Here's my summary of the key events overnight that affect New Zealand, with news the energy markets are changing again.
But first in China, the government there is getting frustrated at the lack of progress on pushing through its 'supply-side reforms'. This involves measures to cut excessive industrial capacity, destock, de-leverage, lower corporate costs "and improve weak links". Apparently at the top levels of power they are prepared to tolerate short-term pain to get the adjustment. But at regional levels there is anxiety about how all this will play out. Tensions are rising internally.
But one area showing a rebound is housing. For example in Shanghai, the bounce is quite dramatic.
India is expecting growth of nearly +8% this year, following last year's +7.6% expansion, a top Finance Ministry official told the Wall Street Journal. The one proviso; that the monsoon rains arrive normally, and that seems likely this year. Banks are expected to fund the private sector growth spurt, and the Government is to institute a GST to help fund its obligations.
Banks are not funding Australia's recent apartment boom in the way they once did, however. In fact, buyers who bought off-the-plan - especially foreign buyers - are finding Aussie banks reluctant to lend at all when time comes to settle, leading to a growing threat of fire-sales in this market. A trend for New Zealand buyers to watch out for, especially as we have our own apartment building boom occurring now in Auckland.
In New York the benchmark UST 10yr yield has bounced higher today to 1.74%. In fact, Wall Street is up very strongly, showing gains of well over +1% today in all the key indexes.
The oil price is higher again today with the US benchmark now just under $48/barrel and the Brent benchmark at US$49/barrel. These prices are now at a six month high, driven by worries about global supply outages. And the long-time oil bear Goldman Sachs has changed its tune to be 'positive' on the commodity, seeing US$50+/barrel becoming normal as demand grows and supply declines.
As a counterpoint, it is useful to note that at one point over the weekend, Germany produced almost all its electricity demand from renewables. It was a brief high-point to be sure, but it is useful to show the scale of the progress they have made.
The gold price is unchanged at US$1,273/oz.
And finally today, the NZ dollar will start at 67.9 US¢, at 93.2 AU¢, and at 60 euro cents. The TWI-5 index is now 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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But first in China, the government there is getting frustrated at the lack of progress on pushing through its 'supply-side reforms'. This involves measures to cut excessive industrial capacity, destock, de-leverage, lower corporate costs "and improve weak links".
The fact that Private FAI is now crashing in 2016 is related to the effects of the liquidation(s). The lack of financial flow in “dollars” convinces more and more firms that despite all the promises the global economy will never rebound while at the same time mothballing projects that will never be restarted and canceling many before they ever get that far. It is the brutal reality of this ongoing paradigm shift – the slowdown that will not stop slowing down. From this perspective, as noted on the chart above, it is easy to understand that there is no amount of “stimulus” (read: waste) that can make it work; without a eurodollar resurrection there is no path back to 2005. Read more
In the name of “shortfalls in aggregate demand,” central bankers have flooded the world with “money” and Credit. Predictably, this unprecedented global monetary inflation has wreaked havoc on financial market behavior and investment patterns, while spurring self-reinforcing asset inflation and Bubbles. And aggregate demand? It is not - will never be - "sufficient". As we’ve witnessed, Credit Bubbles redistribute and destroy wealth. Bubbles distort investment and spending patterns, which in the end ensures too much of a lot of stuff that the general population either cannot afford or does not desire.
A few weeks back I noted analysis that placed excess global energy sector investment at several Trillion. And this week from Bloomberg (Agnieszka De Sousa), “Glencore CEO Lists Mining's Mistakes After $1 Trillion Spree.” And how many Trillions of over/malinvestment were spent in recent years throughout “tech,” biotech, pharmaceuticals and retail? Tens of Trillions throughout China and Asia more generally? Downward price pressures globally on so many things should be no mystery. And by now it should be indisputable that so-called “deflationary pressures” are not the consequence of insufficient “money.”
In the name of “shortfalls in aggregate demand,” central bankers have flooded the world with “money” and Credit. Predictably, this unprecedented global monetary inflation has wreaked havoc on financial market behavior and investment patterns, while spurring self-reinforcing asset inflation and Bubbles. And aggregate demand? It is not - will never be - "sufficient". As we’ve witnessed, Credit Bubbles redistribute and destroy wealth. Bubbles distort investment and spending patterns, which in the end ensures too much of a lot of stuff that the general population either cannot afford or does not desire.
http://creditbubblebulletin.blogspot.co.nz/2016/05/commentary-ominous-p…
Stephen H,
Interesting as always.
Maybe I'm missing a key point, but the narrative with all the charts is very doom laden. And yet all the charts show various supply and demand measures still actually growing in China year on year, albeit at a slower rate than for the last 20 years or so.
Clearly there has been building of too much capacity there (and elsewhere) in nearly everything, and there is some pain in adjusting to that over capacity, either by lower prices forcing some out, or demand eventually catching up. Nevertheless there is still apparently growth, assuming the measures are accurate.
Am I missing something?
I don't know what you are missing, but the global economy including China is missing the previous Eurodollar credit creation capacity of G-Sib banks.
Deutsche Bank AG is stuck in a vicious circle as co-Chief Executive Officer John Cryan seeks to overhaul an impaired business that needs more capital, which the bank would struggle to raise if it tried to tap investors, according to Berenberg.
The Frankfurt-based lender’s biggest problem is excessive leverage, Berenberg’s James Chappell wrote Monday in a note that said the bank faces “insurmountable headwinds.” He cut his rating to sell from hold and reduced his target price for the stock to 9 euros per share, the lowest among more than 30 analysts tracked by Bloomberg and about 40 percent below current levels. Read more
The 2s10s US Treasury note spread collapse below 100 bps is notably bearish.
Bearishness in the yield curve is not something new, however, only the notice of it. While risks to the economy are part of this shift in commentary, the Federal Reserve’s haplessness is as well. Read more
Someone else will have to think of a way to continue the game of musical chairs called capitalism, I certainly cannot.
The only possibility is one country discovers a low cost renewable energy source and proceeds to asset strip every other country like the good old days of coal and the steam engine.
I think Deutsche Bank biggest potential problem is the 20 Trillion Euro's of derivatives it has exposure too, a 5% default would wipe out the Banks capital, a total default could wipe out Germany whose GDP is about a third of Deutshe Banks exposure and undoubtedly other German & European Banks have derivative exposure so any substantial derivative default would have a domino effect and make the 2008 GFC look like dropping a brick in a puddle compared to the Tsunami that would follow such a default.
Deutsche Bank is present in a lot of countries so bank capital going to zero would do widespread damage.
Some good news about them, oh wait no, it's really bad.
http://www.bloomberg.com/news/articles/2016-05-16/deutsche-bank-s-probl…
Gross noted the collapse in bank stock prices after the collapse of Lehman Brothers in 2008: Citi was at $500 in 2007, currently trades around $38; Bank of America at $50 but now trades around $12; Credit Suisse was at $70 and now trades around $13; Deutsche Bank at $130, now around $16, and Goldman Sachs was at $250, and is now at about $146.
Gross warned investors: "Banking/finance seems to be either a screaming sector ready to be bought or a permanently damaged victim of write-offs, tighter regulation and significantly lower future margins. I'll vote for the latter."
Gross said investors should not reach for the "tantalizing apple of high yield or the low price/book ratio of bank stocks." Those prices are where they are because of low or negative interest rates, Gross said.
All told, Gross said: "Central bankers seem ever intent on going lower, ignorant, in my view, of the harm being done to a classical economic model that has driven prosperity, until it reached a negative interest rate dead end and could drive no more."
http://www.reuters.com/article/us-funds-janus-gross-idUSKCN0W51GI
I don't think he was clueless, he made lots of good decisions for a card shark.
http://www.fool.com/investing/general/2014/10/05/how-bill-gross-amassed…
The oil price is higher again today with the US benchmark now just under $48/barrel and the Brent benchmark at US$49/barrel.
If the Bloomberg Commodity Index can stage a May close above 90.50 all sorts of as yet unimagined turmoil will appear and more so in sovereign bond markets?
"The production surplus is still adding about 700,000 barrels a day above current levels of worldwide demand.
And then there is the even more significant reserve environment.
The global oil sector today has far more known, extractable oil reserves then at any time in the past. This is oil that can in short order end up in the market. This acts both as a short-lived bottom-line relief to companies – by giving them more oil to sell when prices make extraction worthwhile – and as a restraint on how high oil prices can go (and how quickly)."
http://oilandenergyinvestor.com/2016/05/forget-about-supply-and-demand-…
If he is right about the supply/demand situation it does not seem likely the current rally will get out of hand.
The govt bury their head in the sand.
meanwhile; some people are looking... 3bn-people-and-158tn-at-risk-says-world-bank
https://www.theguardian.com/business/2016/may/16/climate-change-puts-13…
I think (actually I am absolutely certain) the 2050 time frame referred to in the article is wildly optimistic.
The probability of a record low Arctic ice cover in September [2016] continues to rise by the day. Indeed, the prospect of no sea ice at all in September is increasing by the day: less ice = faster overheating.
http://nsidc.org/arcticseaicenews/charctic-interactive-sea-ice-graph/
or if you prefer an overall perspective
http://arctic-news.blogspot.co.nz/2016/05/further-confirmation-of-arcti…
I suspect we will be into severe climate chaos and rapid sea level rise within a decade, as a direct consequence of the complete failure to address CO2 emissions (in fact promotion of increased emissions) that has characterised the last 40 years of governance.
why should the government subsidise landlords its time the whole accomodation supplement was done away with.
let free market determine the rents, they will be what people can afford if they can not the houses will become empty and have to be sold driving down prices
http://www.stuff.co.nz/business/80036320/rising-auckland-rental-prices-…
So my first thoughts are:
1. Is the data right.
2. If it is right, there must be a mass exodus of people from Auckland, but that can't be true given the immigration figures.
3. The answer must be that too many of the house in Auckland are being purchased by investor/landlords.
4. Are we going to see an oversupply of available rentals which will result in a significant drop in rental income?.....I mean, who would have thought!!
Yes - the data probably is right.
Yes - there is an exodus from Auckland but is it large enough that it out weights immigration? probably not.
Yes - most houses are being purchased by landlords/investors.
No - if demand of rentals is still hight and competitive (plenty of evidence to suggest this) then it's unlikely to cause a price drop. there are still more and more people arriving and living in a city where they can't buy, so they rent.
But why would the number of available listings spike so much if there was such demand? They would be snapped up immediately wouldn't they?
Or have we got to the point where the cost of renting is so high that new immigrants and locals are in fact choosing to sleep in cars and on the streets? Data wouldn't make much sense otherwise.
The numbers re trade me figures, are something I collate as I ponder upon Aucklands housing market . The percentage change is accurate. The rental numbers have gone from 3800 to 4400 a large number come under available now.. Obviously Trade me is only one avenue for rental properties.At the end of the day rental property is all about income not expectation of future gains , given the current yields (which even Interest co misleads by using the lowest quartile house price ) something has to correct. I do not believe rents will rise which leaves one alternative.Will it be 2016 or 2018 or deferred later everyone can make their own decision.
Henry, did you see this?
Dairy giant Fonterra says the milk price bubble it has been warning about has burst and low prices are here to stay.
http://www.afr.com/news/politics/election-2016-get-used-to-low-milk-pri…?
Nice. You are right. From before. It's a take costs out of the system problem we have.
https://m.youtube.com/watch?t=29s&v=5F_CDckDSMU&feature=youtu.be
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