Global trends positive; stock markets rise strongly; trade with China strong; interest rates low & stable; risk chases alternative assets; UST 10yr yield 2.41%; oil and gold up; NZ$1 = 70.9 USc; TWI-5 = 73.2

Here's our summary of key events overnight that affect New Zealand, with the final news roundup for 2017.

It's been a year of growth and development worldwide, one that has unusually seen gains in almost every region. Incomes are up, inflation is low, trade is booming, and global income inequality has eased significantly. Poverty has been pushed back almost everywhere; in fact there are the fewest number of people in extreme poverty since 1990, and almost 1 mln less in general poverty over the past year. The gains, however have been uneven, and the overall decline in poverty levels is through major development advances in China and India.

That is not to ignore problems. The West is struggling with inequality perceptions, but that does not include either New Zealand or Australia where Gini scores remain stable at about .33 as they have done for decades.

New Zealand has greatly benefited from these global trade and demographic trends. Our economic position is strong, by any measure.

On Wall Street, losses in technology and financial stocks weighed on the last trading day of 2017, in what has been a banner year for American shares. The S&P 500 is up +19% over the course of the year.

But that is tame compared to the +36% gains for Hong Kong stocks. In contrast, mainland Chinese markets Shanghai and Shenzen equities didn't make double-digit gains.

The NZX50 rose +22% in the year and just shy of the all-time record in Wednesday. The ASX was only up +7%.

In China, the Shanghai port has broken it's own world record for container handling. It processed a massive 40 mln TEU's in 2017. (Auckland can handle 1.7 mln TEUs, Tauranga over 1 mln in a year.)

The UST 10yr yield has fallen slightly to 2.41% today (-2 bps). In China, the equivalent 10yr sovereign bond is yielding 3.92% (+1 bp) while the equivalent NZ 10yr sovereign bond is yielding 2.75% (+3 bps).

The UST 10 year yield started the year at 2.45%, so the change in the past twelve months is minimal. Over that time it reached a high of 2.62% in March and a low of 2.05% in September. How the US Fed reacts to the new US fiscal stimulus will be the key for 2018.

Fixed income investors couldn't make the returns they once did on falling yields (rising bond prices), so they turned to alternative assets. Securitisations of US car loans hit US$70 bln in 2017, a post-financial crisis high according to S&P. In fact there has been a glut of issuance of asset backed securities this year, not only for car loans, but other leveraged loans, and credit cards as well. Yield can only be found with much higher risk.

But the last day of the year is an expensive one for some Chinese borrowers.

Oil prices are higher in the US today with the WTI benchmark at just under US$60.50 a barrel, while the Brent benchmark is just under US$67. These are recent highs and reinforce the fact that our pump prices, already at two year highs, are about to go even higher. Remember, crude oil started the year at US$54/bbl, so it has risen +12% in 2017.

Gold is up another +US$10 to US$1,303/oz. That is a gain of +5% in just the last 15 days. It is also a gain of +12.4% since the start of 2017. (But is was a little less in NZD, up +11.7%.) This is gold's best year since 2010.

This morning the Kiwi dollar is little changed at just on 70.9 USc, and on the cross rates it is at 90.9 AUc, and against the euro it's at 59 euro cents. That puts the TWI-5 still at 73.2 and the Kiwi dollar ends the year +2.4% higher than where it started.

Bitcoin has stopped falling in the past day or so and now at US$14,567, a +4.2% rise on the day. The annual gain for bitcoin is a head-shaking +US$13,600 - it was under US$1,000 at the start of 2017.

Have a happy, safe New Year everyone.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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18 Comments

On Wall Street, losses in technology and financial stocks weighed on the last trading day of 2017, in what has been a banner year for American shares. The S&P 500 is up +19% over the course of the year.

An ever increasing trend: capitalising future earnings today in the belief they are expected to grow over an ever expanding time horizon beyond what is reality now.

Our view is that no form of investment risk is always worth taking without regard to valuations, fundamentals, economic conditions, or market action. The strategy of buying and holding index funds for the long run is essentially a strategy that says that market risk is always worth taking. Yet the iron law of investing is that a security is nothing but a claim on a future stream of cash flows. Valuation is a crucial determinant of long-term returns. The higher the price an investor pays for those cash flows today, the lower the long-term rate of return earned on the investment.

The corollary is also true. The lower the long-term rate of return demanded by investors, the higher the price moves today. So clearly, changes in investors' attitudes toward risk will strongly affect short-term returns. If investors become more willing to take market risk, it is equivalent to saying that they are demanding a smaller risk premium on stocks (that is, a lower long-term rate of return). Prices rise as a result. Now, the fact that current stock prices are higher also implies that future long-term returns will be lower, but that's part of the deal. Read more

NINO3 SST starting to look a tad nippy.
http://www.bom.gov.au/climate/enso/indices.shtml

Ending on a high alright. 5 of 9 priciest homes sold in 2017 are from Remuera! http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=1196...

The UST 10 year yield started the year at 2.45%, so the change in the past twelve months is minimal. Over that time it reached a high of 2.62% in March and a low of 2.05% in September. How the US Fed reacts to the new US fiscal stimulus will be the key for 2018.

Fixed income investors couldn't make the returns they once did on falling yields (rising bond prices)

They did remarkably well leverage trading relative falling yields in the Treasury spread market employing futures in exactly the opposite way explained here.

Grants interest rate observer

"Under the table

In mid-December, the California Public Employees Retirement System (CalPERS) investment committee voted to change its allocation of its $346 billion investment portfolio. Greater will be CalPERS’ exposure to the stock and bond markets; its allocation to public equities is set to increase to 50% of its AUM from 46%, while fixed income will rise to 28% from 20% (although direct comparison is obscured by the fact that inflation-protected securities will be consolidated into the fixed income category). Lesser will be CalPERS’ dry powder: Cash holdings will decrease to 1% from its current 4% of the portfolio. Bloomberg noted that the only dissenter in the vote, board member JJ Jelincic “has advocated for a higher risk portfolio,” while board member Richard Costigan concurred “I am concerned, we’re leaving money on the table.”

Public pension funds are rarely known for a contrarian mindset, and CalPERS is no exception. The March 24, 2006 edition of Grant’s (“Billions buy funds”) detailed the California capital stewards’ foray into the then-blazing hot commodity realm, with the Thompson Reuters/CoreCommodity CRB Index having logged a 78% advance over the prior three years. CalPERS’ didn’t top-tick the cycle, as commodity consolidation through the rest of 2006 gave way to a strong rally in 2007, but the party ended thereafter and by the beginning of 2009 the CRB index had dropped to those early 2003 levels. One day, California pensioners may wish that CalPERS had held more than 1% cash in 2018.

Maybe they should ask Orange County how to juice up those returns....

Things are looking good for 2018.

Indeed - “Our economic position is strong, by any measure.”
A strong “position” perhaps – however some of the internals can always raise a few questions.
Liam advises me today that – “For New Zealand households, the ratio of debt to income has now reached a record - 168 per cent, well above the pre-financial crisis peak of 159 per cent.”
A quick google also reminds me that GDP per capita fell in the March 2017 quarter after a fall in December.
I could go on – but thankfully will not - the weather today is just too darn nice for such pursuits.
Summer daze….

Forward indicators of our future well-being remain stubbornly muted. NZGS 10 year yields are anchored below the upper boundary of the RBNZ's medium term inflation target.

Our national debt has topped half a trillion dollars and is still rising

$120,000 for every man, woman and child in New Zealand....Someone tell me how that is supposed to be repaid? The answer, "But it doesn't have to be!" is only 'sensible' to those who don't have to worry about it. The Next Lot of New Zealanders; our children, will....

Who is going to claim it?

If someone calls in our debt, then all the debts are being called in around the world. Given everyone owes more than they are owed, the only answer will be a global write-off, then start the merry-go-round again.

I never quite understand where the notion that GDP per capita either is falling or has fallen, recently.

It certainly hasn't on a nominal basis for a very long time, and on a real basis it hasn't since 2008. The data is here. (Annualise it to get past the quarter-by-quarter seasonality.)

The only thing that 'falls' is the growth rate; that is, it grows more slowly at some times than others. But apart from the GFC and in once in 1998, it hasn't actually fallen in over a quarter of a century.

I’m sorry David, but to clarify, are you suggesting that GDP per capita as defined below, has not fallen in recent times and in fact, has not fallen for many years.

“The GDP per capita is obtained by dividing the country’s gross domestic product, adjusted by inflation, by the total population.”

I’m wondering if we are talking about the same thing.

There is a nice little graph here, showing that real GDP per hour is in fact slightly negative and real GDP per capita is mildly positive. There is no getting away from fact that having more people is the real reason GDP is going up.

In the absence of productivity gains, our economy has relied on more people, working more hours. Net migration provides a conveyor belt of fresh labour, but it comes with attendant bottlenecks in housing and infrastructure.

https://www.jbwere.co.nz/assets/Uploads/1708-Working-harder.pdf

Thanks Roger – nice link – I think I now understand what David is saying.

It appears each new (or existing) entrant is still bringing a fall, albeit a fall in growth – but not in absolute terms – yet?!?

However, am I correct in assuming a fall in GDP per capita still means working just as hard to obtain a smaller slice of pie as previous, or now working harder just to maintain that slice?

And thus, in a general sense if we wish to maintain our standard of living whilst allowing a fall in GDP per capita will we need to make up for the shortfall by other means.

Coming off the lows of 2008 it would not surprise that real GDP has grown constantly since – and coupled with population/migrant inflows real GDP growth should be a given – it would seem it’s the underlying “quality” of the growth that is in question.

Moving forward, what is going to turn that “Working Harder Not Smarter” graph around – or are we simply running out of puff?

Personally A Mish take, would be to see where our 'Customers" stand.

https://www.themaven.net/mishtalk/economics/debt-to-gdp-only-4-major-cou...

To ignore the obvious.... would be a huge monumental mistake. No wonder they want their money....back.

What a difference a day makes...

Bitcoin yesterday was $14,500, today $12,500, and the day is young.

Why something of zero value has any worth is puzzling to me.

.Let us all make a crypto each and everyone of us, , then we will all be multi-billionaires and never have to work ever again.

(Wot, no need to rent, I just bought you all out....My gift to you all....who needs China...I make trillions a day)

Them poor Farmers are so stupid, trying to produce and earn their Daily Bread.

Them Hairdressers could take a cut, them drug dealers would never have to Deal again, it would be a magical life, no real illusionists, no Doctors, no Politicians, especially no Bwankers.....no taxes, We is all rich....no wars, no need to produce anything...just Crypto.

What an invention to Save....mankind.

However will Pension Funds survive...no need.....I have just ordered my Ferrari, before all the rush.....had to leave a Cryptic Note...that is all.....the deposit I needed. Made it myself this morning....Gonna buy a boat of Titanic Proportions when I have created the illusion tomorrow.

My crypto is stored in my brain, getting it validated tomorrow. that is if I can find a mind reader.....on Interest.co.NZ.

Trump bought my last lot, he wanted to make America great again, no Trillion dollar debt, so I ...Owe-bliged. him....see I can even make up words to exchange with all you believers.......and Share Traders. And Politicians trying to spend.....hard earned.....Dollars. So old hat, so out...moded.

Happy New Year....I am deeply Owe-Bliged....to all our Readers..

We is all Rich, ...mind over matter...I don't mined...any more....you OWE-me.Won-...so .You don't matter....a BITCOIN....

BITCOIN...so LAST YEAR.......Become...OWE-Bliged. ...I will take Oil-Dollars.