90 seconds at 9 am: China chooses "more debt"

Dairy prices fall -3.6%; the S&P500 hist new record high; China to set local govt bond issue risk rating at zero; Maersk gores north; UST 10yr at 2.82%; oil and gold firmer; NZ$1 = 66.3 USc; TWI-5 = 70.2

22nd Aug 18, 7:43am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news of a flood of new debt about to shore up the Chinese economy again.

But first, we start today with news that dairy prices have fallen -3.6% in US dollars and -3.1% in New Zealand dollars. Leading them down were big falls for cheese (-4.7%) and butter (-8.5%). The bulwark WMP was down -2.1% while SMP was down -1.3%. Today's result will be very unwelcome in the dairy industry because it is adding to a lengthening string of declines, eleven in the past thirteen auctions. Prices are now -9% lower than where they were this time last year and -16% below where they were in early May. These sort of falls are placing the 2018/19 payout forecasts at risk already, very early into the new season. Along with Fonterra's trading stumbles, it is not a great outlook at present.

Elsewhere, the story today is one of optimism. On Wall Street the benchmark S&P 500 touched a record high and equaled its longest-ever bull-market run, as American equities rose on encouraging earnings reports and hopes that the United States and China could resolve their tariff dispute. Yesterday, the Shanghai stock exchange index ended up +1.3%.

One reason might be, they are about to juice their economy again by encouraging banks to increase their holdings of local government bonds. The plan is to reduce the official risk weighting of local government bond holdings from 20% to zero, a move that could boost demand for a flood of sales set to hit the market by the end of October. More debt seems to always be China's answer to economic stress.

In a sign of change and adaption, the giant Danish shipping line Maersk said a newly built container ship is set to leave the Russian port of Vladivostok later this month to sail through the Bering Strait and over the top of Russia en route to St. Petersburg, taking what is known as the Northern Sea Route. If successful, it will save significant time and cost of shipping goods from Pacific ports to the EU, even possibly challenging the new Silk Road rail routes.

The UST 10yr is has bounced back a little today and now at 2.85%, with the US 2-10 curve up marginally to +24 bps and just off its eleven year lows. The Aussie Govt 10yr is at 2.54% (up +1 bp), the China Govt 10yr is at 3.67% unchanged, while the NZ Govt 10 yr is at 2.62%, up +2 bps.

Gold is up by another +US$5 today at US$1,194/oz in New York.

US oil prices are again a little firmer too at US$67.50/bbl. The Brent benchmark is now just on US$72.50/bbl.

The Kiwi dollar is starting today firmer than yesterday at 67 USc which is a rise of more than +½c. On the cross rates we are up at 90.7 AUc, and at 57.8 euro cents. That puts the TWI-5 at 70.5 and right at its four week average.

Bitcoin is little changed at US$6,426 and only marginally lower than this time yesterday.

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29 Comments

by Andrewj | 22nd Aug 18, 8:00am 1534881623

A friend lost their house in the Carr fire, he likes fishing and lived close to the Sacramento river. So it's all gone ,a live time of work and saving, big house pool etc, all the family stuff, nothing left.
The insurance was up to date and all good, started the rebuild and been given a move in date of the 2nd of October, thats this year! California is so over regulated everything takes time.

by BadRobot | 22nd Aug 18, 8:33am 1534883581

Is California over regulated or just very efficient......

by Andrewj | 22nd Aug 18, 8:13am 1534882404

"And yet, German paper was in such high demand during the second half of May that bund yields plummeted, thereby signaling for yet another time they really don’t know what they are doing. In theory, it all works so seamlessly. In practice, it’s a total disaster. Still.

This is what the curves are telling us. Again, they aren’t hard to interpret. If you need some “other” financial market participants to step in with ~$200 billion in “other” ST securities to rescue the system at the last moment, that isn’t a very robust or even reasonably healthy condition.
But this isn’t what you hear on TV or what’s written in every story published at reputable news outlets on the internet. According to this narrative, central banks haven’t just been adequate, they’ve collectively “flooded” the world with liquidity or even money.
It’s just not true"
German bunds or UST’s, the message is the exact same. Flattening at low nominals means liquidity risk remains paramount. This overrides every other concern, including hostility to either government’s fiscal outlook. The US may be technically insolvent given its long-range liabilities, but UST’s are going to be bid so long as the real and effective global money system continues to be a malfunctioning mess.

Liquidity risk is today, right now. A US default is some way off event that just doesn’t matter when faced with that call to put up more collateral. Since nobody’s getting marginal collateral from these rigid government silos, and without the proper money dealing facilities to facilitate flow and redistribution, May 29 is what you get.

http://www.alhambrapartners.com/2018/08/20/the-conspicuous-consistency-…

by printer8 | 22nd Aug 18, 8:32am 1534883570

Re: Maersk Bering Sea shipping route
The linked article refers to how Maersk is adapting to the implications of global warming.
While we are rightly concerned about the implications of climate change and the need for immediate actions to mitigate further contribution to climate change, the reality is that further global warming is with us for the future.
However we tend to focus only on the downside implications; as Maersk is showing how we should also be planning to adapt to global change in beneficial ways.

by steven | 22nd Aug 18, 9:15am 1534886109

Meanwhile the chinese built railway over the "old silk road" to Europe seems to be expanding quite possibly making a northwest passage moot.

by steven | 22nd Aug 18, 9:17am 1534886235

and china's debt is massive, left wondering when the payment is due.

by Advisor | 22nd Aug 18, 9:40am 1534887654

Strange how the loose monetary, low interest rate environment has allowed this system to see debt as a perpetual funding instrument much like equity. When the repayment is due, raise fresh debt to pay off expiring debt.

It's like a game of musical chairs, the one holding the most on their books when the music stops loses.

by Pragmatist | 22nd Aug 18, 9:47am 1534888065

It's like a game of musical chairs, the one holding the most on their books when the music stops loses.

At the country level maybe..

At the company level:-
It's like a game of musical chairs, the one holding the most on their books when the music stops loses...Or wins... depending on which way the bail-out coin flip goes.

by Yvil | 22nd Aug 18, 10:20am 1534890054

That's right, what dire consequence has actually happened from over-borrowing? Nothing, there is no hard lesson that has had to be learnt.

by BadRobot | 22nd Aug 18, 10:25am 1534890314

Maybe at the country and to a degree the company level (depending on the size of the company) but at the individual level there are definitely hard lessons to be learnt.

by Advisor | 22nd Aug 18, 10:33am 1534890799

Right. It's the managers, bankers and CEOs at hedge funds, PE, pension funds etc. who are rewarded for making reckless decisions with other people's money.
Salary structure: A fixed, fat-cat salary plus a severance cheque and a slap on the wrist for failing, and shower of gold for succeeding.

by Ludwig | 22nd Aug 18, 9:57am 1534888631

The payment won’t come due. Spain, Argentina, Greece, Russia, Mexico, etc, have all defaulted - many several times. However, there are always new muppets ready to invest in “safe” govt bonds and who lose their money. The supply of idiots is endless...

by BadRobot | 22nd Aug 18, 10:26am 1534890405

Idiots or people playing with other peoples money (i.e. no skin in the game). .

by Noncents | 22nd Aug 18, 11:04am 1534892661

Seems to be a combination - Idiots playing with other people's money.

by murray86 | 22nd Aug 18, 9:45am 1534887954

Could someone please explain this to me? " The plan is to reduce the official risk weighting of local government bond holdings from 20% to zero, a move that could boost demand for a flood of sales set to hit the market by the end of October." What i understand from this is that officially the risk for people buying local Government bonds in China has been set at 20%, and thus i assume that it then carries an appropriate premium rate. To reduce that risk to zero would then seem to deny the risk, and thus remove any premium that it would deliver. Does this mean the Chinese central Government is backing local Government debt, or they are in denial? why would this be a positive for upcoming bond offerings?

by Nic Johnson | 22nd Aug 18, 10:01am 1534888875

A new metric to keep tabs on. New Zealand Property 'for sale' on Trademe has risen from 30,393 yesterday afternoon to 30,417 this morning. The faster it rises the quicker the progress into a 'buyers' market. Over 350 New listings were recorded yesterday!

by Nic Johnson | 22nd Aug 18, 10:02am 1534888963

30,424 and counting!

by Nic Johnson | 22nd Aug 18, 10:10am 1534889454

30,430... Some really nice stuff coming on today if anyone can be bothered to buy just yet!

by rastus1 | 22nd Aug 18, 10:13am 1534889621

I have been doing the trademe thing on Hamilton for over a year. Today we are at 662, this time last year 639, but the tend was up from August.

by Nic Johnson | 22nd Aug 18, 10:18am 1534889908

I had a look at Hamilton last week. Lots of stuff sitting around at the top end of the market and not a lot at the bottom. It's a shame that the kids are being suckered into buying the rubbish when their is such a limited market for the good stuff - which will have to come down to attract interest. Hamilton will be an investors graveyard in the next couple of years.

by rastus1 | 22nd Aug 18, 10:50am 1534891818

Yes I'd agree with you on that. Am seeing quite decent homes bulldozed to be replaced by 3 or 4 units. Tons of run down rentals around that have had no cap expenditure or maintenance for years that can't be put off forever. Add to that large numbers of elderly one step away from Rymans or the undertaker.

by PocketAces | 22nd Aug 18, 11:35am 1534894535

I live in Hamilton and the rate of building is just phenomenal, from the North City out to Kays Rd from River Rd to Horsham Downs Rd, to the latest one going gangbusters, Greenfields or something off Wairere Drive/Gordonton Rd roundabout then there is Peacockes toward the airport will be next, then there are existing houses being bowled for multiple dwellings, one in particular, one house replaced with 6 units. Hamilton is in grave danger of overshoot, I've thought it for a wee while now.

by Nic Johnson | 22nd Aug 18, 11:45am 1534895104

All being built to house the evacuees from Auckland. The trouble is that without Jonny Foreigner the Auckland evacuees are likely to be selling up for current Hamilton asking prices, which makes the evacuation far less appealing! I think Tauranga will suffer a similar fate. Too much built, too fast during a credit boom where the builders have ripped the cash and the owners will be left with pups that they spent too much developing.

by Nzdan | 22nd Aug 18, 10:18am 1534889902

"Loads of character and charm"

Enquiries over $465,000. Rateable Value $345,000

https://www.trademe.co.nz/property/residential-property-for-sale/auctio…

by Nic Johnson | 22nd Aug 18, 10:21am 1534890113

A beautiful residence if you are buying something for your dog to live in. Sadly that will be the first one to sell because the kids still don't realise how weak the market is in the middle and upper ends.

by bigspender | 22nd Aug 18, 11:50am 1534895401

LOOKING FOR A PROJECT? You mean do I have a Bulldozer?

by Nzdan | 22nd Aug 18, 6:38pm 1534919892

Put in a single lane Olympic swimming pool.......and that’s about it.

by Advisor | 22nd Aug 18, 11:04am 1534892646

The retail sales survey for the June-ended quarter has seen a small increase year-on-year. A closer look shows drops in most major sections of the retail industry, namely food & beverage, electronics, and supermarkets & groceries with a sharp increase in fuel retailing (1.7% YoY in March to 6.9% on 30-June).

So the retail sector is really in trouble despite more than a net 5,000 new shoppers migrating to NZ every month.

by Cowpat | 22nd Aug 18, 11:55am 1534895741

What is truly comical about the retail sales data is how much it was divergent from the economists (mainly bank )forecasts .To rub salt into their wounds Stats NZ makes it 2-0 for the past two quarters. Rather than throw darts,possibly our economists should start tossing each other.