FAO sees ag prices lower, dairy up; EU jobless fall, ECB pressures Italian banks; APRA pressures big 4, China pressures publishers; UST 10yr yield at 1.46%; oil flat, gold up; NZ$1 = 72.3 US¢, TWI-5 = 75.8

FAO sees ag prices lower, dairy up; EU jobless fall, ECB pressures Italian banks; APRA pressures big 4, China pressures publishers; UST 10yr yield at 1.46%; oil flat, gold up; NZ$1 = 72.3 US¢, TWI-5 = 75.8

Here's my summary of the key events overnight that affect New Zealand, with news from around the world.

Firstly, the FAO has said that the period of high agricultural prices is "likely over" as the world's demographics change. This is a big call. But it also said there will be exceptions, including for milk powder which it expects to outperform. Interestingly, it sees few trade prospects for "fresh dairy products".

In Europe, the latest data for unemployment shows that jobless rates continue to trend down in May. In fact, they are now near a five year low.

In Italy, their banking crisis took another turn overnight with the ECB putting the screws on their third largest bank to raise more capital. Italian banks have about a third of the euro-zone's bad bank debt, and Monte dei Paschi di Siena has about 13% of that Italian exposure. There is some sort of contagion building for Italian banks.

In Australia, their banking regulator APRA has noted that while bank capital there has been rising following their sharp prod in 2014, the big four pillar banks have to go further and raise a shed load more capital to strengthen their capital base. These four banks now rank in the top quartile internationally for capital backup, but international rules are raising everyone else's game in this area. So to remain in the top quartile, even more capital will need to be raised and soon. This affects New Zealand because one place to get that capital can be by raiding their New Zealand subsidiaries. The RBNZ needs to be on its game to prevent these local institutions being hollowed out in any way by downstream pressure from the Aussie regulator.

The RBA does its monthly review of its benchmark interest rate again later today. Before the election, most economists were of the view that their 1.75% rate would stay on hold. That still applies, but the new economic uncertainty driven by their stalemate election is surely on the mind of Governor Stevens and today's statement could give some signals on how they are assessing these risks.

In China, President Xi's grip is getting tighter. China’s powerful internet censorship body has further tightened its grip on online news reports by warning all news or social network websites against publishing news "without proper verification".

Although New York markets are closed for their July 4 holiday, UST 10yr yields are being quoted marginally higher at 1.46%.

The US benchmark oil price is mixed but little changed, now just under US$49/barrel and the Brent benchmark is just over US$50/barrel.

The gold price is up a little further to US$1,352/oz.

The NZ dollar starts today higher as well, at 72.3 US¢, at 95.9 AU¢, and at 64.8 euro cents. The TWI-5 index is at 75.8. and now its highest point in a year. Against the Aussie we are now at a 14 month high.

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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Pretty much what I have been saying for a few years here now, we are in a trap of declining velocity that is being countered by increasing the supply of money at lower interest rates. Bottom line is too much debt.

"To repeat once again, inflation/deflation is the velocity of money multiplied by money- and credit supply. The latter factor has in general gone through the roof, but that means zilch if the former -velocity- tanks.

That this velocity is -still- tanking, in Japan as well as in the western world, is due to, more than anything else, an unparalleled surge in debt. At some point, that will catch up with any economy and society. Even if they are growing, which our economies are not. Growth has been replaced with credit, and credit is debt. It’s safe to say that money velocity cannot possibly ‘recover’ until large swaths of debt have been cancelled, one way or another."

interesting re the banks, can the NZ government afford to let them fold to save their parents when GFC2 comes.
the downturn it would cause would be horrendous not to mention the governmental banking, how many billion do they put through Westpac.
as for OBR who's to say what the lead time will be and you might find a lot is under mattresses or sent overseas

A big concern here is that the banks are private money. Governments have allowed them to control economies through their practices, and if they collapse it will be the people on the street who pay while the banks are bailed out. And what will also happen, the parents will borrow against their security and then load the debt against them to mean they don't pay any tax here. I believe that any qualifying debt to put against tax must have been used here, or to produce income here.

Murray if such a scenario was allowed to play out then what trust would be left in such a fragile financial system that anyone would still have faith in to borrow or save/ invest?
Life as we know it would be over. Banks will burn to the ground, politicians better run for their lives.

Better fill the mattresses with cash!! Oh, I can see the line at the ATM forming... got to go...

Exactly - this system we have now is screwed up beyond all comprehension, where the institutions are more important than the people. A small number at the top getting rich off everyone else's back. Government's are supposed to represent the PEOPLE not the money. I put my money in a bank for it to be put to good use while it is held in reserve for ME. I do NOT give it to the banks to be squandered! I expect the politicians writing the laws to write them in my best interests, NOT the banks. Banks are privately owned, why should tax payers bail them out? If they collapse then I think any bailout money should come to replace my funds, in other words to me, not to a bank that has proven it cannot be trusted. And by the way, if a bank collapses because of illegal behaviour, i expect all complicit people to go to jail, put their personal fortunes on the line to pay the losses back and be fully accountable! This system doesn't exist now, so tell me why we should trust it now?

Man, i do not trust it and neither should you. I already removed 90% of my cash reserves and diversified it in all kinds of stuff. Some I will win, some I will lose on. But anyone just leaving their cash in the bank waiting for the day it all goes bust.... then expecting it to still be there has not learned from 2008. They will steal from depositors in a heart beat to keep the status quo if they claim necessary

From ANZ's perspective there's also the Australian Prudential Regulation Authority enforced task of repaying NZ$8 billion to its Australian parent over five years.This comes after APRA last year told the Australian parents of ANZ NZ, ASB, BNZ and Westpac NZ they have until 2021 to reduce their non-equity exposures to their NZ subsidiaries to below 5% of the parent's Level 1 Tier 1 Capital. From ANZ's perspective this means repaying $1.6 billion a year for five years, a significant but not unmanageable task. In contrast Westpac has $1 billion to repay over five years, and ASB "does not expect any challenge." BNZ "currently has no outstanding senior unsecured loans [ie non-equity exposure]" from its parent National Australia Bank. Read more

Is APRA responding to the RBNZ's OBR folly? Without doubt. It wishes/demands NZ bank subs raise unsecured CoCo type funding from the domestic NZ investing community - KiwiSaver, ACC, NZ Super Fund or whatever.

"We have also diversified our funding sources enough to repay all the senior unsecured funding lent to us by our parent, National Australia Bank (NAB)," Duarte said. Read more

Correct Stephen. Unwitting Mums and Dads used to reorganise bank debt structures.

Standard Life Investments has suspended trading on its £2.7 billion U.K. Real Estate fund, effective immediately, following Brexit, Investment Week reported, citing a statement.

The firm has suspended trading on the SLI UK Real Estate PAIF and the SLI UK Real Estate income and accumulation feeder funds.

The company cites "exceptional market circumstances" following an increase in redemption requests from the referendum. Read more

AEP reports S&P's 'not in the Armageddon camp' re Brexit here: http://www.telegraph.co.uk/business/2016/07/04/sp-scoffs-at-armageddon-w...