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US confidence rises; home ownership rate rises; HNA faces cash crunch; EU growth up, confidence up; ASIC hits CBA on BBSW; S&P affirms NZ rating; UST 10yr jumps to 2.73%; oil and gold down; NZ$1 = 73.3 USc; TWI-5 = 74

US confidence rises; home ownership rate rises; HNA faces cash crunch; EU growth up, confidence up; ASIC hits CBA on BBSW; S&P affirms NZ rating; UST 10yr jumps to 2.73%; oil and gold down; NZ$1 = 73.3 USc; TWI-5 = 74

Here's our summary of key events overnight that affect New Zealand, with news that the global bond rally is rattling markets.

Firstly, American consumer confidence has come in a tick higher than expected in January. Markets took that as meaning the US Fed is more likely to raise its Fed Funds rate at a quicker pace and bond yields firmed putting downward pressure on bond prices. Equities sagged because of that and are down more than -1% on Wall Street.

Meanwhile the American home ownership rate rose to 64.2% in 2017 and this is the first time in 13 years it has turned up. The evidence is that young households overcame the price hurdles to purchase homes in growing numbers. (The New Zealand home ownership rate is 62.8%.)

In China, troubled conglomerate HNA is said to be facing a cash crunch of as much as NZ$3.3 bln before the end of March. The company claims all is well but creditor banks are banding together to protect their interests. It is never a good sign when banks co-operate like this on a credit risk.

The 2017 Eurozone economic growth rose to +2.5%, its fastest pace for a decade in 2017. Growth in France gave it a push. That compares to US growth of +2.3% on the same full-year basis. New Zealand economic growth figures won't be released until late March but are expected to be about +2.7% (although that will be sharply lower than +4.1% real growth we had in 2016).

Strong and sustained rises in both consumer and business confidence is building positive EU sentiment at levels not seen in a decade. Matching the heady days of 2000 actually isn't too far away. And all this is being achieved with low inflation. Germany reported it at +1.6% in January, a tick lower than expected.

In Australia, just a day after appointing an internal candidate to the CEO role, regulator ASIC has hit Commonwealth Bank of Australia with a new court action related to 2012 claims of rigging their swap rates. (Australia has subsequently changed the way the BBSW is set.)

Standard & Poor's have affirmed the New Zealand credit rating at AA Stable. They say this because they expect "fiscal performance will remain sound with a slowly improving net debt ratio during the next few years". They also say an upgrade is likely if the Government's budget performance continues to improve "in a sustained way". However a downgrade is possible they warn, if that falters, or if the country's "debt profile, or banking metrics weakened substantially". New Zealand's AA Stable rating is two notches lower than Australia's AAA, although they have a Negative outlook.

The UST 10yr yield is still firming and is now at 2.73%, a gain of +3 bps in the last 24 hours. The equivalent 10yr China sovereign bond is down just a little at 3.95% (-1 bp). The equivalent NZ 10yr sovereign bond is up +1 bp to 2.96%.

Oil prices are down more than -US$1 today and currently just under US$64.50 a barrel, while the Brent benchmark is now under US$69.

Gold is also down by another -US$1 and now at US$1,340/oz.

The Kiwi dollar starts today higher however at 73.3 USc. On the cross rates there are also small rises and we are now at 90.8 AUc, and against the euro at 59.2 euro cents. That puts the TWI-5 just on 74.

Bitcoin is now just on US$10,000 or -10.5% lower than this time yesterday, and a drop of -US$1,250. In fact, the current level is the lowest we have seen the bitcoin price since late November and at one point in the past hour it was below US$10,000.

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

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22 Comments

The UST 10yr yield is still firming and is now at 2.73%, a gain of +3 bps in the last 24 hours.

Is it not past time to add some colour to the situation?

For instance: new incremental sellers of USTs from the MBS space (convexity) hedging and its concurrent options dealer (short gamma) hedging spooked the market again with yields to multi-year highs.

These functional hedging aspects of the bond market quickly compound their impact as panic sets in irrespective of underlying fundamentals..

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Could you translate to something myself and some other non-financial speak terms can understand?

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I have already offered key word pointers that will reveal explanations with the aid of an internet search engine.

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I think its good. Its shows me just how little I know of this industry. If I wanted to understand it in depth I could school myself up.
If the words describe complex financial concepts I think that in general, dumbing down is not in anyones best interests. Unless it is purely unnecessary jargon which is being used.

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I would translate roughly as: as in equities markets where index inclusion forces finds to buy certain stocks, in the US Treasury markets, there has been forced selling from mortgage-related sources. This has created some panic that is not justified by the fundamentals. Therefore buy this dip.

(Very happy to be corrected on this!)

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Stephen. Surely your posts would be far more useful if you spoke to a wider audience. Much of what you write comes across as meaningless without explanations for we non experts.

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Stephen, you clearly have a great deal of knowledge in this sphere – it’s a shame it’s not being disseminated and understood by a wider audience on this forum.
A slightly more user friendly summation would probably help.

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Perhaps his true message isn't the information, but more his delivery...

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His post is heavily loaded with concepts.

Convexity is an important part of bond pricing. When interest rates go up the value of bonds drops (the drop in value increases their yield to market interest rates). Rates are currently increasing the bond market is now starting to respond and they now believe the Federal Reserve will keep increasing rates.

He has noted that there are options on the bonds used to hedge their position. A short gamma position (forgive any mistakes I make here as I haven't traded options for a long time) makes money from the time decay in the option value. However those options lose money if there are price movements in the underlying instrument. In other words they make extra money in the position provided the bond values remain stable, once the bond values change their position goes rapidly out of the money.

In this case it's best to exit the position, realise the loses but not risk losing more money. I'm guessing that they are buying the options and selling the underlying bonds.

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Nice - I can get my head around that.
Interesting and informative - for me anyway.
Thank you!

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Now just wait and watch to see if there is a massive bond sell off. I believe Stephen has hinted at the leverage effects as well. Leverage from the options and the margin lending could have an explosive effect. If people are in a position where they are trading 100 to 10000 times their capital there could be large volumes of bonds that end up dumped on the market.

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..awesome thanks dictator. Can I nominate you to follow stephens posts for us all and do a quick summary each time?

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I spend a lot of my time explaining regulations and technical concepts in everyday language. Unfortunately that makes me very busy so I don't think I could keep pace with Stephen's posts in the morning.

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Convexity is an important part of bond pricing

Certainly is. A more comprehensive, and hopefully not too complicated, explanation can be read here.

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A late post from me but thank you Stephen – hopefully not too complicated you say – I love this “stuff” but in terms of complexity that’s about as far as I can go.
I understand it – but my wheels are definitely spinning.

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Meanwhile the American home ownership rate rose to 64.2% in 2017 and this is the first time in 13 years it has turned up. The evidence is that young households overcame the price hurdles to purchase homes in growing numbers.

Hmmmm.....

Meanwhile, for those looking to buy for the first time, conditions have never been worse. Growth in property values is outpacing wage gains and limiting affordability, representing a major headwind for first-time buyers, and the broader market. Read more

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Red Moon..Feeling blue..Bummer...Or is it Red Sales in the sunset.

https://finviz.com/futures.ashx

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VIX is green

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I see wild volatility in the distance.

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"regulator ASIC has hit the bank"

What bank was hit?

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ASB's parent Commonwealth Bank of Australia.

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