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Wall Street calm; global economy sanguine; US Congress may have 2yr budget deal; China loosens currency controls; Germany gets grand coalition; UST 10yr at 2.84%; oil and gold down; NZ$1 = 72.8 USc; TWI-5 = 74.1

Wall Street calm; global economy sanguine; US Congress may have 2yr budget deal; China loosens currency controls; Germany gets grand coalition; UST 10yr at 2.84%; oil and gold down; NZ$1 = 72.8 USc; TWI-5 = 74.1

Here's our summary of key events overnight that affect New Zealand, with news investors are realising they may have over-reacted on Tuesday.

Equity markets are rising again having apparently shaken off the concerns that caused the rout. The S&P500 is up +0.8% so far today after being up +1.5% yesterday. These rises come after a -6% cumulative fall from this time last week so today's level is still -3.8% net down.

Spurring the realignment higher is the realisation that the world economy is not is bad shape at all, certainly not enough to justify a -6% fall. Another separate question is whether equity indexes should have been that high in the first place. If not, a fall and maybe more could seem quite justified. And today bond prices are being pushed down again by same market forces that triggered the turmoil. This time, however, acceptance that yields are on the way up.

But the notion that the world's economy is actually in reasonable shape is reinforced by the latest building permit data out of Canada - even in the depths of winter, approvals came in much stronger than markets were expecting.

Even the US Congress seems to have reached a two year budget deal, averting a shutdown. But it still must pass votes and there is opposition on the left and right. Substantial new debt will be required.

In China, a senior official has indicated that the Government's grip on foreign currency outflows is to be loosened. It is going from 'tight' control to 'neutral'. And somewhat related, we should note that the exchange rate between the Chinese yuan and the US dollar is at its strongest point since 2013 at 6.2882 yuan to the US dollar (but at 4.57 yuan to the NZ dollar, it is not so impressive). The point is, the Chinese are letting the Americans devalue without responding so far.

And staying in China, the manipulative, secretive and generally dodgy boss of HNA is claiming that there are manipulative, secretive and dodgy moves out there to undermine his company, all part of a giant anti-China conspiracy, apparently.

In Germany, four months of post-election wrangling is coming to an end with a grand coalition finally agreed. Angela Merkel remains as Chancellor.

The UST 10yr yield is up strongly to 2.84% (+6 bps). Yesterday ended with the Aussie 10 year at 2.83% (+1 bp), the Chinese 10 year at 3.90% (-2 bps) and the New Zealand 10 year at 2.98% (-2 bps). It would not be surprising if all three took today's cues from Wall Street and moved up again today. But the New Zealand rates will have the extra influence of the RBNZ MPS positioning to contend with.

Gold continues to be shunned, even in volatility. This morning it is at US$1,318, -US$10 lower than yesterday.

Oil prices are down sharply with the US benchmark now over US$61.50/bbl and the Brent benchmark over US$65.50/bbl. Both are a drop of more than US$1.50/bbl and this has probably been triggered by fast-rising US petrol inventories.

The currency markets are sailing on as it nothing has really happened in the past week. The Kiwi dollar is at 72.8 USc. On the cross rates we are little changed at 92.8 AUc and 59.3 euro cents. That leaves the TWI-5 at just on 74.1, where it was yesterday and its general level for most of 2018.

Bitcoin is rising again, in fact it is up significantly. Remember Tuesday it dipped under US$6,000 and then rose to start yesterday at US$6,917. Today it is at US$8,328, a gain of +US$1,410 in 24 hours or +20.4% - which is an impressive one-day move in anyone's language. And that is despite China now blocking access to offshore cryptocurrency platforms and the BIS calling it 'a bubble, a ponzi scheme, and an environmental disaster'. And India is going after tax on cryptocurrency profits.

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

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10 Comments

Perhaps the RB will execute a surprise rate cut this morning.
No further reason really for NZ to persevere with their ‘higher than all developed countries’ high interest rate policy. Inflation is lower than the mid range target. Does the target mean anything anymore?

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I think this fixation with inflation, along with the current means of its calculation, may ultimately be seen to have done more damage than good.

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The rant by HNA's Wang Jian would be funny if it wasn't actually right out of the Party's playbook, which is roughly that whenever the Chinese government doesn't get what it wants, it talks about 'containing' China and blames shadowy evil foreign forces who are trying to upset China's rise. No mention or consideration of any other mitigating factors. In this case, Wang's speech is most probably pandering to a local audience who might be concerned about HNA's debt load and commercial performance.

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So Auckland house prices to double again this year?
In China, a senior official has indicated that the Government's grip on foreign currency outflows is to be loosened

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And incomes for the many to match?

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Spurring the realignment higher is the realisation that the world economy is not is bad shape at all, certainly not enough to justify a -6% fall. Another separate question is whether equity indexes should have been that high in the first place. If not, a fall and maybe more could seem quite justified. And today bond prices are being pushed down again by same market forces that triggered the turmoil. This time, however, acceptance that yields are on the way up.

Hmmmm....

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

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The UST 10yr yield is up strongly to 2.84% (+6 bps).

Indeed.

Treasury futures were and are with eurodollar futures the premier hedging instruments for everyone of any size and substance (including LTCM). If you are worried about something big, that’s where you go because that’s where there’s sufficient liquidity to lay off whatever risks you might perceive. And it’s what everyone was doing throughout the first two-thirds or so of 1998.

It’s not a perfect indication by any means, but whenever open interest hits above 800,000 across the Chicago platforms it’s been in the past a sign of something. Read more

CHICAGO, Jan. 24, 2018 /PRNewswire/ -- CME Group, the world's leading and most diverse derivatives marketplace, today announced it reached an all-time daily open interest record for Eurodollar futures of 14.5 million contracts on Jan. 23, 2018. The previous single-day open interest record was 14.4 million contracts, set on Dec. 13, 2017.

"In this climate of ongoing economic uncertainty, market participants continue to turn to CME Group's Eurodollar futures and options because of deep liquidity, flexibility and a diversity of participants," said Agha Mirza, CME Group Global Head of Interest Rate Products. "Eurodollar futures are an important risk management tool and global benchmark for investors around the world." Read more

The S&P cash index closing peak @ 2873 was recorded on 26th January 2018 EST.

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