90 seconds at 9 am: Coalition talks weigh on currencies

NZD and euro impacted by uncertainty of how NZ and German governments will look; Chinese authorities ban home sales shortly after purchase; US/North Korean war of words escalates; UST 10yr yield at 2.23%; oil & gold up; NZ$1 = 72.8 US¢, TWI-5 = 75.1

26th Sep 17, 8:12am by Jenée Tibshraeny

Here's my summary of what's happened around the world overnight that affects New Zealand.

International investors are spooked by the make-up of our next government being in the hands of Winston Peters. While the New Zealand dollar under-performed yesterday, it has rallied back a little overnight. ANZ economists are watching to see whether the policy uncertainty impacts business and consumer sentiment.

Angela Merkel is also trying to build a government further to the German election over the weekend. Yet talking to the business friendly Free Democrats and pro-regulation Greens, which are at odds over issues like migration, tax and the environment, Merkel has a tough task ahead of her. The emergence of the Greens as powerbrokers has weighed heavy on markets.

Wall Street is down as the war of words between North Korea and the US continues. North Korea’s foreign minister says Donald Trump has effectively declared war on the state, so it reserves the right to shoot down US bombers even if they’re not in its air space. The White House has just dismissed North Korea’s suggestion as “absurd”. This latest exchange was sparked by Trump tweeting the North Korean leader “won’t be around much longer”.

The European Central Bank is increasingly confident inflation will rise to its target. However its president Mario Draghi is calling for patience, as a “substantial degree of monetary accommodation” is still necessary. He singles out currency volatility as a source of uncertainty.

Finally, Chinese authorities have taken what we may consider extreme measures to fight property market speculation. Several second-tier cities have just announced bans on the sale of houses within two to three years of purchase. Altogether, more than 40 Chinese cities have reportedly introduced these measure since March.

In New York, the UST 10yr yield has fallen to 2.23%.

The crude oil price has risen to US$52 a barrel, while the Brent benchmark is up to US$59.

Safe haven gold has jumped to US$1,306/oz.

The New Zealand dollar has fallen to 72.8 US cents, 91.5 AU¢, and 61.4 euro cents. The TWI-5 index is down 4bps to 75.1.

If you'd like to catch up with all the changes from 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 JetLiner | 26th Sep 17, 8:31am 1506367894

This is worth keeping an eye on. The Queensland state government is going a bit localist, and is in an argument with the Australian Federal government over Free Trade Agreements.

"The Queensland government will not be constrained by free trade agreements that force Queensland companies to compete with Third World countries," Mr de Brenni told ABC radio on Monday.

[...]

"We have said that we will unashamedly preference Queensland businesses," he said. "And if that offends free trade agreements signed by other governments, then we won't apologise for that.

"We've got unemployment at problematic levels in regional Queensland. We've got small businesses out there that we need to be backing in. Unashamedly, we've decided the best thing we can do is spend Queensland taxpayers' money in the way that [produces] the best outcome."

State elections are coming up in May next year, and that may have something to do with the aim here, but I also suspect that this is part of a larger worldwide pattern of a shift to the local over the global. However, it is especially interesting to see it from a politician, set out in such clear terms, and I think reflects a possible sea change.

by JetLiner | 26th Sep 17, 8:59am 1506369565

Link here: http://www.afr.com/news/massive-rise-in-sovereign-risk-in-queensland-fi…

by murray86 | 26th Sep 17, 9:16am 1506370618

Refreshing really, pollies putting their people first - What a strange thing to do!

by Ralph | 26th Sep 17, 10:23am 1506374613

I do not see it like that Murray.

They are happy for QLD exporters to take advantage of the freedoms of trade that were negotiated, but are then happy to renege on the agreement when it doesn't suit them in the other direction.

At best that is hypocritical and at worst two-faced lying.

But I suppose if someone like the US calls them out over any breach it will be tax payers money that gets poured down the legal toilet. So perhaps it would be more accurate to say pollies putting their peoples *money* first.

It is just as likely a cynical grab for an election win, leaving the people holding the baby if it blows up.

by murray86 | 26th Sep 17, 11:51am 1506379883

Fair comment, every sword had two edges, but in this case they are saying state contracts will go to locals first rather than trade which is more about exports, and that where products are available locally they will be bought locally even if there is a financial penalty. I see this less about free trade but more protecting jobs. Unregulated free trade results in big players demolishing local industry at huge long term cost to communities and countries. I prefer what they are doing.

by Ralph | 26th Sep 17, 1:43pm 1506386591

If the circumstance were that narrow Murray, what would it have to do with any free trade agreement?

by Stephen Hulme | 26th Sep 17, 8:37am 1506368221

International investors are spooked by the make-up of our next government being in the hands of Winston Peters.

Hmmmmm...

A leading global FX analyst expects New Zealand Dollar to underperform over coming months as the economy experiences a sharp slowdown as a build up of private debt finally catches up with rich asset prices.

New Zealanders have been steadily taking on debt over the course of the past ten years; a process that has contributed to eye-wateringly expensive real estate prices.

But debt - or leverage - goes beyond just house prices, it is used to finance spending across the economy and is identified as a key driver of New Zealand’s recent economic outperformance relative to other developed-market economies. Read more h/t gingerninja

by bw | 26th Sep 17, 8:50am 1506369059

"The Bank of England has warned that British high street banks risk losing as much as £30bn from defaults on credit cards and personal loans credit....this would knock 150 basis points from aggregate common equity Tier 1 capital ratio of the UK banking system."
http://www.telegraph.co.uk/business/2017/09/25/bank-england-warns-pocke…

by Roelof | 26th Sep 17, 8:51am 1506369079

Nothing new here..
This has been the model for economic growth in the western world for the last 40yrs.....Debt Capitalism.

by Stephen Hulme | 26th Sep 17, 9:12am 1506370328

Nothing new here..

What about the extraordinary high net present value of outstanding debt, given record low discount factors?

Pension scheme funding difficulties are an obvious symptom. PPP schemes another.

by Roelof | 26th Sep 17, 9:37am 1506371863

Add in the $10 trillion dollars of Govt bonds that earn -ve interest.. It defies understanding..?? ( at least for me).
Shows how upside down things have become.
How extreme do we have to get before we actually have any kind of change based on underlying first principles...???
I'm guessing the forces of "debt Capitalism" will take us to the extreme ( point of no return ,crisis ) ... maybe resulting in some kind of social revolution..??? OR... maybe Stateism,
Historically... it becomes a climate for War..??
Ray Dalio has 1937 as an analogue time period that is similar to today..

http://www.zerohedge.com/news/2017-06-09/ray-dalio-warns-we-may-be-path…

by Stephen Hulme | 26th Sep 17, 8:43am 1506368590

The European Central Bank is increasingly confident inflation will rise to its target. However its president Mario Draghi is calling for patience, as a “substantial degree of monetary accommodation” is still necessary. He singles out currency volatility as a source of uncertainty.

Will somebody take his microphone away?

More immediate than inflation is lending; loans are, in fact, the vehicle by which QE and the LSAP’s were supposed to affect real economic outcomes, washing out in the end as consistent and stable 2% inflation.

Lending in Europe remains instead at a standstill. Total loans in July 2017 were a paltry €60 billion more than in March 2015 despite €1.93 trillion in asset purchases among the three major LSAP channels.

One major point of emphasis with these monetary policies was to get lending and credit flowing into the business sector. Yet, the total volume of loans to NFC’s (non-financial corporations) was actually €9 billion less in July than when QE made its first purchase more than two years before. It doesn’t matter in the slightest, it seems, that Europe’s central bank also purchased more than €100 billion in corporate bonds dating back to last June. Read more

by ham n eggs | 26th Sep 17, 8:57am 1506369432

Yip - big problem - who is going to keep propping commodity prices up if lending is flatlining?.... Answer; the Central banks have to but its the death of capitalism.

by murray86 | 26th Sep 17, 9:20am 1506370826

The other question that this raises and one that is raised here, and above, is where did those loans go? Were they for building industrial capability/capacity and thus jobs and thus under pin long term growth, or did they just go to property purchases and proping up lifestyles?

by Andrewj | 26th Sep 17, 9:26am 1506371209

Rod Oram: Farming’s bankrupt, time for natural capital
https://www.newsroom.co.nz/@boardroom/2017/09/25/49857/rod-oram-farming…

by ham n eggs | 26th Sep 17, 2:12pm 1506388364

Effectively all commodity producers are "bankrupt" .. consumers can no longer afford their output unless central banks manipulate the scoring system so that trucks keep rolling...

As for Rod Oram's conclusion about the new wave of prosperity . .. hmmm. Thats economist logic for you.

"It is immoral to squander our environment. We have to learn how to be as wise, productive and conservative with our 'natural capital' as we learnt to be with our economic capital after farming’s previous bankruptcy. Doing so would unleash a new wave of innovation, prosperity and sustainability for farmers."

by Boatman | 26th Sep 17, 9:27am 1506371222

Its good news we need a weaker currency to help our export sector

by Andrewj | 26th Sep 17, 9:45am 1506372334

People will accept what is sympathetic even if it is disastrous. In political terms, that means they will ride out a storm even when the response to it is incompetence. What they cannot abide is that plus denial. It is an entirely different story when authorities see the same problem you do and bungle the solution in good faith than when authorities claim you are crazy for thinking there is any problem at all when there really is.
The issue is trust, and the last ten years have performed perhaps the opening act in disavowing it across an enormous expanse of the globe. It is a form of corruption, one that is far more devastating than any official who just outright steals from the national treasury. A politician who does that is understandable; one who declares that what is isn’t is an enigma who can only be solved, in the public mind, by increasingly radical means.
http://www.alhambrapartners.com/2017/09/25/distinct-lack-of-good-faith/

by Groen_mamba | 26th Sep 17, 11:25am 1506378317

There is no housing crisis ; Foreign buyers only account for 3%

by Alter Ego | 26th Sep 17, 9:49am 1506372561

Let us weaken our reserves, we can stand any pain, weaken our resolve, weaken our stance, weaken our platform, train crash is on the way. Toot Toot.