relatively attractive on the global stage. Portugal and Greece are the only countries in the OECD offering higher yields."

This shows how high and attractive NZ yields are, (and we are way better off than Greece or Portugal). It results in NZ banks having lots of cash to lend, and our borrowing ballooning including for real estate investing. It does't matter where our yields were last year or 5 years ago, the world is trading NOW. Only one way to go for NZ yields; DOWN.

New Zealand bonds are generally illiquid and held by foreigners offshore - how else are we to fund the persistent current account deficits after successive governments had to sell the family silver on our behalf?

The local Australian banks are probably about to try and load up the next set of greater fools with this sort of nonsense while they repatriate cash from New Zealand to Australia to meet more stringent domestic regulatory requirements. Hardly an environment for the bank manager to rush out lending credit to those that can fog a mirror.

And did I forget to mention the share price of our largest bank's parent is not doing so well either? View Graphic

And on that score, this latest development in immigration policy has received little attention:

The Government is preparing to put the scheme [i.e., buy our bonds in return for residency] into overdrive with a "New Zealand Investment Attraction Strategy", which aims to bring in $3.5 billion in the next three years from wealthy migrants.

Sure sign they are concerned.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1158...

I guess it's just a target as is MPI striving to double ag exports by 2025. And yes, desperation is breaking out all over the place.

It is indeed. Where's profile to tell us all is OK?

Not just this one. Go to "max" and we see the last time this dropped this much, this fast was the last GFC.

cocos, so they are there to absorb risk, how does it "absorb"?

I'd almost wonder now if the hedge funds and speculators will be circling looking to make a killing.

cocos, so they are there to absorb risk, how does it "absorb"?

Which part did you not understand.?

A contingent convertible capital instrument, or CoCo, is a type of bond designed by regulators after the financial crisis. The bonds allow banks to skip interest payments without defaulting, and they’re designed to convert to common equity or suffer a principal writedown if a bank runs into trouble. This provides a buffer in times of stress while inflicting losses on CoCo investors.

Yes, the coco investors are the buffer.

and will provide a small delay prior to OBR taking the NZ depositors to the cleaners.

However, as soon as 'the trigger event' is invoked (from either Aus or NZ) you can start betting there will an immediate run against that particular bank insuring that OBR is also invoked. There has been very poor thought from RBNZ about the dynamics of financial stability.