90 seconds at 9 am: China suffers "massive blow"

US economy growing solidly; Wall Street hits new records; China loses sea claim case comprehensively; China FDI grows strongly; UST 10yr yield at 1.50%; oil up, gold down sharply; NZ$1 = 73.1 US¢, TWI-5 = 76.8

13th Jul 16, 7:32am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news China has lost a key international arbitration ruling in a spectacular and humiliating way.

But first, the Atlanta Fed's real-time tracking model now shows the American economy probably grew at a +2.3% annualised rate in the second quarter following the latest data on wholesale trade. While not spectacular, it is a solid rate, and one that will inform the US Fed policy makers. Certainly there is no sign of any Brexit impact on the US.

These sorts of base economic news and reviews is seeing a strong shift of investor funds into equities with Wall Street posting record highs, and bond yields rising as funds are shifted away from fixed income allocations.

Closer to home, China has lost a legal dispute about overlapping maritime claims in the seas off of the Philippines. The case was brought by the Philippines, arguing that China’s claims of historic rights don’t comply with the United Nations Convention on the Law of the Sea. While the court says the ruling is binding, it lacks a mechanism for enforcement. China’s assertions are based on a 1947 map showing vague dashes -- known as the nine-dash line -- that cover about 80% of the what China calls "the South China Sea". China has already rejected the ruling, but it does set up a more dangerous situation in the area and will embolden Vietnam and Malaysia in their defence of waters adjacent. It will also put the US in a difficult strategic situation with China.

New Zealand will get to add its nickels worth on the dispute next week when American Vice President Joe Biden visits here.

However, this political dispute does not appear to be restraining investment by American firms in China. Foreign Direct Investment in the Middle Kingdom is up +10% year-on-year in June, overcoming a May bump. The US was the main investor.

Back in New York, UST 10yr yields have risen sharply again for the third straight day and are now at 1.50%.

The US benchmark oil price is up as well by more than US$2, now just under US$47/barrel and the Brent benchmark is just over US$48/barrel.

The gold price is down by more than US$23, now at US$1,322/oz.

The NZ dollar starts today up strongly against the greenback at 73.1 US¢, is at 95.7 AU¢, and at 66.1 euro cents. The TWI-5 index is at 76.8. In fact, this is the highest level since May 2015.

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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30 Comments

by ngakonui gold | 13th Jul 16, 7:45am 1468352736

China may have lost the dispute and although the ruling is binding ,it is unenforceable.
The Chinese have just given us another 2 fingered salute.

by Noncents | 13th Jul 16, 12:57pm 1468371441

International courts are great. Maybe they could station UN Peacekeepers there - that always fixes everything.

by sharetrader | 13th Jul 16, 7:59am 1468353586

ahhh who do we side with new masters or old masters

by dtcarter | 13th Jul 16, 8:29am 1468355341

We are ruled by the Philippines?

by Caleb | 13th Jul 16, 8:41am 1468356072

You know he means the US.

by sharetrader | 13th Jul 16, 10:54am 1468364040

correct i expect a flying visit by our foreign minister to both china and the US to say ,
we wont take sides please dont make us,
or is it with this government what can you do for us and we will back you

by dtcarter | 13th Jul 16, 11:46am 1468367176

UN=US?

by kiwichas | 13th Jul 16, 11:27am 1468366034

A bunch of Chinese believe that the Philippines belong to China, just like Tibet.

by lesnakey | 13th Jul 16, 9:20am 1468358439

The old.

https://freedomhouse.org/report/freedom-world/freedom-world-2015#.V4Vet…

by Stephen Hulme | 13th Jul 16, 9:23am 1468358587

The US benchmark oil price is up as well by more than US$2, now just under US$47/barrel and the Brent benchmark is just over US$48/barrel.

The recent return of cantango does not presage 'good times' ahead for producer pricing, but surely reflects a wholesale finance shortage for storage, hence a need to dump product independent of the recent price trend.

On the surface, the recovery of the global oil market is firmly in place, signaling an end to two years of oversupply and collapsing prices. However, one key indicator is warning of turbulence ahead.

Crude’s rally stalled near $50 a barrel in the past month and the one-year price contango -- where near-term deliveries are cheaper than those a year ahead -- has almost doubled. That’s a signal that demand from refiners could be weakening. When the same thing happened last summer, a fragile oil rebound gave way to a renewed rout. Read more

by ham n eggs | 13th Jul 16, 9:40am 1468359609

I agree - the Oil price looks fragile and could easily tumble

by Stephen Hulme | 13th Jul 16, 9:26am 1468358815

Whatever happened to a 'government of laws, not of men'?

The US government decided not to pursue criminal charges against HSBC for allowing terrorists and drug dealers to launder millions of dollars after George Osborne and the UK banking regulator intervened to warn that prosecuting Britain’s biggest bank could lead to a “global financial disaster”. Read more

by James007 | 13th Jul 16, 10:07am 1468361255

It is "who" you know that counts. The church of money will not be brought down.

by murray86 | 13th Jul 16, 10:29am 1468362541

It is interesting; Governments acting to protect private corporations and individuals. Corruption at the highest levels. How do we hold them to account?

by scarfie | 13th Jul 16, 10:47am 1468363656

Fascism is perhaps a broad term, but I think it fits.

by moa man | 13th Jul 16, 3:50pm 1468381808

Pragmatism, perhaps.

by workingman | 13th Jul 16, 10:28am 1468362522

'The government of laws', Stephen, has been subverted globally by unaccountable, often corrupt, financial interests. Google last September's 33rd Cambridge International Symposium on Economic Crime, (the world’s leading such Symposium).

Attendee and financial crime expert, Rowan Bosworth-Davies, summed things up like this: ‘What became very quickly clear this year was the general sense of deep disgust and repugnance that was demonstrated towards the global banking industry. I can say with some degree of certainty now that a very large number of academics, law enforcement agencies, and financial compliance consultants are now joined, as one, in their total condemnation of significant elements of the global banking sector for their organised criminal activities.

'Many banks are widely identified now as nothing more than enterprise criminal organisations, who engage in widespread criminal practice and dishonest conduct as a matter of course and deliberate commercial policy.’

by Scepticism | 13th Jul 16, 10:36am 1468363007

is it possible that this is actually the beginning of a positive change?

In that banks and politicians have ALWAYS been completely, utterly, amorally corrupt. However, in very recent years with the combination of impacts on daily life too big to hide, and social media, blogs & websites like this one there is far greater public scrutiny and interest in these issues.

This would imply that the disinfectant of sunlight being shone on these things may make for positive change?

by murray86 | 13th Jul 16, 11:16am 1468365379

We can only hope

by Stephen Hulme | 13th Jul 16, 11:27am 1468366023

This situation certainly needs the glare of sunlight to rectify many injustices.

Here - in one simple chart - is why Ireland is keeping very quite in the international debate over tax inversions.

The Irish economy grew over 26% in 2015, officials from the Central Statistics Office told a stunned room full of economists and reporters in Dublin on Tuesday. Previously, they had estimated growth of 7.8%... Read more

by David George | 13th Jul 16, 3:41pm 1468381310

These big banks can pretty much do what the hell they like by the look of things. Actively evading tax themselves as well as assisting their multinational clients to do likewise, laundering the proceeds of arms smugglers, drug dealers, human traffickers, terrorists, corrupt governments and dodgy dealers of every stripe. No banking licences pulled or any of their spiv executives behind bars; pretty much business as usual and the shareholders stump up for the joke fines. But governments are talking tough, yeah mate they're gonna cut out cash!
This is so sick you could hardly make it up. I won't be able to include a $50 note with my granddaughters birthday card but the crooks can do what the hell they want while the untouchable big banks give them all the help they need. The politicians that enable this carry-on just can't understand why the people are fed up with the whole thing. Things like the British EU vote and the rise of Trump are the result. I think NZ First will do very well next election. Recall one W. Peters and his winebox?

by profile | 13th Jul 16, 2:31pm 1468377072

$881 mill is chicken feed. The drug trade needs to launder anout $400 billion annually- that isn't going fit under mattresses, or Auckland real estate, so has to go through the global banking system. Takes a lot more cooperation than HSBC widening a few teller windows to disappear that amount of cash every year.

Amy Elliot - whistle blower on the Citi drug money scandal "…this goes in the very, very top of the corporation, this was known…on the very top. We are little pawns in this whole thing”

by Stephen Hulme | 13th Jul 16, 9:52am 1468360326

But first, the Atlanta Fed's real-time tracking model now shows the American economy probably grew at a +2.3% annualised rate in the second quarter following the latest data on wholesale trade.

All may not be as it seems.

We are conditioned to look at things in straight lines; we are even told that history is linear. This is simply not the case, as cyclicality is encoded in our DNA by the most basic processes of astrophysics and planetary motion. I have to believe what you see here is quite a bit more than ancient biases protruding into modern life, but overall it makes perfect sense to find drastic seasonality; especially under conditions of monetary illiquidity and tightness that has the effect of amplifying even natural pressure points. Read more

by nzakl | 13th Jul 16, 10:41am 1468363277

Asian Giant will rule with military power or with money power. Pumping money and tempting leaders of small island / countries with development (Behind doors what happens that is less said the better) and slowly steadily establish themselves and a time comes when they will have more say than the local. Initially remote controlling from behind door through government in power and than ..............

Where money power does not work will try to through muscle power.

Early, one realize the better for any self respecting nation.

by KH | 13th Jul 16, 11:15am 1468365351

Law of the sea. The competitive advantage New Zealand has is natural assets, one of which is our ocean. In about 20 years a big war fleet might steam down to take the last two cod, and not much we could do then. Short of that sad day and in the meantime our best investment would be to remove factory fishing entirely from our waters, and set up a navy to defend it from the smaller thieves. Think investment.
That chunk of ocean which is huge even on a world scale is perhaps as valuable as our landmass.

by reena | 13th Jul 16, 12:53pm 1468371223

Would be interesting to see New Zealand government stand on South China Sea and its advise to China.

by Stephen Hulme | 13th Jul 16, 1:43pm 1468374231

Some background:

But the speech really breaks new ground when it sets out how New Zealand sees its future defence relationship with China, which Mr. Brownlee calls a ‘true strategic partner’. A Five Year Engagement Plan between the PLA and NZDF is cited as the first with a Western military and likened to the ‘four firsts’ New Zealand has achieved with China in the political and economic arena. Unfortunately, the Plan doesn’t seem to be publicly available, but Mr. Brownlee says a key area for closer military cooperation will be in Humanitarian Assistance and Disaster Relief. Another priority will be creating opportunities for junior NZDF and PLA soldiers to work together, which ‘will boost interoperability, mutual understanding and enable us to share perspectives on the world.’ Read more

And then this:

China should explain its island building program in the South China Sea or it will continue to fuel insecurity among countries whose economies depend on free trade, including smaller nations many miles away, New Zealand Defence Minister Gerry Brownlee said.

“What we are looking to see from the Chinese is some better understanding about what it is about,” Brownlee said, referring to islands China has created that now cover more than 3,000 acres of land. “It is extremely important for the whole world’s economies that that remains a peaceable area and that open sea lanes and skies are available,” he said in an interview on Friday on the sidelines of the Shangri-La security forum in Singapore.

“In that part of the world, the proximity of those countries would mean that it is a very difficult circumstance to resolve,” he said. About 80 percent of New Zealand’s annual trade passes through the South China Sea. Read more

by 12000 | 13th Jul 16, 2:08pm 1468375717

Well NZ will stand by court judgement.

Actually should but knowing our government will find some excuse and avoid taking a stand.

This is national government of NZ.

by sharetrader | 13th Jul 16, 3:09pm 1468379356

first they will deny there is a problem
then they will blame labour for signing a FTA with china
then they will call it a challenge as the US and china start shooting at each other
Last they will send our two frigates out to try to keep the peace but they will both break down and china will tow one back and the USA the other
Job done

by 12000 | 13th Jul 16, 2:08pm 1468375719

Well NZ will stand by court judgement.

Actually should but knowing our government will find some excuse and avoid taking a stand.

This is national government of NZ.