90 seconds at 9 am: Oil prices sink, iron ore prices rise

China sends conflicting signals; US factories upbeat; iron ore prices rise; US corporate defaults rise; AU house sales boom; UST 10yr yield at 1.49%; oil down, gold unchanged; NZ$1 = 71.9 US¢, TWI-5 = 75.3

2nd Aug 16, 7:24am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news the oil industry is struggling with its fundamentals.

But first, overnight there have been some unusual signals from the Chinese manufacturing sector. Their official gauge shows a Chinese factory slowdown and contraction. However the private unofficial one, generally more trusted by economists, shows an upturn, with output, new orders and buying activity all returning to growth.

China's official PMI for services is also positive, reaching its second highest level in a year.

Extending the positive theme is the American factory PMI reading, recording a sharp turn higher in July, boosted by much better output, new orders (especially export orders), and importantly new hiring. A second survey reported almost the same PMI level.

One immediate impact of all this factory activity is to push iron ore futures prices sharply higher; in fact, they are at their highest level since February 2015.

However, oil patch stress is taking its toll on American corporates. Corporate defaults among speculative grade US companies are heading for their highest level since the GFC according to Moody’s. But outside the oil and mining industries, their data shows little change and only normal levels of stress.

In Australia, sales of new homes jumped sharply in June after two months of weakness. The Housing Industry Association said its survey of large-volume builders showed new home sales jumped +8.2% in June, more than making up for a -4.4% fall in May. Sales of single family homes climbed +7.2%, while apartment sales surged +11.5%. But not everyone thinks the apartment boom will last.

In New York, UST 10yr yields have started their week a little higher at 1.49%.

But the US benchmark oil price has fallen and is now just on US$40/barrel and the Brent benchmark is just on US$42/barrel. At one point today, the US crude price was below $40, and this is despite it being the peak summer driving season there. The Saudis and the US frackers are competing with each other to a standstill. Some think the only way from here for oil prices, is down.

The gold price is holding at its higher level, up US$2 to US$1,351/oz.

The NZ dollar is also holding at its high level. It will start today at 71.9 US¢, at 95.1 AU¢, and at 64.4 euro cents. The TWI-5 index is still at 75.3.

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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20 Comments

by scarfie | 2nd Aug 16, 8:29am 1470083385

Yesterday Stephen Hulme posted a link that outlined the real test of economics is in its predictive value. That is one thing that my rework of the Quantity Theory of Money to accommodate interest has been most useful for. (M.V)+i=P.Q.

I first made the claim that interest rates would drop back here back in 2012 sometime. I have periodically made the additional claims that velocity would keep dropping. The other feature that this theory permits an assumption of is that production can decrease, but an increase in price can give the artificial belief that production is rising. I think the recent Ireland example is nice proof of that.

The start point for me in developing the model was reading that the right side of the equation is essentially GDP. It was interesting to look for evidence of my theory and find it in the 30 year downward trend in interest rates. Perhaps the first 10 years or so after coming off the gold standard is harder to explain, although I have ideas about that.

Really it is quite simple, it is compound interest in reverse - compound debt.

There you have it, the prediction is still out there. Lets see how it shapes up in the future.

by OnwardsUpwards | 2nd Aug 16, 9:18am 1470086304

Interest rates dropped from 8% (24 July 2008) to 2.5% (11 December 2011).

Then you came along in 2012 and said interest rates were going to drop. Give me a break.

by moe | 2nd Aug 16, 10:40am 1470091252

You are correct but to be fair to scarfie, we had many "experts" from banking, business and media screaming every day that mortgage rates were going up to 7-8% in the period 2013-15.

by scarfie | 2nd Aug 16, 1:37pm 1470101859

I back up my statement with economic theory that challenges the theory developed by Newcomb, Fisher and Mises. You respond with the great economic principle of blind optimism.

You have been called a troll, but I am going to be more frank than that. You are just a dick.

I would laugh, but the tragedy is that 99% of the population pray to the same economic god you do.

by @tony | 2nd Aug 16, 2:18pm 1470104310

Sadly your not alone...

http://www.bbc.com/news/business-36937109

See around middle...

"And where the conflict comes is where people fall into this grey zone, and so I think it can absolutely happen again.
"Especially as we go into what could be the next phase of the great financial crisis over the next 12 to 24 months."

by ham n eggs | 2nd Aug 16, 8:35am 1470083732

"...news the oil industry is struggling with its fundamentals."

The trouble is Oil isn't an industry, it is the economy. And yes Oil is in a no win situation; its needs higher prices to fund exploration but the world economy cant afford higher prices. Result; the world economy is about to hit the wall. Any rebound of prices will smash what feeble growth there is.

by OnwardsUpwards | 2nd Aug 16, 9:25am 1470086720

... the world economy is about to hit the wall.

You're going to have egg on your face by the end of the year. Guaranteed.

by The Oracle | 2nd Aug 16, 10:12am 1470089576

Perhaps you could substantiate your bullish view Onwards Upwards... commentary on some lead indicators would be a good start.

by ham n eggs | 2nd Aug 16, 1:17pm 1470100620

Do you mean from when it all blows?

by Stephen Hulme | 2nd Aug 16, 9:49am 1470088183

I suppose economic growth is also seen in the eye of the beholder.

Activity in China's manufacturing sector eased unexpectedly in July as orders cooled and flooding disrupted business, an official survey showed, adding to fears the economy will slow in coming months unless the government steps up a huge spending spree.

While a similar private survey showed business picked up for the first time in 17 months, the increase was only slight and the much larger official survey on Monday suggested China's overall industrial activity remains sluggish at best.

Both surveys showed persistently weak demand at home and abroad were forcing companies to continue to shed jobs, even as Beijing vows to shut more industrial overcapacity that could lead to larger layoffs. Read more

Moreover, Bill Dudley hasn't got your back.

Other factors may also prompt caution from the central bank, Mr Dudley said. These included the view that longer-term drags on the economy mean US monetary policy was only “moderately accommodative” at current levels; the potential impact of overseas setbacks on US financial conditions; and that it was a bigger risk to lift rates too soon than to wait. Read more

by MikeM | 2nd Aug 16, 10:54am 1470092078

I was sifting through US stocks last night, which I haven't done for some. The income statements were the worst I've ever seen them. Sales flat at best and most were engaged in buy backs - the only way to show any 'earnings growth'.

by Stephen Hulme | 2nd Aug 16, 11:14am 1470093284

S&P 500 EPS Drops $2 In The Past Month; Index At New High

by sharetrader | 2nd Aug 16, 11:15am 1470093328

and how many are using the debt markets to fund the buy backs, that is really scary.
it goes to show the misuse of cheap interest rates they are not being used for advancements in business but for advancements in share returns

by Stephen Hulme | 2nd Aug 16, 11:44am 1470095093

None as much as Apple, apparently.

by Stephen Hulme | 2nd Aug 16, 10:34am 1470090848

Stress-Tests Results Fail to Revive Faith as Europe Banks Fall

Lenders in the benchmark Stoxx Europe 600 Index slipped 1.8 percent, reversing a gain of as much as 1.3 percent. UniCredit SpA sank 9.4 percent, while Britain’s Barclays Plc dropped 2 percent as it fared worse than Deutsche Bank AG, down 1.8 percent. Italy’s Banca Monte dei Paschi di Siena SpA, the worst performer in the regulators’ exam, rallied as much as 11 percent as it said it’s working on a plan involving private investors to help bolster its finances. By the end of the day, it had pared most of its gain. Read more

But if in doubt remove the biggest losers from the index.

What do you do when you are one of the biggest indices in Europe and are unable to rise simply because two of your biggest constituents, if not so much in market cap any more but certainly in terms of systemic importance, just can't catch a bid? Why you delete them, of course even if the two names in question happen to be Europe's two largest banks, Deutsche Bank and Credit Suisse.

Moments ago, STOXX Ltd, the operator of Deutsche Boerse Group’s index business, announced component changes in the STOXX Europe 50 Index due to the fast-exit rule. All changes become effective with the open of markets on Aug. 8, 2016. Read more

by mfd | 2nd Aug 16, 12:33pm 1470097981

This is how indexes work. If you have a list of the 50 biggest companies in Europe, you have to update it every now and then as different companies rise and fall. It's not a conspiracy, the index rules tend to be pretty public. Our own NZX50 changes constituents every now and then so it continues to represent what it is supposed to represent. If you didn't do that, you'd eventually end up with a list full of tiny, or defunct, companies.

by Stephen Hulme | 2nd Aug 16, 1:29pm 1470101399

It's not a conspiracy, the index rules tend to be pretty public.

Who said it was? But historical comparisons with present values need to be qualified and rarely are, when promoting fiction with actual individual stock ownership experience. Unless, one just trades E-mini S&P 500 futs.

by mfd | 2nd Aug 16, 2:01pm 1470103317

The vast majority would be best off buying an index and ignoring the constituents. Save time, and all the research I've read suggests the more you play with your portfolio, the worse it does (trading costs and typical psychology working against you). I felt that the article you linked was being quite over-dramatic:

"What do you do when you are one of the biggest indices in Europe and are unable to rise simply because two of your biggest constituents, if not so much in market cap any more but certainly in terms of systemic importance, just can't catch a bid? Why you delete them, of course"

My interpretation: "Periodic rebalance of index performed according to the rules set out at its creation". Unfortunately that's not quite as scary.

by Learn to Socia… | 2nd Aug 16, 10:50am 1470091851

Found this comment at Naked Capitalusm this morning

"Steve H.
...if the ISDS provisions in TPP go through, corporations will no longer need to bribe politicians to sweeten up the laws."

http://www.nakedcapitalism.com/2016/08/links-8116.html

If TPP goes through, will NZ "politicians" be going on far fewer overseas junkets? They will be redundant, down the road, vestigial.- no longer intrinsic to the looting operation?

NZ politicians could be going the way of the supermarket checkout person, replaced by "innovation".

by Stephen Hulme | 2nd Aug 16, 11:00am 1470092434

Foreign Appetite For U.S. Securities Has Taken a Drubbing
Chinese and Middle Eastern investors have other priorities. Read more