Dairy prices rise on lower volume; China ODI declines; China downgrades US credit rating; Germans on strike; AU savings interest rates drop; UST 10yr 2.56%; oil and gold lower; NZ$1 = 72.7 USc; TWI-5 = 74.2; bitcoin down -US$3,000

Here's our summary of key events overnight that affect New Zealand, with news that bitcoin has crashed, down more than US$3,000 on the day.

First up however, dairy prices took a good jump in today's GDT auction. Overall they were up +4.9% on a weighted average basis in USD (although only up half that at +2.45% in NZD). But most individual key components recorded good gains; WMP is up +5.1%, SMP up +6.5%, cheddar cheese is up +5.2% and butter is up +8.8%. The reason is the lower volumes on offer. Fonterra advised a -6% fall in milk production in December although total season milk volumes will only be down -3% in New Zealand. That brought out the bidders - there was the highest number in more than three and a half years. For farmers unaffected by dry conditions, especially those with irrigation, they will get the best of both worlds - high production and higher prices. This is when irrigation really pays off.

China's dairy industry is the world's third largest (after India and the US) and they Ministry of Agriculture has been checking the quality of their fresh milk, which they now say has "never been better than today".  ;)

And China has recorded its first drop in outbound direct investment since 2009. This comes after officials tightened up criteria in response to the activities of companies like HNA who have contributed to a surge in fund outflows and rapid depreciation in the yuan.

China's Dagong Global Credit, has downgraded the American sovereign credit ratings from A- to BBB+. Dagong cited reasons including “deficiencies in the current US political ecology” and American tax reforms that “did not attack the root cause of the unsustainable debt-driven economy of the US” and instead “directly reduce the federal government’s sources of debt repayment.” So far, the action has mainly drawn smirks from outside China.

But the American's are closer to debt default with no deal to raise their [self-imposed] debt limit. Markets expect an extension, just like every other time, but with the extreme level of toxic partisanship in Washington under this Administration it isn't so clear.

In Germany, tens of thousands of industrial workers are on strike in support of trade union demands for a +6% pay rise, and reduced weekly working hours. Employers, which includes major car makers, are offering about +2%.

In Australia, interest rates for savings accounts have been trimmed over the holiday break. Fortunately, the same banks who operate here did not do that on this side of the ditch. Not yet, anyway.

The UST 10yr yield is up +1 bp at 2.56% today. The equivalent 10yr China sovereign bond has held at its much higher level and is unchanged at 4.02%. The equivalent NZ 10yr sovereign bond is up +1 bp at 2.90%.

Oil prices have slipped a little today with the US benchmark now just under US$64 a barrel, while the Brent benchmark is now over US$69.50.

Gold is also lower, down -US$7 to US$1,334/oz.

The Kiwi dollar is down more than -½c to 72.7 USc returning to where it was before the US holiday. On the cross rates it is at 91.4 AUc, and against the euro at 59.4 euro cents. That puts the TWI-5 back at 74.2.

Bitcoin has fallen sharply over the past 24 hours by a massive -US$3,000 to US$11,161, a -20% slump. That takes the price back to where it was on December 4, 2017. Growing regulatory pushback is behind the reassessment, especially in Japan, Korea and China where the exuberance was most pronounced.

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

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31 Comments

"China's Dagong Global Credit, has downgraded the American sovereign credit ratings from A- to BBB+. Dagong cited reasons including “deficiencies in the current US political ecology” and American tax reforms that “did not attack the root cause of the unsustainable debt-driven economy of the US” and instead “directly reduce the federal government’s sources of debt repayment.” So far, the action has mainly drawn smirks from outside China."

Don't know what they are smirking at. Sounds a lot more sensible than the other ratings.

While true - dogma / politics / prejudice just gets in the way. I think it just shows the insanity that is pervasive in the world.

Exactly!!!

On Monday, Bloomberg confirmed that the Bundesbank plans to add the Chinese yuan to its currency reserves.

"This is especially important in light of America's huge budget deficits, which will grow by at least another trillion dollars due to Donald Trump's recent tax reform. After all, the convenient printing press used to plug gaps in the US budget is possible only thanks to the enormous demand for dollars outside the US. If such demand ceases to exist, or is greatly reduced, the country will either have to learn to live within its means (something they have long-since forgotten how to do), or take Zimbabwe's hyperinflationary route." Read more

Don't be too harsh - Mugabe was just a man ahead of his time !

Should have called it QE and all would have been well.

Duplicate

I can immediately think of a three reasons to smirk.

1. Dagong Global Credit is a Chinese company and therefore operates under the thought control and largesse of the Communist party of China. They are unable to say anything the government does not want said. This implies that every statement is a politically approved statement.

How any organisation can seriously operate as a source of "independent advice" when it is politically controlled is a big credibility problem.

2. Being the reserve currency of the world makes the USD a special case. Regardless of how bad you might think their situation is there is literally no where that is better to place your money. In that context to say the USD is a bad credit risk is to say, to a meaningful degree, the world monetary system is a bad credit risk.

Some might say, 'Well duh".

3. Because many more US dollars are used outside the USA than inside the USA they are able to export inflation in vast quantities whilst paying off their debt by printing money.

I don't think irrigation is going to pay off at these prices. The nutrient limits are kicking in and those irrigated farms are some of the biggest offenders and high cost systems. This is about a difficult summer on the back of a horrible winter.

I talked to a rural real estate agent who told me there is no interest in dairy farms, he must be wrong because one sold around here, but I think he is right it's a very difficult market at present.
I think what is going to happen to us is that we get knocked off our perch as the main dairy exporting country.
I think this quote from a US grain grower is apt,

“Twenty-five years ago, I was at the center of the world wheat crop,” he said. “I was in Kansas. The Kansas wheat crop doesn’t matter any longer. The U.S. wheat crop almost doesn’t matter any longer. World wheat stocks will be the highest in 16 years. "

Soon we just won't be as important to dairy markets, like the US beef industry where ETF's are starting to impact the beef industry in weird ways

https://www.investopedia.com/articles/investing/080715/top-3-livestock-e...

http://www.dairyglobal.net/Articles/General/2017/5/Russia-invests-in-bui...

https://www.dairyreporter.com/Article/2017/11/15/Ekosem-Agrar-boosts-gro...

The trouble today is that barn dairy systems are easily transferable. It's often more logical to move the cow to the market than the milk to it.

http://www.disputedwaters.com/blog/17/03/2011/egypts-biggest-dairy-farm

https://www.reuters.com/article/us-algeria-usa-agriculture/algerian-firm...

Expect a large cow kill in the north hemisphere on top of record beef kills, and maxed out processing plants.

Add to this a growing awareness among the young that beef has a very high environmental impact per kg relative to other meats, along with a longer term prospect of meat alternatives...Tough prospects.

Local farming is fading as profit margins decide what food makes it to our plates. The new Netflix documentary series Rotten exposes the fraud, corruption, and the consequences on our health of today’s global food industry. Nobody’s hands are clean. Only on Netflix, January 5.
https://www.youtube.com/watch?v=_ot6W_7hvrM

Food of almost every kind is so plentiful in the world it is very hard to make money farming.

I am curious if lab grown meat would have any wider appeal after all most tend to go for straight vegetarianism/veganism on conscience instead of artificial and the movement to more "natural" produce forms has produced much better marketing opportunities.

First of all what a relief to many to see prices heading back up. Secondly I very much agree with Aj. Irrigation doesnt replace a bountiful mother nature. When the temps are high, its dry and windy the rates of evapotranspiration are way higher than what an irrigator can do. Plus there are irrigators on soils that will never hold that water. For some it works well. Unfortunately many got sucked into a spiele from a good salesman.

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16

After 9 years of taking a non-interventionist / cap spending approach while in Govt, National have now presented the current Govt and media an urgent ‘to-do’ list! Lol.
Why not use the time when you’re actually in Govt to work on the ‘to-do’ lists and serve your citizens?

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12

because they were too busy on issues that were not in the interest of majority of nzers...

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11

The most obnoxious piece of work by National's years would have to be that "flag debate". That was designed as a nod to the Chinese government who would clearly be uncomfortable with trading with a Union Jack in Pacific Asia region. Unforgivable selling out of the Nations patrimony. Who's side are they on?

Hard to find votes by promising to sell off schools and hospitals.

Labour has already rolled back enough on the selling of HNZ stock to get a big pass mark by me.

I would remind you that a flag referendum was part of Labour's election manifesto - JK just trying to be nice was another interpretation.

I'll take your word for it. Still madness.

Don't understand - where in the article does it say anything about National producing a to-do list?

1970s replay?
BERLIN/FRANKFURT (Reuters) - Tens of thousands of German industrial workers downed tools on Tuesday in support of trade union IG Metall’s demands for a 6 percent pay rise and a right to the first new cut in weekly working hours since the 1980s.

Workers have been staging such warning strikes since last week, a common tactic in sectoral wage negotiations in Germany. About 33,000 workers took part on Tuesday, including 10,000 at Mercedes maker Daimler AG (DAIGn.DE), taking the total to 425,000 since last week.

With Europe’s largest economy steaming ahead and unemployment at a record low, Germany’s biggest trade union is confident of winning a significantly better deal for around 3.9 million workers in the metal and engineering sectors.
https://www.reuters.com/article/us-germany-wages/german-strikes-spread-t...

German workers have woken up. This is a significant event.

On the one hand we are being told that our jobs are being replaced by robots, yet a lot of countries have very low unemployment, especially of low skilled workers. I wonder if the endless robot stories are just to suppress pay rises?

I came through Auckland airport on Monday. My pre purchase duty free was collected and delivered to me by a robotic arm. Fascinating to watch..all it needed was a smiley face!

I dream at night of robotic arms changing the world and then realise they are just the same as coke machines and wake up in a cold sweat...its a nightmare.
No offence to coke..all the dispensers are the same.

Buying stocks on margin is buying stocks with money you don’t have. Usually, it’s speculators who engage in this risky practice that can be profitable as long as the market keeps going up.

Let’s say you have $10,000 in an account with your stockbroker. Under normal circumstances, you could buy up to $30,000 worth of stock with a $20,000 loan from the broker. Let’s assume you are lucky and the stock goes up 50 percent. The position is now worth $45,000, and your equity has increased by $15,000 to $25,000. This means you can increase your position size again to $75,000 and buy more stock, because most brokers only require you to keep 30 percent of cash or stock as collateral.

This is why using margin is so powerful in a rising market and why margin debt in the accounts of the New York Stock Exchange (NYSE) has kept pace with the records in the S&P 500 and the Dow Jones industrial average, reaching an all-time high of $581 billion in November 2017. Read more

I suppose it's the same deal local banks offer indebted NZ "homeowners".

It always bothers me how margin on shares never approaches the amount you can borrow for a house. You can leverage a liability more than an actual asset that has an income producing business behind it. If we hit a large correction when the western housing bubble bursts I suspect the amount being lent to homeowners and investors will need far more serious scrutiny.

Perhaps some questions about why houses are used for consumer finance rather than productive lending should also be asked.

The REAs must be getting desperate. This note from "Alan" looking to buy houses though his agent has been doing the rounds this week: https://i.redd.it/o7tj8uvkoda01.jpg

It must be about time for the REINZ statistics.
*Rubs hands together*

Funny, I had a call from ANZ yesterday, asking if I want a 90% mortgage. Banks getting desperate too!

It sounds like ANZ has been approved to move from 10% to 15% of their mortgage book as 90% LVR. RBNZ has been loosening restrictions so calls like this from the banks will be a bit more common.

Interesting position.
Alan is motivated enough to go leaflet dropping, but still also wants to ensure that Sam Munn can clip the ticket for 2%.
Altruism alive and well.

Ha ha - yes, sign up with the agent and all of a sudden, Alan has disappeared..!

According to canstar NZers paid 700 million of interest on credit cards last year,up 50% since 2009.
Thank god the banks will make money again this year.

According to ABC News in Australia, Australian's pay $2.7 Billion dollars every year in road tolls.

http://www.abc.net.au/news/2018-01-16/road-tolls-boom-but-effect-on-traf...

That is more than they pay in vehicle stamp duty (what is that Kiwi's say - another tax I answer) - more than car license fees - more than their luxury car tax (what is that Kiwi's say - just what it says, another tax I answer).

Between banks and private toll operators it is clear there are big advantages to "enabling" government policies.