90 seconds at 9 am: Banking stress reappears in China, Europe

Growth of US consumer credit slows; OECD sees higher growth; China cuts costs but banks raise rates, Spain rescues a bank, Aussies rate GDP record; UST 10yr yield 2.18%; oil and gold lower; NZ$1 = 71.9 US¢, TWI-5 = 75.9

8th Jun 17, 7:38am by David Chaston

Here's my summary of the key events from overnight that affect New Zealand, with news of banking stresses in China and Europe.

Firstly in the US, the growth of consumer credit slowed sharply in April, very much lower than expectations. It was lending for cars and for education that showed the weakest growth.

The OECD is predicting the global economy is set to grow +3.5% this year, its best performance since 2011, with growth nudging up to 3.6% in 2018. That is a slight improvement on their March estimate. It said increased global trade and investment flows had offset a weaker outlook in the US.

China has announced it is cutting taxes and fees on businesses by about NZ$58 bln per year from July 1, and that includes reducing or eliminating charges for electricity use, and supervision fees for insurance and banking firms. They are aiming to reduce a whole range of government charges and taxes on business of over NZ$200 bln in this drive for efficiency. However, at the same time, it appears that the large state banks are raising interest rates for both residential and business lending.

This interest rate rise is another squeeze on SMEs in China. Typically they don't have easy access to bank loans, and interest rates in their bond market have been rising sharply recently as Beijing moves to 'reform' financial markets in a necessary move to control financial stability. But for smaller enterprises, who are often quite highly leveraged, this is clamping them in a harder squeeze.

Overnight in Spain, their fifth largest bank failed, and was promptly absorbed into its largest bank. The event went off without a hitch, showing how far the ECB has come in managing banking failures. This comes just a week after the largest Italian bank was formally rescued by the Italian government. The Spanish bank however failed because it could not handle leftover toxic mortgages from their housing boom of a decade ago and emphasises just how fragile that legacy has left local banks.

In Australia, they have taken the record for the longest run of uninterrupted growth in the developed world, in data released yesterday. It has been 103 quarters - more than 25 years - since they have had a technical economic recession. But they remain vulnerable with essential reforms unable to be progressed in a toxic political situation. The cost may be a future of sub-par growth. They need a clean-out, but any stumbles there will not help us here.

In New York, the UST 10yr yield is higher at 2.18%.

The price of oil is sharply lower today with the US crude benchmark is now just under US$46 a barrel, while the Brent benchmark is now over US$48. Both are down by about US$2/barrel. An unexpected rise in American crude inventories is behind the move.

The price of gold is lower as well, and now at US$1,285/oz, a US$6 fall.

And the Kiwi dollar is pretty much unchanged at 71.9 USc. On the cross rates the Kiwi is at 95.3 AU¢, and 63.9 euro cents. The TWI-5 index is now at 75.9.

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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17 Comments

by Andrewj | 8th Jun 17, 8:26am 1496867206

https://timhayward.wordpress.com/2017/06/07/blowback-from-regime-change…

by ham n eggs | 8th Jun 17, 8:33am 1496867623

"The event went off without a hitch, showing how far the ECB has come in managing banking failures."

Either that, or it shows how far into la la land the economic system is now operating.
Given toxic debts just don't magically disappear without unintended consequences, im guessing the latter.

by Stephen Hulme | 8th Jun 17, 8:46am 1496868407

The costs were enormous for the TLAC investors and Santander shareholders face dilution of ownership at great cost..

Popular stock and bond holders lose about 3.3 billion euros

Santander will raise 7 billion euros in rights issue for deal Read more

by Rumpole | 8th Jun 17, 12:57pm 1496883476

Spanish Bank Failure, Italian Bank Failure, Biggest Canadian non Bank Mortgage lender in serious strife and talk of 2 Million unauthorized account openings, loss of 94% of deposits tells a sorry tale . Will we see revelations of Liar Loans etc - you bet. Bank misconduct continues with Bankers, Politicians and Regulators in Public denial, just minor cracks in the Dam nothing a sticking plaster can't fix until the Dam bursts when many will be drowned and all will get wet.

by dictator | 8th Jun 17, 10:10am 1496873407

There's only so much you can sweep under a rug. When you sweep the corpses of banks under the rug it gets kind of lumpy. What the ECB is saying is to not to hold euros as they're going to keep pumping money into the system until Europe flips over into hyper inflation.

by ham n eggs | 8th Jun 17, 11:07am 1496876834

right exactly. You can print away until your hearts content but sooner or later without a corresponding increase in actual resources ... you deflate the resource quotient that the currency represents.

by gypsymanz | 8th Jun 17, 12:35pm 1496882110

you deflate the resource quotient that the currency represents.

Here is a question for you, you've talk before about currency being in a strong relationship to energy and/or resources, is it possible to measure the 'resource quotient' of a currency?

by Stephen Hulme | 8th Jun 17, 8:55am 1496868920

Central bankers and investors are grappling with a $100 trillion question: why consumer price inflation remains so low in most parts of the world even as economic growth quickens.

Compounding the riddle, question marks are now emerging over the one part of the global inflation picture that had been moving higher -- producer prices. That’s because two engines of that turnaround -- China’s resurgent factories and prospects for tax-cut fueled stimulus under President Donald Trump -- are showing signs of fading. Read more and more

by JetLiner | 8th Jun 17, 9:18am 1496870281

Port of Darwin put up as collateral by Chinese owner Landbridge seeking a loan from Chinese government's Import-Export Bank (http://www.afr.com/business/darwin-port-owner-landbridge-seeks-500m-loa…). What happens if there is a default?

Watch what assets you sell 99-year leases for.

by russellj | 8th Jun 17, 1:19pm 1496884752

Yeah so the Chinese government owns the port isn't that the plan control the pipeline

by Boatman | 8th Jun 17, 11:37am 1496878670

Re Spanish Bank collapse , surely they had a decade to provide for the bad debts raise provisions and write the assets down to net book value , in terms of the Basel rules .

by dictator | 8th Jun 17, 11:46am 1496879176

You've pinpointed the exact issue. Both Spanish and Italian banks have been told to hold bad debts on their books. Their assets that they know are bad and should be written off aren't because it will cause an asset issue for the ECB and those banks. Those bad debts are many years old but they are being treated as capital for now.

Are they in breach of the banking regulations/Basel III? Yes. What is the regulator/ECB doing about it? They are telling them to break the rules or they will be punished.

by Stephen Hulme | 8th Jun 17, 12:15pm 1496880958

The ECB deliberately fools itself all the time.

Full QE was initially begun in March 2015 over two years ago, and the Continent’s HICP rate barely notices if at all. Despite bond purchases through PSPP of €1.5 trillion, additional covered bond purchases of €162 billion under the third such program, and now €82 billion of corporate bonds added to the various NCB balance sheets (totaling €1.8 trillion altogether), total lending in Europe has in those twenty-six months increased by a paltry €108 billion.

Given that total lending remains more than a half a trillion euros still below the September 2011 peak, these are embarrassingly unimpressive results in just linear terms. In non-linear terms, the cost of almost six years in this state has added up, which is why the EU itself has been threatened politically in a way that ten years ago was thought impossible. Monetary policy simply contains no actual money, because, as TLTRO2 demonstrates, it’s not what the ECB does with inert and idle bank reserves that matter but rather how banks construct their balance sheets which remain full of liquidity preferences this far down the road.

Without banks lending, there will (can) be no increase in inflation. The ECB for all its rhetoric and posturing is helpless to achieve anything. Read more

by dictator | 8th Jun 17, 1:10pm 1496884249

I was just looking through the mortgagee sales on trademe. I usually focus on Auckland but there's more than 50 sales listed across the country and Christchurch has the same number as Auckland. I am wary of the numbers through as some are clustered under one former owner and have been listed for some time now.

It wasn't long ago they were few in number. There's obviously more on the the way with some of the desperate and must sell keywords.

by JetLiner | 8th Jun 17, 1:25pm 1496885150

Yes, definitely worth watching. I think Cowpat's keeping an eye on this data as well. It's an indication of the feeling in the market.

by dictator | 8th Jun 17, 1:38pm 1496885914

Look at the individual listings there's a few quirky ones in there. One as is where is earthquake damaged house and an "as is" house. The "as is" looks to be in bad shape with the toilet seat on the floor, no sink and no taps for the bath.

That said there are some interesting looking rural sites, and a house on the west coast for $90k. Unfortunately the condition is old and run down, so in Auckland terms it would only be worth $1m.

by JetLiner | 8th Jun 17, 1:24pm 1496885064

Some wisdom for the always-interesting Garth Turner on the Canadian debt and housing market (http://www.greaterfool.ca/2017/06/07/the-sleeper/):

If residential real estate continues to lay an egg, first in TO, then everywhere else, you might be getting a margin call on your house.

Home equity lines of credit are huge. There are thirteen million households in Canada, and three million of them have HELOCs. That’s 23% of the population. Sheesh. And of those people, 40% don’t make regular payments. By the way, eight in ten have their lines of credit linked to the mortgages, which means their available credit grows with every payment.

The amount of debt that residential real estate has credit is without precedent. Two-thirds of the $2 trillion we owe are mortgages, and billions more are lines of credit backed by houses. In the latest three-month period for which we have stats, mortgage debt rose 7% while lines of credit bloated by eight times. Most of that debt came in the form of HELOCs, which are backed by homeowner equity.

So what? Why’s it even remotely interesting to have more evidence Canadians are undisciplined, credit-snorfling debt addicts?

Well, if what happened in the GTA last month keeps on happening for a while (prices down 6%, sales lower by 20% and listings up by half), a lot of the people with HELOCs might be surprised. It’s important to understand a home equity line of credit is a demand loan. There is no term for it – in theory it goes on forever – but the lender can demand payment in full at any time, and for any reason. The interest rate isn’t fixed, but floats with the prime rate, and can be raised by the lender if conditions change.

Seems like Greater Toronto Area real estate is turning, but no-one quite wants to pick the top, and if they do, they suggest that it'll come up to speed again shortly (http://www.macleans.ca/economy/realestateeconomy/is-torontos-housing-ma…):

It’s official: after a long period of extraordinary home sales and home price growth, the Toronto Real Estate Board (TREB) reported that the Greater Toronto Area’s housing market posted the first set of this year’s declines in May for a market that’s been hot for at least the last two years. But will this be a one-month blip, or a turning point followed by falling prices and sales in the coming months?

Forecasting real estate market performance is a tricky business. But a closer look at the TREB data seems to provide enough support for a reasonable call: sales and prices will continue to fall for at least two or three more months.

Sound familiar??