90 seconds at 9 am: Bonds suffer, gold hammered

US CPI up to +1.7%; homebuilders confident; Fed adopts bank-protection rule; rate rise causes trouble for China, and losses in bond markets; UST 10yr yield at 2.59%; oil down, gold slumps; NZ$1 = 70.2 US¢, TWI-5 = 77

16th Dec 16, 7:33am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news of turmoil in bond markets.

The day after the US Fed rate hike, and their indication there may be as many as three more rate hikes in 2017, their CPI inflation release showed prices rising +1.7% pa, and +2.1% "ex- food & energy". This is the fourth consecutive rise.

The US homebuilding industry is in a confident mood with their members reporting optimism at its highest level since mid 2005.

The largest American banks will have to pay as much as US$2 bln more a year to insure against a future market collapse, according to a newly adopted Fed rule designed to protect their financial system. The rule puts higher obligations on equity and bond holders to maintain a long term exposure, as a way to protect short term depositors in the event of a failure. In fact, these big banks may need to raise as much as US$70 bln to meet its obligations under this rule.

Interestingly, China is soon to be dethroned as the top holder of US government debt. China's foreign currency leakage, along with its weakening exchange rate, means it is likely Japan will soon overtake it as the largest creditor of the US. Japan was last the largest in 2008, apart from one brief month in 2015.

In fact, the US rate rise is ratcheting up pressure on the Chinese currency. The Chinese are nervous with investors in yuan-backed securities are getting decidedly skittish. Chinese authorities have halted trading in key bond futures for the first time as panicky investors dumped these securities on concern that their long, credit-fueled bull market was coming to an end.

In New York today, the UST 10yr yield has jumped to 2.59% on the Fed decision to go for a faster set of hikes. At one stage it got up to 2.64%, but has since settled at a rate that is +10 bps higher than at the start of this week, and +15 bps higher than the start of December. Markets 'knew' a rate hike was coming and thought they had priced it in. What they have been surprised about is the indication that three more hikes are likely in 2017. It has been estimated that global bonds are now worth US$1.5 tln less now than after the sell-off began on the US election day. Given the global bond market is worth more than US$82 tln, and the US bond market is worth more than US$31 tln, it is still quite a fall in less than 40 days.

Oil prices have fallen overnight by about -US$1, now just under US$51 for the US benchmark, while the Brent benchmark is now just under US$54 a barrel.

The gold price has been absolutely hammered and is down a massive -US39, now at US$1,124/oz.

The New Zealand dollar is sharply lower against the greenback, now at 70.2 US¢. On the cross rates it is holding its own at 95.6 AU¢, and against the euro up at 67.6 euro cents. The NZ TWI-5 index is at 77.

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 ».

Daily exchange rates

Select chart tabs

Source: RBNZ

Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

13 Comments

by sharetrader | 16th Dec 16, 7:49am 1481827741

who would think 25 basis point would led to turmoil.
oh that's right plenty of people have been warning about ZIRP and QE running too long

by Roger Witherspoon | 16th Dec 16, 9:54am 1481835265

You might like this:http://www.mcoscillator.com/learning_center/weekly_chart/lumbers_messag…

It seems that the good times may be finally arriving in the US, and the Fed is behind the curve. We tend to discount any talk of future interest rate rises as the Fed has cried "Wolf!" too often.

Curiously, the effect on China is strongest, even though the Fed could not have warned them more clearly in advance. Even curiouser, if Trump pours fuel on the fire with tax cuts and massive infrastructure spending, at a time of nearly full employment, he may well do to China what Reagan did to the USSR; ie push up world interest rates to a level that absolutely destroys the lower productivity economy.

Will the Chinese Communist Mandarin Dictatorship explode back into The Three Kingdoms? It may not be so far fetched an idea. The Franco-German Bureaucratic Empire has already begun to fragment, what with the loss of it's second biggest colony, sorry, source of loot, I mean "funding" (Britain, that is).

by ham n eggs | 16th Dec 16, 8:43am 1481831018

Re raising interest rates to "destroy" other economies - i wonder if this is now the US plan while the petro dollar exists ... print money and sell money, raise rates, let other countries go broke and hoover up resources while the world still has faith in the US being the least bankrupt of all the bankrupts.
ie maintain the core while the periphery sinks

by Roger Witherspoon | 16th Dec 16, 8:53am 1481831595

I don't know how planned it all is, but the parallels may be there. I prefer to think of the US as a lumbering giant that lurches between extremes, rather than a deep state conspiracy (of course the Deep State does exist, but it is not all powerful or all knowing, and has it's own internal dissent). The last crisis started at the core, so presumably the next one will most affect the periphery, as you say.

by Anarkist | 16th Dec 16, 12:17pm 1481843861

It is planned. Paul Volcker acknowledged as much in 1979 when he became chairman of the Federal Reserve, in the wake of international banks who needed to recycle Petrodollars, conspiring with pro Western dictators like Suharto to saddle the peoples of the Third World with billions of dollars of unrepayable debt, which often ended up paying for unnecessary infrastructure like dams and industrial facilities in the middle of nowhere, that was, naturally built by Western firms. Many of these countries were banrupted in the 1980s when interest rates skyrocketed and the IMF and Western banks came in , having those governments over a barrel, plundered public assets and redirected tax revenues towards debt and interest repayment instead of providing for the public welfare.

"It could be a happy coincidence that the trade and monetary ponzi game has finally played out at the very time the world reaches peak oil production. But I doubt it. Paul Volcker, the former head of the Federal Reserve Bank, said in 1979 when he was recently named chairman:
"We have argued here that asymmetric prudential oversight tends to follow asymmetric hegemonic power, in a world in which recurring financial crises set up market-entry and wealth-enhancing opportunities for financial firms headquartered in nations with hegemonic capacity. And recurrent financial crises combined with a loss of regulatory discipline lead, in the end, to a systemic breakdown beyond the rescue capacity of even the greatest monetary hegemon."[15]

He seemed to know what was slowly panning out. In fact, the year before Paul Volcker delivered the Fred Hirsch Memorial Lecture at Warwich University in England entitled ‘The Political Economy of the Dollar’. He stated:
"A controlled disintegration in the world economy is a legitimate object for the 1980s."[16]"

https://www.newyorkfed.org/medialibrary/media/research/quarterly_review…

by Roger Witherspoon | 16th Dec 16, 4:30pm 1481859020

Thanks Anarkist, I will have a read through that. Sounds like exactly what Michael Hudson talks about, as you say, the substitution of debt funding from overseas for tax producing revenue, resulting in a toll booth economy. No one seems to understand that debt is not an operating expense, and therefore should not be tax deductible. It is the big rort, hidden in plain sight.

by scarfie | 16th Dec 16, 10:08am 1481836136

Yes. I have long been an advocate for the USA remaining the strongest on the way down. Last man standing if you like. Empires always extract resources from the periphery, and the US is an empire. But like Roger says, it isn't necessarily conscious. Just a juggernaut rolling along, one that has more mass and momentum than others. It is simple in some aspects, but the global consequences are far too complex to be by design.

by murray86 | 16th Dec 16, 10:35am 1481837749

"...push up world interest rates to a level that absolutely destroys the lower productivity economy" a warning there I think for NZ business's who have always looked for the easy way out where productivity is concerned. Little to no investment, just export jobs to lower wage climes while you rake in the profits, and eventually the whole business gets exported.

by profile | 16th Dec 16, 12:37pm 1481845044

And of course the #2 lead on the Fairfax Stuff website today can't be over looked in national importance.

"Basically the same dress.

If you didn't catch H&M $30 red dress before it sold out...".

MSM more and more like the The Onion every passing day.

Stuff.co.nz

by Yvil | 16th Dec 16, 1:29pm 1481848144

Sharetrader, Roger Whiterspoon, I value your opinions, can I have your take on rising interest rates. I assume we can agree higher interest rates will mean lower asset prices, which, in my opinion, will spell big trouble for individuals, companies and governments because we are all so indebted.
So if we sell assets to protect ourselves from the downturn, what do we do with the proceeds from the sales, the cash, in simple terms ?

by bigblue | 16th Dec 16, 3:38pm 1481855937

interest.co - not liking your automatic mobile site when using iphone or ipad - prefer desk top view & there doesn't appear to be an option for switching back to it. Also your mobile version doesn't appear to have ability to login & make comments?

by Yvil | 16th Dec 16, 4:26pm 1481858812

Sorry BigBlue, I use Android and I LOVE the new auto mobile site that fits any text in the width of a phone be it portrait or landscape, please keep this feature, it's awesome !

by Henry_Tull | 16th Dec 16, 5:28pm 1481862521

And could it take comments. Or you back to other version?