US factory outlook brighter; Mexico raises rates; S&P cuts EU rating; BofE eyes more QE; Italy rescues bank; China warns on growth; UST 10yr yield at 1.46%; oil and gold lower; NZ$1 = 71.2 US¢, TWI-5 = 75.1

US factory outlook brighter; Mexico raises rates; S&P cuts EU rating; BofE eyes more QE; Italy rescues bank; China warns on growth; UST 10yr yield at 1.46%; oil and gold lower; NZ$1 = 71.2 US¢, TWI-5 = 75.1

Here's my summary of the key events overnight that affect New Zealand, with news the Bank of England has signaled more money printing, to hold up the UK economy post Brexit.

But first, in the US, factory activity in the key manufacturing region of the Midwest surged to its highest level in almost 18 month in June amid strong gains in new orders and production.

South of the border, Mexico has raised its benchmark policy rate by +50 bps to 4.25%. It said it did so to keep inflation in check even though they would have preferred to have followed the US Fed's lead. Their problem is, the Fed isn't leading.

In Europe, Standard & Poor's cut its long-term credit rating on the European Union to 'AA' from 'AA+' but raised its outlook to "stable". That puts the EU on the same rating as the UK, but the UK's outlook is "negative".

The British currency has fallen sharply as the Bank of England said "some monetary policy easing" will be required post-Brexit. (p15)

And Germany has rebuffed an Italian government plea to ease EU rules during the Brexit loss-of-confidence so that it could action a wider bank rescue plan. But time is not waiting for Rome; they have had to bail out a mid-sized bank overnight. Veneto Banca has sought €1 bln from investors to recapitalise, but got almost zero takers.

China's finance minister has warned that tax collections are running behind forecast and their economy is "facing great downward pressure".

The Australian election is coming to its conclusion with the vote tomorrow. After decades crude and bitter battles, this one seems to have been contested with a civility unusual in Australian politics, probably because the leaders of both main parties are uninspiring. Both are competent for the job however. But the lack of political venom in this contest is noticeable, and unusual.

Wall Street equity markets are all higher by more than +1% in mid-afternoon trading.

In New York, the benchmark UST 10yr yield has held overnight and is still at 1.46% in late trading. Credit risk premiums continue their reductions however, even for Australasian investment grade corporate debt.

The US benchmark oil price is lower today, now just over US$48/barrel and the Brent benchmark is just over US$50/barrel.

The gold price is also lower, down US$8 to US$1,315/oz.

The NZ dollar has risen yet again overnight but only marginally this time and is now at 71.2 US¢, at 95.7 AU¢, and at 64.4 euro cents. The TWI-5 index is at 75.1. Still, it has been more than a year since when our TWI has been at this level.

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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9 Comments

Fed unable to control it's self imposed interest rate corridor?

General collateral repo rates opened Thursday at 0.85 percent and reached 1.1 percent by 12 p.m. in New York, twice Wednesday’s close, according to ICAP Plc, the world’s largest inter-dealer broker. The average level of overnight general collateral repo traded with ICAP was 0.847 percent Thursday morning, the highest since October 2008. The one-month bill rate fell to 0.17 percent, down from 0.18 percent a day earlier and 0.20 percent Tuesday. Read more

There is supposed to be a determined hierarchy of interbank money rates all governed by risk. Repo rates, for example, should, for the most part, trade less than federal funds or LIBOR (in comparison to term repo). The reason is simple and intuitive; secured vs. unsecured. A repo transaction contains collateral therefore the cash borrower obtains a lower cost for putting up financial security. Federal funds or eurodollars are unsecured and thus any bank borrowing in those markets will pay for the lack of security. Read more

Climate chaos is going mainstream, with the Independent reporting a global climate emergency as a consequence of severe disruption to the jet streams, caused by overheating due to CO2 emissions.

Whether this will manifest as loss of seasons and major disruption to global food supplies, as suggested, will be revealed over the coming years.

http://www.independent.co.uk/news/science/climate-change-emergency-jet-s...

Meanwhile, America's Lake Mead continues to look in an awful condition - a record low level and trending down.

http://mead.uslakes.info/level.asp

As far as this year's Northern Hemisphere summer is concerned, we will have many answers in September, including the degree of meltdown of the Arctic region.

Thanks for raising the climate change issue. There is so much misinformation and misunderstanding about climate change. Check this link, for what I think is the most definitive, albeit pessimistic comment on climate change I've seen.

http://guymcpherson.com/climate-chaos/climate-change-summary-and-update/

The upshot is that a 2degree rise in global temperatures will happen, and sooner than we think. Mankind cannot do anything to stop it. The unknown factor is whether we get a 3, 4 or 5 degree rise before the end of the century, because if we do, we as a species face extinction.

This from The Guardian:

"Scientists warn that the global warming target will be overshot within two decades, as annual concentrations of CO2 set to pass 400 parts per million in 2016.

The Met Office forecasts 2016 will see annual CO2 concentrations breach 400 parts per million. To keep below global warming of 2C - the ‘safe’ level - concentrations must be kept below 450ppm. Atmospheric concentrations of CO2 will shatter the symbolic barrier of 400 parts per million (ppm) this year and will not fall below it in our lifetimes, according to a new Met Office study."

Also in that summary (note "by 2020"):
:
"A paper published in the 9 March 2016 online issue of Nature Climate Change indicates that we are on the verge of “near-term acceleration in the rate of temperature change.” In this case, near-term means by 2020. As indicated in the paper’s abstract, “We find that present trends in greenhouse-gas and aerosol emissions are now moving the Earth system into a regime in terms of multi-decadal rates of change that are unprecedented for at least the past 1,000 years.” “Anthropogenic carbon release rate unprecedented during the past 66 million years,” according to the title of a paper in the 21 March 2016 online issue of Nature Geoscience." More heat yields more atmospheric water vapour from ocean evaporation, yields more sun heat trapped, yields....(positive feedback loop)

"they have had to bail out a mid-sized bank overnight. Veneto Banca" So Italy, a virtual bankrupt nation, has bailed out a bankrupt bank. You couldn't make this stuff up!

You could not - but central banks' default response always reverts to seeing, if not actually catching financial unicorns.

Is this the latest fantasy update?

Italy Granted "Extraordinary " €150BN Bank Bailout Program To Prevent "Panic, Run On Deposits"

"China's finance minister has warned that their economy is "facing great downward pressure"."
That would be an understatement. Also very revealing that the are actually acknowledging it - must be very bad.

China aint seen nothin if Don Trump gets in, there will pratically be a ban on goods imported from China. The import tariffs will be so high that companies like Apple will have to bring production back to the US again.

Anne Gibson writes a shameless puff-piece in the Herald:

Brexit and Donald Trump: Why the world is suddenly searching for New Zealand property

The website, established in 2007, is half owned by the Real Estate Institute and half owned by number of big real estate agencies.

Nuff said!