NZD expected to rise modestly on market-open; Peters to create uncertainty; Angela Merkel to stay but support for anti-immigration party surges; Moody's downgrades UK credit rating; UST 10yr yield at 2.25%; oil, gold stable; NZ$1 = 73.3 US¢, TWI-5 = 75.5

Here's my summary of how the world’s looking after a big weekend of politics.

National’s strong result in Saturday’s election is expected to see the New Zealand dollar rise when markets open this morning. However those gains are set to be dented by the fact Winston Peters is back on his kingmaker’s throne.

In the lead up to the election, markets have responded more favourably to the prospect of a National-led government, versus a Labour-led one. And Westpac economists note the average response by the NZD over the past 10 elections has been a modest rise on the Monday after, followed by a two-week period of sideways movements, and then a larger rise.

While we can’t be certain this is how things will pan out this time around, it’s a good indicator.

ANZ economists note that while the last thing the NZ economy needs is a drawn-out process to form a coalition, the ability of an economy to navigate uncertainty shouldn’t be underestimated. Just look at the resilience of the US and UK economies.

As for what having Peters in government may do, Westpac economists say his policies are likely to have a neutral to negative effect on the Official Cash Rate (OCR) in the short run. However they’re reluctant to make any set calls on this, noting the fact we don’t know what either National or Labour will give Peters, and whether this would see them run a more stimulatory fiscal policy than would otherwise be the case.

Either way, ANZ economists believe we can expect the next government to spend more in 2018/19. They say this may be required to offset key growth drivers, such as housing, net migration and tourism, which all look to be starting to run out of steam.

Coming back to the NZD, the German election is likely to have a bigger impact on this than our election. Chancellor Angela Merkel appears to have won a fourth term in office, but support for her conservative bloc has slumped to its lowest point since 1949.

The anti-immigration Alternative for Germany party has stunned the establishment by winning 13% of the vote, according to projected results, which will put a far-right party into parliament for the first time in more than half a century. The Social Democrats received their worst result since the 1940s, at 21%.

Finally, Moody's has downgraded the UK's credit rating, citing concerns about public finances and the effect of Brexit. Moody's was the first major credit ratings agency to strip the UK of its AAA rating in 2013 and it has now cut the rating from Aa1 to Aa2. The credit ratings agency says the outlook for public finances has "weakened significantly" since it last changed the country's rating.

In New York, the UST 10yr yield has dropped since this time on Friday to 2.25%.

The crude oil price is stable at just under US$51 a barrel, while the Brent benchmark is just under US$57.

The gold price remains at US$1,293/oz.

The New Zealand dollar is up since this time on Friday at 73.3 US cents, 92.2 AU¢, and 61.5 euro cents. The TWI-5 index is at 75.5.

If you'd like to catch up with all the changes from 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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23 Comments

As for what having Peters in government may do, Westpac economists say his policies are likely to have a neutral to negative effect on the Official Cash Rate (OCR) in the short run.

What discernible impact did OCR have here?

Either way, ANZ economists believe we can expect the next government to spend more in 2018/19. They say this may be required to offset key growth drivers, such as housing, net migration and tourism, which all look to be starting to run out of steam.

Yes, indeed - the fall back socialism solution when all else fails from excess crony capitalism abuse. Who other than tireless taxpayers can fill the void of reduced bank lending?

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The anti-immigration Alternative for Germany party has stunned the establishment by winning 13% of the vote, according to projected results, which will put a far-right party into parliament for the first time in more than half a century.

Second largest polling party in the old and decidedly poorer East Germany. Funny how fascists find a way of aligning with the down trodden underbelly the neoliberal class inevitably create.

Wouldn't they be old-guard communists not fascists in poorer East Germany?

No.
East Germany was not communist by choice, Lapun.

Jacinda has hopefully learnt that New Zealanders dont like uncertainty about taxation. She could have won this election had her tax policies been spelt out clearly and concisely , with nothing hidden up her sleeve.

Phil Goff and David Cunliffe both learnt this lesson in previous elections , and Andrew Little went off on the same tangent with his tax nonsense ............ wanting to reverse inflation adjusted tax brackets .

Rocket Carrying Top Secret Cargo Launched From Vandenberg

The United Launch Alliance Atlas 5 rocket is carrying a classified NROL-42 satellite. Read more

Gotta laugh - the rocket engine is a Russian RD180 type.

It would be great if they could park half a dozen directly over North Korea capable of zapping anything coming from rocket man. I would imagine quite a few people considering emigrating to this neck of the woods would be starting to think twice, as the threat of an H bomb over the Pacific is not very comforting. Time to stock up on cans of Tuna

Interesting couple of articles from Jeremy Snider.
"My larger point is not to speculate (which is what that is in the two paragraphs immediately before, a fun exercise nonetheless) on exactly what is going on out there for we will likely never know. It is more subtle and general, ultimately more important; in the mainstream treatment of currencies, currency flow is treated as flows of currency. There is no currency here anywhere, only liabilities on some multiple of banks’ (at least two) computer screens.
The eurodollar system is non-reservable, meaning there aren’t pools of actual dollars that these liabilities will be converted into in these kinds of situations. It is instead convertible into whatever might be collateral that can then be in turn liquidated into the same type of thing (if maybe in a different denomination) as when it all started. It’s like a dog chasing its tail, or a computer program stuck in an infinite loop. There is no beginning nor end, no monetary pyramid upon which to rest whatever follows.
Because of this style of arrangement, “currency flows” are limited only by imagination. Or, as I alternately describe of it, what one bank may dream up that another bank will accept. On many occasions it sounds just this ridiculous, but often the truth is even stranger than we can figure even when we figure the fantastical. It’s why bank balance sheet capacity is the ultimate monetary force, because in the end the ability of any one or more counterparties to accept the imagined is dictated by what balance sheet math (especially volatility) determines as acceptable. "

http://www.alhambrapartners.com/2017/09/21/the-eurodollar-equation-begin...

Every day, trillions of dollars are borrowed and lent in various currencies. Many deals take place in the cash market, through loans and securities. But foreign exchange (FX) derivatives, mainly FX swaps, currency swaps and the closely related forwards, also create debt-like obligations. For the US dollar alone, contracts worth tens of trillions of dollars stand open and trillions change hands daily. And yet one cannot find these amounts on balance sheets. This debt is, in effect, missing.
But it’s not missing and it never was. It’s out there and it is working and doing things, playing some large, perhaps majority role in the global economic condition. These trillions can only be categorized as “missing” because the world’s monetary “experts” never bothered to look for them. That doesn’t make them missing, it shows monetary authorities as utterly incompetent and clueless. Content with their own indoctrinated ignorance, they have conducted their policies with only a third or less of the monetary picture in hand. It isn’t hard to fathom why things have turned out as they have in too often globally synchronized fashion.
http://www.alhambrapartners.com/2017/09/22/footnote-dollars/

"This debt is, in effect, missing"

This seems a bit misleading to me. on a couple of fronts:

1. A balance sheet is not calculated every day, so its a poor measure.
2. Should the organisation be purchased, go bankrupt etc, those transactions will almost certainly be counted.
3. They can only be "lost" off balance sheet for the term of the transaction.
4. Any gains and losses sure will show on the Profit and Loss statement, sooner or later.

Maybe their existence and impact may well be opaque to investors but they will be very real to management.

but these loans are outside the fractional reserve banking system.

Sure, but conversely are you suggesting if banks make "loans/hedges/bets/etc" management are unaware of that fact and do not hold record of the dollar value of them?

I understand they may not account for the contingent liability of them on the balance sheet, but that does mean they are driving totally blind from an internal management point of view.

'Globalisation is a highly capital intensive economic set-up due to the sheer amount of working capital needed to make it work. It’s not necessarily optimum in a more equal world.
The beneficiary consuming states (the ones with the capacity to create hard currencies to fund the working capital and run trade deficits) effectively provide the rest of the world with the hard currency credit they need to source the global commodities and resources required to fabricate the end-products they themselves mostly end up consuming.
This credit is squared off with repayments in hard currencies once the manufactured goods arrive at location, with enough of a respective hard currency payoff to keep the manufacturing countries incentivised to keep the set-up going.'
https://ftalphaville.ft.com/2016/11/15/2179675/dollar-shortage-alert-plu...

If the central bank doesn't know about it, then they are flying blind. Which I think is the point of the second article.

SH posted those links of Friday's 09@9, and I commented there on how the missing money might be accounted for in asset prices.

This aspect of the shadow banking system is what I worked out a few years ago, but it has largely disappeared from discussion. Zerohedge did quite a lot of articles on it. I reckon it works similarly in money creating to the retail banks here. As long as all the banks are creating loans at an equal pace, then it nets out across all the banks. ie: they are essentially trading each others loan amongst themselves.

Any loan, backed by any asset, could be traded, and thus money created, the same way. It is the trust in the system that keeps it going. A cynic might say the commercial banks all know the loans are dodgy as all, but they are all in on the game. The game will continue as long as they keep it hidden from sight.

From the FT link
Speaking to the LSE on Tuesday, Shin reminded the audience that every argument which suggests market finance is a stabilising influence on the financial system (acting as a spare tire when the banking sector is impaired) can be offset with the argument that capital markets force banks to behave even more pro-cyclically than they might otherwise be inclined to do so.

He also reminded the audience of the futility of drawing a clear-cut distinction between banks and capital markets when wholesale funding is the margin of adjustment of bank leverage. In the case of Northern Rock, it was the deleveraging forced on the bank by its wholesale creditors that precipitated the run. The retail reaction was the publicly unacceptable face of that run, but by no means the cause.

The lesson to takeaway from that affair is that “when banks and other financial intermediaries are stretched to high levels of leverage, supported by razor-thin haircuts, any slight knock to the haircut leaves them vulnerable to forced deleveraging” and notably that “forced deleveraging is the key to understanding funding pressures on banks”.

It makes me wonder how many know exactly how the game is played, and at what point in their career they find out. It would also be interesting to know where the limits of their understanding are.

I think Sniders article is the perfect answer to those subscribed to conspiracy theories (I think Winston cultivates this vote). There isn't any group of people at the top in control. There is a bunch of people that eventually learn the core of the system and realise their insignificant part in it. I would think a fair few of them just shake their heads and carry on when they see the joke.

1. A balance sheet is not calculated every day, so its a poor measure.

Every bank I worked at in London had real time marked to market VaR adjusted balance sheet output presented to dealing room department heads everyday and the higher risk large value positions were marked to market from in house dealing OTC activity, bookie and futures market quotes around the clock - London, New York and Tokyo.

Thanks Stephen, I didn't know that.

Maybe many of these counterparty derivative transactions fall under the category of "contingent liabilities"..??
Then..... they may not be recorded on balance sheets..??
http://www.investopedia.com/ask/answers/042415/how-are-contingent-liabil...

While watching the movie the "Big Short", one of the most poignant moments for me was the casino scene which described the nature of the "betting" that wall street did. ... ( and a bet... is a contingent liability)
( to a certain extent..., this bet is a creation of credit, ( contingent IOU ) BUT... its' very low on the "moneyness" scale. )

https://www.youtube.com/watch?v=ZM_LYusnXk8

(Just my thoughts.... and I'm dog paddling at the shallow end when it comes to derivatives )

( to a certain extent..., this bet is a creation of credit, ( contingent IOU ) BUT... its' very low on the "moneyness" scale. )

Ledger entries they maybe.

But if in the money on a marked to market and realised basis they are eligble to count towards bonus payments which are normally in the form of non National Insurance (UK) eligible commodities such as shares and bullion - hence, readily converted into what masquerades as money today.

And what has happened to the NZD so far today, even lower against the pound. I wonder why.

Morgan Stanley is recommending traders short NZD.
Redeker believes two scenarios could play out within these leveraged economies;
1) Leverage may reach its natural limits, slowing economic activity.
2) Rising global funding costs may increase debt maintenance costs, causing outperforming economies to underperform.
“Over the course of the coming quarters, these economies' growth may slow,” says Redeker.
While the recent decline in business confidence may been related to election uncertainties, Morgan Stanley note that immigration has not been growing, the highly valued housing market seems to be topping out with sales volumes falling rapidly, “and household debt might soon cripple spending”.
New Zealand house prices have been rising at break-neck speeds: in 2016 the country’s QV house price index found that the typical Auckland home overtook the value of a London home following an increase of 15.9% over the year.
Importantly, Morgan Stanley warns foreign exchange markets have not considered the likely outcome of New Zealand’s debt problem, therefore the risks of a sizeable adjustment lower in the New Zealand Dollar might occur should Redeker be right.

https://www.poundsterlinglive.com/nzd/7615-nz-dollar-and-massive-debt-le...

but, but,but rockstar economy, growing house prices are a symptom of success....

Even pyramid schemes are successful..........................for a while.