Here's our summary of key events overnight that affect New Zealand, with news the availability and cost of credit may be at risk, both from fallout from the Aussie Royal Commission, and our own reaction to our cattle disease.
Firstly however we should note that Wall Street is closed today for their Memorial Day national holiday. (It's a holiday in London as well.) Other markets are muted but we should observe that the Hong Kong markets rallied strongly yesterday, even it that was not mirrored in either Shanghai or Tokyo.
But in Australia, the main share market index, the ASX200, took a bit of a local beating. It was down -0.5% yesterday and is now down to just on the 6000 index level and its lowest in a month. Lower prices for bank stocks and for miners is behind the weakness. Miners are down because the oil price is slipping. The NZX50 is not suffering the same way and was up marginally yesterday.
In Italy, attempts to form a government have collapsed after the Italian president rejected a eurosceptic pick for the key economy ministry. An interim Prime Minister with IMF experience ("Mr Scissors") has been appointed. Markets are seeing this as inflammatory and haven't reacted well. The most likely outcome now seems to be another election. If that is the case, Italy will again risk another odd result, possible by a low turnout by weary voters.
In Turkey, their President has called on 'patriots' to sell their dollars and euro and buy lira. It is a pretty desperate move, and will probably trigger the reverse. At least, their central bank has recommitted to use normal practices to avert their crisis, although it may be moving out of their control and influence.
In China, a large energy conglomerate has defaulted on a US$350 mln dollar-denominated bond payment. That has triggered further cross-defaults of at least US$650 mln. This is the latest result of tightening credit conditions in China, especially for companies that have had aggressive non-yuan based funding. Some see this series of defaults as a good sign for a more normal corporate bond market in China.
In Australia, their anecdote-focussed Royal Commission races on. So far there is little to suggest that judge-jury-executioner Hayne is looking at anything systemic, rather he is chasing a series of specific mistakes made by the big players. (That's not to say there aren't crucial systemic issues to be remedied; its just that he seems not very interested in those.) One consequence that is looking much more likely is that there will be a general pullback in the availability of credit, especially for small business. Broker-based lending may also suffer. Imposing on lenders the responsibility for borrowers who lie on their applications is almost certainly going to make any new loans very had to get in Australia. And it is likely to keep international creditors wary of lending there as well. That could well mean the cost of debt will rise for their four pillar banks and it is hard to see how that won't affect New Zealand.
And staying in Australia, S&P have downgraded their major telco, Telstra, to A- on the basis that it is becoming less relevant and newer technology marches on. A- is still quite good for a major telco, but it is a drop from an A rating. In New Zealand Spark also has a A- credit rating.
In New Zealand, the cattle disease mycoplasma bovis is getting sudden emergency attention - but risks weren't even mentioned in the Budget. The costs are likely to weigh on our economy. All eyes will be on the RBNZ now and their Financial Stability review tomorrow to see what impact they assess.
The UST 10yr yield is now at 2.93% and unchanged overnight because of the US public holiday. The Chinese 10yr is at 3.64% (unchanged) while the New Zealand equivalent is at 2.74% (up +1 bp).
Gold is up another +US$8 to US$1,297/oz in overnight trading.
Oil prices are down sharply again today and are now just under US$66.50/bbl in the US and the Brent benchmark is now just under US$75.50/bbl.
The Kiwi dollar will start today unchanged at 69.4 USc. But on the cross rates we are firmer at 92 AUc and we are at 59.7 euro cents. That puts the TWI-5 up slightly at 72.5.
Bitcoin is now at US$7,234 and that is -4.8% lower than this time yesterday.
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48 Comments
The price of petrol at the pump went up three times last week.. according to the companies, all acting independently of course, ... it was because of rises in the cost of oil and the falling New Zealand dollar.
Today, we find that the cost of a barrel of oil has gone down and the NZ dollar has firmed.. can we presume that the petrol marketers in NZ will now claim that it takes some time for these lower costs to work through their systems and we will just have to wait for any price drops at the pump?
Dear oh dear, those naughty petrol companies. I know let's be mean to them and stop them drilling for the stuff. That will sort them out.
Both National and Labour like it when petrol prices go down as they can sneak in extra fuel tax without any push back from the ignorant masses.
Then those naughty companies will buy every single barrel of oil from overseas in USD denomination, exposing the local petrol prices to even greater global shocks. Hardly a punishment for them.
Until we replace our entire oil-guzzling fleet - light and heavy trucks, buses and passenger cars for EVs, this problem shall persist.
And let's compare today's indices with Treasury's BEFU:
WTI: BEFU assumption around 60 for calendar 2018. Currently 66.61 or 4% higher
TWI: BEFU assumption aound 75, currently my series on truck-stop diesel - unless yer local superette is supplied by unicorns riding cargo bikes, there'll be pain at more than the pump....
... our problem is that the new coalition government is ideologically opposed to fossil fuels .... blithely ignoring the fact that human progress since industrialization has been underpinned by oil and coal .... we got to where we are , and are still here , thanks to fermented ancient bugs ...
And to destroy our reliance on fossil fuels by banning exploration , and ramping up excise taxes , is plain barking mad when there's currently no economically viable alternative to them ...
I suggest you are wrong on both counts. I suggest that they agree, as most who accept that global warming is really occurring do, that something has to change. The problem is that the large petrochem companies have been, and continue, to reap huge profits from a finite resource, without, apparently, paying one iota of interest to what happens when the resource runs out. where they could have been putting some of those profits into developing the next energy source and securing their own future (and power base) as well as that of mankind.
What this Government has done is simply serve notice that ever increasing energy costs cannot continue, that ever damaging impacts on the environment cannot continue, and most succinctly, that they are prepared to apply a little bit of subtlety rather than make a big dramatic, and drastic measure that would cause economic collapse. We are a small country and cannot do a lot, but this is a sensible approach. for the critics out there, i suggest you put your money where your mouth is and suggest an alternative? The Nigel No Mates (sorry National) Government's head in the sand policy could not continue indefinitely. The current situation is the consequence of the Free Market economy, and our Government has decided to put some brakes on it. IMHO - about time!
It is always like paying Russian roulette commenting on climate change but here goes. Yes I agree we are going through a warming period, what I find harder to quantify is how much of that is due to humans use of fossil fuels. Are we throwing the baby out with the bath Water? Also, wouldn’t we be better of extracting oil and gas here in a more environmentally conscious manner rather than sending supply to other areas of the globe with lower standards. Finally, affordable energy assists the technological development needed to have viable solutions for when it becomes uneconomic to extract fossil fuels. We need sensible solutions yes, but labour aren’t offering any?
I agree. I don't accept that you have to agree that it is human caused global warming. I'll quote a scientist who stated that by the time we will know that it is definitely caused by human actions, it will be too late to fix it. What i suggest we have to acknowledge is that human influence on our environment has an impact that ultimately must impact on the environments' ability to support us. this is a symbiotic relationship. There are plenty of cess pools around this planet to demonstrate that if we do not become more environmentally aware rapidly, then we will turn our planet into such a toxic environment that we cannot survive on it.
The weather extremes we see today are the consequence of the excess amounts of energy that are being released into the atmosphere, either directly or indirectly. A part of it at least is human caused. that you cannot deny. These extremes are the planets attempts to heal itself, expending energy to try to restore balance.
And HamNEggs below is correct, the current alternate energy sources cannot and will not save us. But the big players are too interested in extracting profits and not interested enough in finding the next energy source. So if the private interests will not act to to save us, then we must turn to our Governments to begin to take steps, and the current Government has done that in a small way. They are still working on the principle of hoping someone will be forced to come up with the ultimate solution, rather than funding research themselves, but whatever way something has to happen.
Hi Murray, I’ll continue to look into it but I still maintain the government hasn’t handled it well. In your words “They are still working on the principle of hoping someone will be forced to come up with the ultimate solution, rather than funding research themselves, but whatever way something has to happen.” - it seems a bit contradictory, something has to happen but they are hoping someone is forced to do something. Why oh why didn’t they just use the royalties we are now forgoing for r&d?
Nope.
"https://www.vox.com/2014/11/19/7247103/google-renewable-energy-research"
"" the two engineers ultimately concluded that "Today's renewable energy technologies won't save us."....the new clean energy sources can't just be comparable to fossil fuels. They have to be clearly superior..
So ... Italy is on the verge of economic and political collapse ... no small economy this one , unlike Greece , Italy does matter ...
... and , overnight I've heard that the Malaysian government has scrapped plans for a super fast train link between Kuala Lumpa and Singapore .... citing too much debt of the books already ...
Who's next ... the NZ dairy industry ? .... hmmmmm .....
"Imposing on lenders the responsibility for borrowers who lie on their applications is almost certainly going to make any new loans very hard to get in Australia. That could well mean the cost of debt will rise for their four pillar banks..."
Thinking out loud, if banks have a harder time writing new loans, why would it mean they raise interest rates? Could it not mean they become more desperate to write new loans (because that's their business) so they will reduce interest rates by cutting their margins?
Opinions folks? Counterpoints?
Lets say it takes the bank twice as long to process each mortgage application due to the additional responsibilities imposed on them, then in theory they can only write half as many mortgages in a day/week.
Either the bank hires more staff, or they carry less loans on the books. Loans on the books are income streams. If it takes twice as long to process mortgages, then without an increase in staff they end up with half as many loans on their books.
i.e. If the bank wants to make $1 million per year, and they do this with 100,000 loans on the books then they charge $10 per year interest on every loan. What happens if the bank still wants/needs to make $1 million a year but now they only have 50,000 loans on the books.
Hi Yvil, I’ll venture an opinion. I’ve come back to NZ after living in Melbourne for 4+ Years in which I bought a unit. Dealing with banks and brokers, lying on applications was everywhere and it came from all angles. AU banks have a big potential mess on their hands with customers inability to pay.
I initially thought that this would lead to aggressive behaviour as they would be highly susceptible to a decrease in credit growth but thinking it through more I now don’t think they will do much other than slowly try to unwind the precarious positions that they are backed into. Kind of like a slow version of the gfc where the big US banks tried desperately to unload their dodgy CDO’s.
Reality will bite when credit growth deceleration affects house prices to a point that forces it to be a political issue. For reference, 2007/8 the AU government halved stamp duty for first home buyers to keep the gravy train going during that time and they have removed all stamp duty recently for FHB’s as housing was slowing again.
I see this as turning into a political issue more than anything and if recent history is anything to go by then lower interest rates is my guess as to how the RBA will react as there really aren’t many other tools other than removing stamp duty for everyone which they won’t as they are too dependant on.
Hope this ramble makes sense as it is this plebs best estimation of what will happen.
NZDan & Whitay, thanks for both of your replies. I don't disagree with the points you make (although I think you're missing a few zeros in your example NZDan) but I was actually asking the question:
"why would banks raise interest rates if they have a harder time writing new loans?
is it maybe because they will have a harder time to get deposits so they will need to raise deposit rates to attract funding, hence it would increase lending as well?
Any clues here as to why they might raise -
"While struggling with ultralow interest rates, major banks have also been publishing regular updates on how well they would do if interest rates suddenly surged upward. . . . Bank of America . . . says a 1-percentage-point rise in short-term rates would add $3.29 billion. . . . [A] back-of-the-envelope calculation suggests an incremental $2.9 billion of extra pretax income in 2017, or 11.5% of the bank’s expected 2016 pretax profit . ."
https://ellenbrown.com/2018/04/22/fox-in-the-hen-house-why-interest-rat… .
Rock and a hard place. 60%+ of funding for AU banks comes from deposits (did a quick look up through RBA’s website) so yes, raising term deposit rates will add to their funding for more loans. On the flip side, with affordability stretched and a lot of lier loans out there that could backfire badly if they raise interest rates to compensate.
To increase their loan portfolio, either reduce the spread between term deposits and interest rates and take the hit or secure more non deposit funding or a mixture of both. Either way I can’t see interest rates raising very far at all mostly due to the risk of setting off a chain of defaults.
Short answer, I don’t think the decision to raise interest rates will hinge so much around the fact it’s harder to write new loans, the decision would be based around other factors that are at play.
Hi Yvil. Will agree with you on banks struggling to raise rates during the crash for fear of triggering further losses and the Reserve banks will hold a similar position on both sides of the ditch maybe even reducing headline cash rates. However what you will find is that the headline rates will only apply to those with proper levels of equity - 50% plus would be my guess and banks will compete to try and win the most secure debt when the rounds of re-mortgaging come around. Anyone not satisfying what will be very strict equity requirements over 60% mortgages. Good luck you won't be wanted by your bank or any other as values continue to slide so your financing is likely to revert to whatever the banks standard variable rate is. (which will rise, as they try and offload you as risk) or dareisay will keep you if there is a significant premium attached. Good time to be reducing LTV's over the next 12 months so that you are an attractive bet for the debt beauty parade. Hope that makes some sense. If you already a have LTV of 80% mortgage then you'll have to factor in your revised equity position after the corresponding reduction in prices due to the current market re-positioning. Hope that makes sense, there is a playbook for this and it was written by the UK banks. You'll probably find that debt to income ratios will also be massively reduced from 6-8 times in Australia closer to 4.5 would be my guess.
Yvil,
The comment does not say that banks are having a harder time writing loans, it says that it will make loans harder to get. It's a subtle but potentially significant distinction, with the emphasis on the borrower not the lender. The issue will likely be that lenders will need to be able to demonstrate that they have checked borrowers affordability more thoroughly, which ties into what Withay mentions below because one of the issues uncovered is "liar loans"and loose lending behaviour.
If the banks in Oz are forced to reevaluate their lending criteria and process, it might not necessarily be that they raise "headline" rates, but that many borrowers who had previously seemed a much lower risk (because of exaggerated income or shallow/superficial credit scoring) will now be evaluated at a higher risk and therefore unable to access the better rates on offer. Stricter borrower assessments will also lead to lower amounts of borrowing being offered to new borrowers because the exaggerations won't be in the calculation and banks might start deducting more for outgoings etc
For example, let's say you bought a unit in Sydney in 2017 but had exaggerated your income and also lied about your outgoings to get as much money as cheaply as possible, but in 2017 this was easy to do, because the banks weren't required to check terribly thoroughly. Then in 2018 your fixed rate periods end and you need to shop around for a new fixed rate. The advertised interest rates are low and you are looking forward to fixing at an even better deal than last year. However, all the banks you go to now assess your income lower and outgoings higher because they are checking thoroughly, now your debt levels look too high and you become a higher risk customer, so you can't access the headline rate, and you get offered a higher rate. You can shop around sure, but all the banks have had to implement the same more rigorous checks, so you are unlikely to be considered a desirable-low risk borrower to any of them.
This is what happened in the UK after the GFC and is still happening. You can't fluff your income, you can't hide the true reality of your outgoings, they deduct points for every debt, the level of debt, every missed payment, every credit application. The higher risk you are scored at, the higher the interest rate you are offered. Whereas someone with a good LVR, low DTI and good credit history will get offered the lowest the bank has.
There is definitely room to move lower with interest rates in NZ and Oz should either country need the stimulation. However, asset values can and do, still decline in a very low interest rate environment when there is credit tightening (especially when the tightening comes as a reaction to prior dodgy lending and there are a bunch of ugly loans on the books).
Would it be enough? As gingerninja points out, values can still fall in a low interest environment and if that happened which I think is plausible then I think we would see something like the crash many commentators go on about. Terrifying that interest rates are their/our only real backstop.
Michael Reddell has a good point to make, although the phrase 'gifting' could also be applied to beneficiaries, pensioners, Waiheke ferry off-peak users and other non-productive attachments to the ever-generous Gubmint Munny Teat.
Despite announcing yesterday a plan that aims to eradicate mycoplasma bovis from New Zealand, there was no sign of the pro-active release of any background papers or analysis. We don’t have copies of the relevant Cabinet papers, or the relevant advice from The Treasury or MPI. Not that long ago, the incoming government talked of its commitment to open government, and now it plans to spend hundreds of millions of dollars of taxpayers’ money – without, it appears, any additional legislation – without giving us, up front, any of the relevant papers.
One of the more obvious consequences of the cull is that real, productive units - 400KgMS per unit per season - are being turned into burgers and pet food with a much lower unit price. This is like replacing factories with coffee shacks, although, come to think about it, That's already happened: the foundry and machine shop I worked at in Invergiggle as holiday employment for a mechanical engineering degree (unfinished, y'all are quite safe) is now a bowling alley.
Another consequence is that, while entire farm herds are being culled and earnings fall, the debt load does not. Cue Boomer's Story.
We worked through Spring and Winter,
through Summer and through Fall
But the mortgage worked the hardest and the steadiest of us all
It worked on nights and Sundays,
it worked each holiday
It settled down among us and it never went away
So lenders will be anxiousiy poring through their dairy client's contracts, and trying to estimate what effect the cull will have on everything from provisions for defaults, to downstream effects on contractors, equipment sales and repair outfits (dependent on financing for sales) and the wider rural communities. For a marked-to-market loan on (say) a typical dairy farm in MPI's cross-hairs, this has gotta be a substantial write-down. Enough of these on the loans ledger, and the banks themselves are vulnerable to a credit downgrade. And we can guess what that will do to both the cost and availability of credit for - well, almost anything, as DC notes in the article.
The final (and there are more, as common taters may care to append) aspect is that there will be reduced economic activity as between farms: transport, sales, calf-rearing, the casual neighbourly offer of excess milk to next-door's calves, the annual Calf Day at rural schools, breeding herds, and the list can be extended far and wide. Reduced activity means less transactions, less tax, more calls on benefits and other support schemes, and everyone entering hunker-down-and-sit-it-out mode. This could easily last 3-5 years.
So Michael R's question about the basis upon which this whole scheme has been entered into, by the Good Intentions Paving Company (2017) limited, is a very valid one. Transparency is sorely needed, not hand-waving.
a good piece on Italy's problems
https://surplusenergyeconomics.wordpress.com/2018/05/22/127-quantum-of-…
https://www.zerohedge.com/news/2018-05-28/italian-banks-bonds-crash-di-…
"Italy’s ECoE of 9.1% is higher than the world average (8.0%), and this reflects heavy reliance on imports (about 82% of energy consumption). Rising ECoEs are a problem for every economy, the more so for countries which are ‘energy disavantaged’.
"... my interpretation is that, worldwide, ECoEs are already high enough to kill growth in prosperity. That Italy, ahead of the curve in ECoEs, is already experiencing deteriorating prosperity, backs up this point.
There may be climate change and a hell of a lot of pollution, but there is SIMPLY NO EVIDENCE of long term global warming attributable to human activity .
We have heard so much about this over the past 30 years , I simply ignore the global warming looneys .
First it was the irreparable damage to the Ozone layer ........... why is this no longer an issue ?
Then it was Global Warming , but it cannot be supported by evidence ,
Now its climate change , and the jury is still out on this one
First it was the irreparable damage to the Ozone layer..........why is this no longer an issue?
Boatman, please do some initial research on some of these things. Quick googling will give you background on the CFC ban and the ozone layer.
https://newrepublic.com/article/48549/what-the-ozone-scare-can-and-cant…
https://www.acs.org/content/acs/en/education/whatischemistry/landmarks/…
When the scientists reported their findings in 1974, CFCs were widely used as refrigerant gases and as propellants in aerosol sprays. Rowland and Molina convinced skeptical industrialists, policymakers, and the public of the danger of CFCs. The scientists’ advocacy — and the discovery by other researchers that the ozone layer over the Antarctic was thinning — led to worldwide phaseout of CFCs and the development of safer alternatives. For their work, Rowland and Molina shared the 1995 Nobel Prize in Chemistry with another atmospheric chemist, Paul J. Crutzen.
http://www.sciencemag.org/news/2016/06/ozone-layer-mend-thanks-chemical…
It's a great example of human actions and their effects being addressed when evidence was pointed out - albeit in the face of skepticism from the financially invested, of course - and the planet being given a chance to gradually recover.
Good on you for pointing out a successful historical example, in fact.
Boaty may have also noted recent reports that indicate the hole in the ozone layer is growing again, and the suspicion that someone in Asia (somehow their instruments can tell to a degree where they are coming from) is causing CFCs to be released in a grand scale.
"The current warming trend is of particular significance because most of it is extremely likely (greater than 95 percent probability) to be the result of human activity since the mid-20th century and proceeding at a rate that is unprecedented over decades to millennia." - NASA
https://climate.nasa.gov/evidence/
The Discovery of Global Warming - American Institute of Physics
https://history.aip.org/climate/co2.htm#S3
More crony capitalism from Crooked Donald & his family - https://www.citizensforethics.org/ivanka-trumps-business-wins-approval-for-more-china-trademarks/
The Italian situation is potentially explosive. The voters will not be weary like the article says. There is going to be a massive vote for the euroskeptic Lega Nord and the more left populist 5 star party. Imagine if our governor general refused to allow Adern to form a government because Robertson was too left-wing. That is essentially what just happened in Italy the last couple of days. People are calling it an EU coup. Watch and learn lovers of austerity politics. The rise of neofascists - economic nationalism combined with anti-immigrant hardline. That is the end game.
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