Abe wins big in Japan; Spain convulsing; EU confidence improves; China house prices jump; Argentina backs reform; big profits flow from Aussie regulation; UST 10yr yield at 2.38%; oil and gold up; NZ$1 = 69.6 US¢, TWI-5 = 72.5

Here's my summary of the key events over the long weekend that affect New Zealand with news from around the world.

Firstly, Japan's yen hit three-month lows against the US dollar (just as ours is falling too on a Government change) as a big election win for Shinzo Abe gave a green light for his super-easy monetary policy. And he indicated he will change their constitution "to clarify the legal status of Japan's Self-Defence Forces" in the face of the threat from North Korea.

Meanwhile, the euro also sank as Spain's constitutional crisis aggravated concerns about political unity in the bloc.

And there is an odd piece of EU data out today. Eurozone consumer confidence strengthened for a third straight month in October to its highest level since 2001, according to an official EU survey. The result was also better than markets expected. The odd thing is that actually, this data is negative - there are more pessimists than optimists in the EU. This survey hasn't been positive since January 2001.

In China, new data out overnight showed that China’s new home prices rose in September at the fastest rate on record as buyers rushed to close contracts before new restrictive measures took effect in October. Prices in China’s 70 major cities rose +11.2% in September from a year earlier, accelerating from a +9.2% annual increase in August, as 64 of them saw year-on-year price gains.

And in Argentina, President Macri has won a sweeping nationwide victory in midterm congressional elections over the weekend and is moving swiftly to overhaul Argentina's economy with tax cuts and austerity measures, rolling back years of profligacy with policies that repeatedly took them near to, and into, bankruptcy.

And an interesting situation is developing in Australia. Their regulators forced banks to clamp down on interest-only lending, rationing it by reducing access and raising interest rates by applying the regulator's higher risk assessments. But now those same banks are under fire for 'profiteering' from responding to those instructions. It is almost as though the regulators had no idea the consequences of what they required. They need to be careful what they wish for; their moves gave a free-pass for them act in unison, without any competitive consequences.

And staying in Australia, network operator Vocus as announced it is hiving off its New Zealand business, having built it by buying Slingshot, Orcon and Flip. They are to be spun out and sold by Goldman Sachs.

In New York, the UST 10yr yield is now at 2.38%, sharply higher than on Friday.

The price of crude oil is marginally higher today and now just under US$52 / barrel, while the Brent benchmark is just under US$57.50.

The price of gold is also marginally higher and now at US$1,279 oz. New data shows that gold output is expected to rise in Australia over the next five years.

But the Kiwi dollar is down sharply from where we left it last week, at 69.6 US¢. But on the cross rates we are unchanged at 89.2 AU¢, and at 59.3 euro cents. Our TWI-5 index is now at 72.5.

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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34 Comments

Ah yes banks are profiteering when interest rates go up. Next property "investors" will complain they were tricked into borrowing all that money.

....but they were!
By, us, in the Government we elected; by the taxation regime we installed; by regulation that saw public housing responsibility foisted onto the private sector; by the financial system we allowed to create its own unfettered debt etc etc et.
And, yes, we were all tricked. Is there an answer? A way 'back'? probably. But it's going to hurt the very people that have been tricked......as it always does.

When you make investments, at the end of the day, only one person is responsible for the consequences. - You.

Did people believe that record very low interest rates would go on for ever - really?

Did people believe that there was no risk that the highly distorted tax regime was going to be changed as frequently discussed by some future government - really?

Did people believe that the highly distorted supply and demand in the housing market would not be eventually rebalanced - really?

Bull market thinking where greed takes over and investors don't show restraint in terms of the risk they take on. I suspect we're going to see more issues in short order.

@Chris-M that's nonsense. We have enough history to know that financial markets/advice must be adequately regulated because a majority of people do not have the financial literacy required to understand the consequences. For example in NZ in the 2000's people were buying high risk bonds without the understanding that they were inappropriate to their circumstances.

"Did people believe that record very low interest rates would go on for ever - really?"

Yes. They will only be forced lower.
Unless you see productivity measures increase (which they wont with declining net energy) then there is only one way interest rates can go to stop the ponzi imploding. The ponzi needs more debt.

Being tricked would suggest that we acknowledge the trick and steer clear from letting it happen again.

Being lied to, brainwashed, indoctrinated, manipulated or just plain ignorant may be better descriptions.

"If we aren't being taught how to grow own food, how to take care of ourselves and our families, and how to live without the need for huge governments, banks and corporations - as our ancestors once did - then we aren't being educated; we're being indoctrinated to be dependent and subservient to the system."

"If a man is born ignorant to parents that are ignorant, in a society that is ignorant, lives a life of ignorance and eventually dies in ignorance.... ignorance is a norm. So indoctrination can be called education, hypnotism can be called entertainment, criminals can be called leaders and lies can be called truth, because his mind was never truly his own."

Dictator - interested to know how ?

Charging investors more is completely warranted in my view. They are much more likely to default when interest rates go up and property prices down. So its like the loan sharks: in order to make money long term, more needs to be charged to the category where the risk is higher. And to reduce the cross subsidy from first home buyers and depositors for when the huge losses occur.

Indeed - banks also surely need to apply more loss absorbing capital resources in addition to that which you claim is correct.

@ Stephen Hulme, Small rental holders are nearly identical to standard home owners in terms of risk profiles. Larger rental holders have a number of adjustments made to LVR requirements and servicing buffers, they also receive business rates which are most of the time higher than residential rates.

What's that got to do with deleveraging banks' residential mortgage capital commitments via upward RWA adjustments for instance - which inevitably make it less profitable for banks to fabricate debt?

@Stephen Hulme, I am pointing out that banks do in fact charge more for larger and riskier portfolios. Essentially somewhere around 4 to 5 properties banks view the average return as lower and consequentially look to charge more interest (moving from blackboard rates to individually calculated risk adjusting rates- business rates) and to have the lender carry more equity. It effectively is less profitable for banks to carry concentrated risk and so they do in fact make pricing adjustments.

National leader Bill English says Jacinda Ardern's new government is "unusual" but concedes that it is legitimate.

Speaking to various outlets on Tuesday morning English repeatedly called the incoming government's mandate to "change capitalism" into question and said the [sic] most New Zealanders thought the country was going well. [my emphasis]

And while he conceded the result was "legitimate" he repeatedly called it "unusual". Read more

Only to those that can't count.

I don't think Bill understands that he won the battle but lost the war .....

It's a worry that National were that bad at strategy.

A few blunders there, trying to run an FPP campaign in an MMP world, asking voters to "cut out the middle man" then leaking Winston Peters' pension details before having to try to recover from both and try to align again.

Or maybe they genuinely believed they could get over 50% of the vote, despite the rumblings of discontent in NZ? A bad miscalculation.

@Stephen Hulme, You are thinking unusual means that it doesn't include the largest party but it is unusual because NZ First and Greens are about the same size but one has 4 cabinet positions and the other has 0. Its rather strange for a 3 party deal to be a coalition of only 2, in fact its hardly fair to the spirit of MMP. Remember this is a 55 seat government and national has 56 seats.

Am I? Nonetheless, don't presume to think on my behalf.

@Stephen Hulme, Feel free to clarify :-)

In China, new data out overnight showed that China’s new home prices rose in September at the fastest rate on record as buyers rushed to close contracts before new restrictive measures took effect in October.

Hmmmmm - who to believe?

Bloomberg - China's Home Prices Rise in Fewest Cities Since January 2016

As a layperson , who reads a lot , I would pick that the EU will eventually break up .

Unless there is uniform monetary and fiscal policy across the entire EU there will be fractures .

There gap between surplus ( core countries ) and deficit (peripheral countries ) , or rich and productive vs poor and unproductive , is simply too great for a monetary union to work in the long run .

Yes, I wonder whether we're seeing a beginning of the end of globalisation and a swing into nationalism. I suspect more countries are feeling that hey, perhaps not everyone is playing the globalisation game (nor on a level playing field) so they're best to think of their own interests first too.

I think it is a level playing field, it's just the field is a bit lower down than what we are used to.After all, the current Western way of life is not likely to be the global equilibrium point.

Trickle down in absentia

The sentiment is entirely towards Nationalism ( america first ..) because we have hit limits with any gains made from globalising ... the global pie is now in decline. The rhetoric & action will only get uglier.
And the harsh reality now is if anyone wants out of the financial Ponzi your living standards will immediately decline. Its tough to think of any country which is even close to self sufficiency in resources (Russia? ) who can possibly walk away from the table.

New Zealand could be the almost perfect model for self sufficiency. The change in living standards doesn't have to be a decline.

Im imagining how a majority would describe a move to few consumer goods/ electronics/refined fuels/meaningless debt fuelled jobs to a transition of hard labour to produce food .
Above all, in our current easy lifestyle you need ongoing easy energy which works with existing infrastructure.. which is Oil (tricky to build a city with a solar panel)
http://www.inscc.utah.edu/~tgarrett/Economics/Economics.html

They need their EU subsidies to keep their EU ponzi economy going: Agricost has developed into the biggest cereal producer in Romania receiving $14.8 million per year in EU subsidies.....If it were to cap our subsidies, that would be totally disastrous for our business here.
http://www.producer.com/2017/10/europes-biggest-farm-57000-hectares-14-8...

These are huge companies and the subsidies shouldn't be required, most are development subsidies trying to create jobs. I've actually been to this farm but a while back.

Big business, is modern corporate ag

http://www.producer.com/2017/10/europes-biggest-farm-57000-hectares-14-8...

"most are development subsidies trying to create jobs."

Which is all that money printing on a huge scale is... A ponzi to keep meaningless jobs going so that demand doesn't tank.

The Oz banking kerfuffle is a classic 'universal pricing signal'. Gubmints seem not to recognise that issuing such signals enables private sector re-pricing without any fear of triggering cartel/trust-busting action.

A local example, which I find deliciously at odds with the 'affordable housing' meme, is the Welcome Home loan limit. This acts as a local pricing floor for builders and RE agents: either would have to have rocks in their heads to suggest a price lower than the WH current regional limit......

"New Zealand’s new prime minister Jacinda Ardern calls capitalism a blatant failure. Former Greek finance minister Yanis Varoufakis says capitalism is ‘merely’ coming to an end because it is making itself obsolete. Mathematics professor Bruce Boghosian claims that without redistribution of wealth, our market economy would not be stable, because wealth always tends to concentrate. The people at Artemis Capital Management write that the stock market has begun self-cannibalizing like a snake eating its tail, and the only reason we’re not in a recession already is ‘financial alchemy’."
http://www.zerohedge.com/news/2017-10-23/capitalism-dead-or-merely-dying

It is not so much that capitalism (or any ism) has failed, it is that humanity has failed.