90 seconds at 9 am: Markets sell off again

Wall Street posting more losses; US consumer debt up; China trade rises, surplus falls; German surplus falls; BofE sees earlier, faster rate rises; UST 10yr at 2.85%; oil and gold down; NZ$1 = 72.3 USc; TWI-5 = 73.5

9th Feb 18, 7:38am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news the financial market tremors are not finished yet.

Firstly, Wall Street equity markets are sliding again today. The S&P500 is down almost -2% in mid-day trade. The European markets had a tough night as well, with the German DAX down -2.6%. The volatility measures are rising again with the VIX back up over 34 although not equaling the 49 spike it reached on Tuesday.

Meanwhile, consumer debt growth in the US remains very strong. Although it was below market expectations, there was an +US$18.4 bln rise in December, growth at a +7.7% annual rate compared with the same month a year ago, but there was an unexpectedly large upward revision in the November data. This is a rising pace, as overall growth for all of 2017 was +5.4%.

Also growing strongly is trade. Data out overnight showed substantial jumps in China's imports, and to a lesser extent, their exports. Exports were up +11% in January in USD compared with the same month a year ago. But imports were up an eye-popping +37%. As a consequence their merchandise trade surplus shrank to its lowest level in a year and less than half analysts forecasts.

German trade data was also released overnight and for the whole of 2017 it reached record levels of imports and exports. But the December data also showed their trade surplus actually shrank in 2017 for the first time since 2009.

And staying with the trade theme, the Canadian prime minister has repeated that no deal on a NAFTA renegotiation would be a less-worse option than a bad, one-sided deal.

And a quick update on Canadian housing. After yesterdays data showed strong growth in building consents, data out today suggested that housing starts in January took a small dip.

The Bank of England said it expects to raise interest rates in Britain earlier and faster than it anticipated last year, responding to stronger growth in the global economy.

The UST 10yr yield rose strongly overnight reaching 2.88% two hours ago. But since then it has retreated and is now at 2.85%, up just +1 bp from this time yesterday. Their 2-10 curve is little changed at +60 bps and far below the equivalent New Zealand curve of +108 bps. The equivalent China curve is just +32 bps while Australia is at +85 bps. Yesterday's RBNZ MPS saw markets adjust their bond pricing very little.

Behind all this market turmoil is the excessive levels of debt worldwide. The issue is peaking now because the US Administration is signaling that their future debt levels will grow fast to pay for their tax cuts and new spending.

But gold continues to be sidelined. This morning it is at US$1,318, unchanged from yesterday.

Oil prices are down again today with the US benchmark now under US$61.50/bbl and the Brent benchmark over US$64.50/bbl.

The currency markets have marked down our currency a little. The Kiwi dollar is at 72.3 USc a full -½c lower than this time yesterday and a full -1c lower than on Wednesday. On the cross rates we are softer too at 92.5 AUc and 58.8 euro cents. That leaves the TWI-5 at just on 73.5.

Bitcoin is at US$8,147 a -US$180 dip from this time yesterday.

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

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Source: RBNZ

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29 Comments

by Andrewj | 9th Feb 18, 8:43am 1518119000

This could never end well, cheap money chasing yield.
https://finviz.com/futures_charts.ashx?t=ES&p=m1

What did everyone expect S&P to infinity and beyond? So when do the pension funds start to panic because thats along way to fall?

It's all fun and games until someone losses an eye

https://www.zerohedge.com/news/2017-11-13/calpers-calls-top-largest-pub…

by Stephen Hulme | 9th Feb 18, 8:46am 1518119211

The UST 10yr yield rose strongly overnight reaching 2.88% two hours ago. But since then it has retreated and is now at 2.85%, up just +1 bp from this time yesterday. Their 2-10 curve is little changed at +60 bps and far below the equivalent New Zealand curve of +108 bps. [my emphasis]

I think not - more like ~72 bps. View data here and here.

by Andrewj | 9th Feb 18, 8:51am 1518119517

As a result, despite a banner year of stock market investments, CalPERS, by its own accounting, currently has at best only about 70 percent of the funds it should to cover pension benefits that workers already earned.

The problem will likely get worse. Most cities have encouraged CalPERS, or sat back silently, as the pension administrator continues to rely on forecasts of 7 percent investment returns even though its chief investment officer predicts 6.1 percent over the next 10 years.
https://www.mercurynews.com/2018/02/08/borenstein-aint-seen-nothing-yet…

by Andrewj | 9th Feb 18, 9:20am 1518121225

Money figures flash ‘amber’ warning for eurozone growth
http://newschannel256.com/50602

by Boatman | 9th Feb 18, 9:28am 1518121693

I have been around long enough to see a stock market rout when its coming .

The signs are everywhere :-

The market flies
Everyone piles in
Your hairdresser starts giving you investment advice
Prices rise pushed by chasers
FOMO leads people to ignore the fundamentals when P.E. ratios lose connection with reality
Sharp fund managers sell and "take their profits "
Short sellers see the signs and enter the market
Interest rates rise and geared buyers start to exit
Prices fall
Short sellers close off their positions
Prices rise
Nervous investors continue sell , even when everyone tells them it "all good"
Pirices fall
Now the shares start to look "cheap " so risk taking buyers take up some stock
The cat is actually dead , but it is now bouncing
Reality hits when there are no more buyers wanting a smelly carcass
Prices fall sharply back to decent PE ratios .
Geared investors who bought at the peak ........jump out of windows

by Yvil | 9th Feb 18, 10:13am 1518124411

...and the Fed reverses its rate hikes to alleviate the carnage.
I STILL DON'T BELIEVE IN LASTING RATE INCREASES

by Advisor | 9th Feb 18, 10:16am 1518124598

The message from the Fed is loud and clear, the tightening is to ensure that it can be reversed in times like this. How much lower will the ECB, SNB and BoJ go from the already negative interest rate territory if deflationary pressures were to build up following a market rout in 2018.

by sharetrader | 9th Feb 18, 11:28am 1518128906

so many are now saying they will need to raise interest rates, can the world handle higher rates with the amount of debt that has been created since the GFC.
ie have a look at the amount of debt in NZ now compared to 2008 and every .25 increase in rates is now a problem
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=118…

by Yvil | 9th Feb 18, 10:14am 1518124478

No, the world cannot handle higher interest rates

by Didge | 9th Feb 18, 10:26am 1518125161

Dont forget the real wealth of a nation is in its own natural assets and its abilities to utilise them. Out of the ashes of a world wide monetary collapse, materially wealthy nations will arise first. However, many peoples will suffer terribly during the ensuing debacle while our elites watch on hardly affected unless war gets to them. For NZ it will be a test of our abilities to feed ourselves which should not be too difficult.

by Andrewj | 9th Feb 18, 10:30am 1518125445

The best thing about those assets is we can borrow against them and leverage our housing stock.

by Didge | 9th Feb 18, 10:36am 1518125790

O cynical you!

by Alter Ego | 9th Feb 18, 11:34am 1518129276

The Dow is down only 1000, today so not much to worry about. Seems the deficit does not matter, one iota...or one jot this week....in Total.

And sadly one cannot put ones BITCOIN on ones credit card..so short sighted...like Houses, always get a rise out of em.

https://www.quora.com/Why-are-banks-banning-Bitcoin-purchases-on-credit…

(What they do not like block heads?..gambling).

I was gonna put my new Musk rat Electric inspired Car on the House,, but as it is being built by Fletchers and Eion had fired the Tesla convertible into the stratosphere I thought I would not bovver as it was Friday.

I do like a joke, but..con-vertibles and Derivatives...rocketing up....so last year...or is it the Sale of the Century......eh.

by PeakEverything | 9th Feb 18, 11:37am 1518129470

Looks like the warning NZF/Labour gave about impending economic issues was correct.

by iconoclast | 9th Feb 18, 11:50am 1518130215

the others are high on hopium

by Ex Expat | 9th Feb 18, 12:12pm 1518131556

I thought it was Winston Peters alone that gave that warning. If Labour is so worried about impending economic issues then I guess they'll be re-casting forecasts that see them taking an extra $4 billion in tax for each year to 2020. If that expected revenue doesn't materialise then are they going to either borrow or cut promised spending. I'm going to enjoy watching this develop.

by scarfie | 9th Feb 18, 12:35pm 1518132934

Do the forecasts not come from Treasury? I mean we vote in politicians that don't have a clue to govern us, but they rely on the expert advice from people we don't elect. We have to hope and believe that the people we elect have the ability to understand what their Ministries tell them, and if they do understand then they make decisions based on that information, combined with their own ideological beliefs. Makes perfect sense right?

by Ex Expat | 9th Feb 18, 12:55pm 1518134146

Makes sense, but the need to get re-elected screws the scrum e.g. if the current lot were told that there was no money to keep their promises do you think they would tell their voter base to wait until the money is there?

by fat pat | 9th Feb 18, 12:15pm 1518131738

I guess this means the FED will start another round of QE soon... BTFD? ..or catch the falling knife... or bail out... or do nothing. Nice to have choices I suppose.

by sharetrader | 9th Feb 18, 1:22pm 1518135726

the FED are looking to raise next month 84% chance, that is what the markets are reacting to now, that and the BOE looking to raise and the EU to finish QE early.
will RBNZ raise unlikely but that wont matter as banks will still raise mortgage rates
https://www.cnbc.com/2018/02/08/the-cause-of-this-brutal-market-sell-of…
Winograd took it a step further, positing that the Fed likely will increase the pace of rate hikes from an indicated three moves to four

by fat pat | 9th Feb 18, 8:38pm 1518161936

Good points, I agree, and here are some counter points.
The US and others with high debt loads cant afford high rates. Pension schemes all over the world are dependent on stockmarket levitation. As Jim Rickards always says dont listen to what they say, but watch what they do, and in that context the CB's are all talk, the EU and others are still going full steam ahead with their QE programs. Another possibility is more QE, and more extreme financial repression.

by waymad | 9th Feb 18, 1:27pm 1518136068

Good article from the inimitable Megan Mcardle, on the proven economic cluelessness of Rent Control....

Compulsory reading for the Gubmint wallahs who, in their enthusiasm for all things mid-last-century, might just be considering it....

by Biologist | 9th Feb 18, 2:35pm 1518140124

I'm in my early 30's and pretty naive about these things and took my first foray into the market a couple of months ago. I was looking at my term deposit rates thinking I could do better - and not thinking about timing my entry into the market. I've bought and sold houses since 2008 but know nothing about the sharemarket. Since selling out of AK I've put my money in a bank-managed investment fund and now it's losing value. We all know people who lost everything during the last recession. Were these people who hadn't diversified and/or had all of their investments in dodgy finance companies? After recessions there seems to be recovery so just wondering if my position is to hold long term, is my money safe(ish) in such a fund?

by Wildcard | 9th Feb 18, 5:49pm 1518151765

Hi Biologist, I'm a bit younger than you but I've been investing in equities for the last 2 years and below is some information and advice I've learned that you may find helpful. :)

- If your investment horizon is more than 10 years, then cash should be a very minor part of your portfolio as it is one of the worst performing asset classes over the long term (especially with record low interest rates).

- If you haven't got one yet then make an emergency fund; ideally enough cash to pay for a few months of living expenses, and any incidental expenditure (e.g. dentistry, insurance excess)

- If you haven't already opened a KiwiSaver account then open one and make sure to put the minimum $1000 a year into it to receive the $500 Gubmint contribution. Match your employers contribution also.

- ETFs and index funds are an easy and cheap way to get into investing in stockmarkets. Try looking at Smartshares, Superlife, Sharesies and InvestNow that provide funds that track a variety of Australasian and overseas indexes and markets.

- Always look at fees for whatever funds you invest in. Try to find the lowest you can as they eat into your profits a lot over a long timeframe (ETFs and index funds are usually the lowest cost funds; some US domiciled ones have MERs as low as .10%).

- Check fund SIPOs and quarterly performance sheets for what exactly your funds are invested in. Some managed funds charge obscene amounts (1.5% and greater) for what is essentially a bundle of ETFs and index funds with MERs around .60%. If you can get access to the underlying ETF/index fund for a lower cost than the managed fund then do it.

- Don't worry about timing the market; almost no one can do it constantly and compounding returns will dwarf the potential increased cost of the asset at any given time. $100 invested in the S&P/500 at the peak of 1987 is worth around $650 (inflation adjusted and before tax) today. The key is not to time the market, but time in the market.

- Educate yourself. Read books, look at sites like MarketWatch and Investopedia, listen to podcasts, join investing groups and sites and so on.

- Look where investing is heading for indications of areas that might grow and provide opportunities. There is a global move towards lower cost passive index funds and ETFs, with startups like Tomorrow Super, Sharesies, InvestNow, Six Flags, Acorns and Robinhood emerging to cater to investors. Companies in fields like automation, robotics, biotechnology, blockchain technology, 3D printing are also moving forward at a rapid pace.

- Diversify. Diversification is key to minimizing risk.

Finally, buying and selling houses since 2008 means you have primarily been doing it in a massive bull market since 2009, which may distort your views away from potential losses and towards a "you can't lose" mantra. Make sure you can be ready for a potential recession or a downturn, and have cash on hand to take advantage of any corrections or recessions; they can be excellent times to gain assets cheaply when everyone else is panic selling and running away. Be aware of FUD and FOMO and only invest money you can afford to lose. Remember that past performance is not an indicator of future performance.

Above all, make sure you have fun and enjoy investing! :)

by JB | 9th Feb 18, 6:03pm 1518152619

Simply follow Buffett's advice - the best investment you can make is in yourself.

Put an hour aside each week and then read and note carefully the contents in Buffett's annual Letter to Shareholders that he has written for over 50 years.

Start at the front - there are no shortcuts !

The best advice you will ever receive - the only cost your time.

by sharetrader | 9th Feb 18, 7:32pm 1518157958

DYOR = do your own research
dont worry too much about timing if your timeline is long, ten years etc, your returns over that time line are all that matters.
take time to set your OWN criteria on how and what you will invest and yes diversify
eg i will invest up to X amount in each company and when it hits y will move on
when share hits Z i will either sell part or some and reinvest
i will invest in certain types of industries that i understand

and finally dont be afraid if something changes in a company your invested in ie management, direction etc to sell out and move on, even if at a loss, its better to sell for a loss and reinvest in something that will make that back over time than to stick with a dog of an investment. Fletchers is an example of this

and last look for the opportunity coming, remember with the sharemarkets falling at the moment wait for your time to buy that company that you want at an attractive price. Good companies will still increase in size and price even through the times may slow down

i found every bit of cash i could find in 2009 to invest sold about a half in 2015 and paid cash for my house
now the rest of my investments pay all my outgoings so CG is not as much a big deal for me, its more about a balance between growth and income now.

and last invest in other things as well dont put all your eggs in one basket

ie bonds, companies , property , farms etc you can still invest even in a small scale in any of these

by Wildcard | 9th Feb 18, 6:49pm 1518155354

A few more things I forgot:

- Check your risk appetite using a survey like the one on Sorted (https://sorted.org.nz/tools/investor-kickstarter). That will determine the weighting of various sectors of your portfolio (cash, fixed interested, real estate, stocks, gold etc). The more risk adverse you are the more defensive assets you will have. If you have a 10+ year timeframe to invest then the majority of your portfolio should be in growth assets.

- If your fund is losing value, check what type it is (conservative, growth etc) and what it invests in. I'm guessing it is defensive or conservative where the low returns of the large bonds and cash allocation is being eaten away by fees and inflation.

- As for people who lost everything, each case will be slightly different. However, I think a big issue is people borrowing against their house to buy stocks or more property because of FOMOand a "you can't lose" mentality. The investment tanks due to a recession, and their house is gone burger along with a drop in their investment value. Diversification is also an issue, as NZers love their houses and all other investments come in a distant second to the love for the Church of Property. NZ doesn't really have a culture for investing in stocks or businesses, so you have disproportionately large amounts of $ tied up in real estate compared to other asset classes.

- "Is my money safe?" No. No investment is without risk. Even cash in the bank has a chance of getting a haircut under the OBR. As for funds, no one can predict how they will perform in the future. Some will tank, some will skyrocket, some will stagnate. You can, however, minimise risk by educating yourself, diversifying, making sound choices and learning.

Good luck!

by JB | 9th Feb 18, 2:53pm 1518141231

Imagine the Dow had not moved since mid November 2017 for period of 3 months and would thus be where it is currently.

There would not be a single comment or concern - so why all the apparent panic, gnashing of teeth and wailing ?

Could someone with a better understanding of markets please explain the concern ?

by Independent_Observer | 9th Feb 18, 3:09pm 1518142173

Try reading 'Thinking Fast and Slow' by Kahneman and/or 'Animal Spirits' by Shiller/Akerlof.

Fear of losing money is greater than the benefit of potential rewards (Loss Aversion) - in human nature. If the flock starts panicking, rational behavior no longer prevails.