Lower asset prices see endowments shrink; EU growth & inflation higher, jobless lower; Denmark pushes back in finco regulation; AU property values to fall; UST 10yr yield at 2.45%; oil and gold up; NZ$1 = 73.2 US¢, TWI-5 = 78.5

Lower asset prices see endowments shrink; EU growth & inflation higher, jobless lower; Denmark pushes back in finco regulation; AU property values to fall; UST 10yr yield at 2.45%; oil and gold up; NZ$1 = 73.2 US¢, TWI-5 = 78.5

Here's my summary of the key events overnight that affect New Zealand, with news that higher interest rates are biting in the US and about to bite in Australia.

Higher interest rates bring lower asset prices. The wealth effect is reversed. One American industry that relies on these being positive are their universities. But the turn is hurting big time. More than three-quarters of the 800 largest American universities saw their endowments shrink as their investment portfolios lost money last year. The inflow of new donations is down. Their spending levels are growing. A looming funding crunch faces them.

American consumer confidence fell in January, although it remains elevated.

The Eurozone economy grew at a slightly faster pace at the end of 2016, touching +1.8% real, while their unemployment rate fell to 9.6%, its lowest level since 2009, putting the currency area on a steadier footing at the start of a year clouded by political uncertainty. Eurozone inflation is up sharply to +1.8%, nearly all due to higher energy costs.

In Denmark, there is growing tension between risk-averse regulators and the financial sector. A new Government minister wants to see a rollback of some EU regulation on the financial sector which he thinks has gone too far. His key point: if you only have defenders on your team you never score any goals.

In Australia, JPMorgan analysts are predicting that commercial property values are at their peak driven by record low capitalisation values. From here out they see values that will decline, and that will bring losses for commercial property investors.

In the Southern Hemisphere, the El Nino weather pattern may be back sooner than expected. It's been less than a year since the previous strong cycle disappeared  and now forecasters are predicting the weather pattern is about to return.

Here in New Zealand, all eyes will be on our Labour Market statistics which will be released for the December quarter later this morning. Will our unemployment rate fall below its current 4.9%, and will we see faster wage growth that the current +1.7% ?

In New York, the UST 10yr yield is marginally lower overnight at 2.45%.

Oil prices are a touch higher today now just under US$53.50 for the US benchmark, while the Brent benchmark is just under US$56 a barrel.

The gold price is also higher, up US$13 to US$1,209/oz

The New Zealand dollar is higher as well at 73.2 US¢. On the cross rates we are at 96.7 AU¢, and against the euro at 67.9 euro cents. The NZ TWI-5 index is at 78.5.

If you want to catch up with all the 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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5 Comments

So even the quiet , well behaved and compliant Danes are up in arms over the EU .

Its little wonder , the EU is a group of un - elected bureaucrats passing and enacting laws and rules that effect peoples lives in diverse ways , without consideration to consequence .

Its little wonder the Brits saw it for what it is , and opted out

Regarding the Commercial property piece , most savvy investors know or at least realize there is an inverse relationship between Capitalization rates and the interest rate .

Prices have got away from reality , and an adjustment is necessary

Frankly we have even seen some Auckland commercial property selling at cap rates ( yields) so low that make no sense whatsoever .

To be fair it happens with all investments , and Bonds are a good example

When you buy a gilt at a face value of 2% and interest rates go up and new gilts are issued at 4% , you can lose a big slug of your capital if you sell the 2% paper when the market wants or expects a 4% yield

When you buy a gilt at a face value of 2% and interest rates go up and new gilts are issued at 4% , you can lose a big slug of your capital if you sell the 2% paper when the market wants or expects a 4% yield

Inversely, taxpayers get to wallow in the luxury of underwriting 2% coupons over the term to redemption and avoid a significant transfer of wealth revealed in this article, given interest rates fell for the next 30 years. This outcome certainly favoured wholesale Japanese investors, while US taxpayers had to fund the extraordinary coupon payments with increased debt liability issuance.

Good point , two sides of the same coin

The fall in commercial values with respect to return will be interesting. I'm wondering how many people I deal with will be affected. It's been a good time for a number of people to cash out.