Here's our summary of key events overnight that affect New Zealand, with news emerging markets are struggling to contain their pressures.
But first we should note that Wall Street is closed for their Labor Day public holiday. Yesterday most markets in our time zone closed lower, including our own, and there is an anxiety over what the New York markets will signal in September. The very long bull run will end at some point and memories have faded on how these things turn. Over-reaction is a common outcome.
The OECD is pointing out that global financial system risk is high with interconnectedness through high levels of financial derivative exposure, as high as it was just prior to the GFC. They also want global standards to manage and restrain cross-border infrastructure investment like that of China's Belt+Road Initiative, pointing out the extreme risks building for emerging economies through China's shadow lending. They see the current Chinese track based on corruption, a lack of transparency, ignoring environmental risks, and a twist to the dominance of state-owned enterprises.
Surprisingly China has responded quickly; overnight President Xi has promised Africa 'debt relief'.
Argentina has announced austerity measures in a bid to tackle the "emergency" created by the country's currency crisis. Their President said they could no longer keep spending more than they earned. He announced new taxes on some key exports, and said "about half" of the nation's government ministries will be abolished. Their gamble on 'gradualism-with-IMF-support' clearly didn't work, and they have been left with few choices.
The currency situation in Indonesia is not looking flash either.
In Turkey, inflation has leaped to +18% pa, an all-time high and up from +10% in March. Their central bank has promised action to restrain it. Their official interest rate is currently 16.25% and is likely to rise substantially soon.
Manufacturing activity in Mexico expanded more slowly in August, but it still expanded. In Brazil, their rate actually picked up, moving from a contraction two months ago, to expansion in August.
In the Eurozone, they are recording a slowing in their relatively high rates of factory activity. It is now a run of expansion that now stretches to 62 months. But the latest data is the slowest growth since November 2016.
In China, the private Caixin China General Manufacturing PMI slipped to 50.6 in August from July, marking the third straight monthly drop and its lowest level since June 2017. It has come in lower than analysts expected. The sub-indexes for new orders and output both expanded, with the former falling and the latter climbing. This showed cooling demand and strong supply existed at the same time across the Chinese manufacturing sector. This PMI reading is more cautious than the official Government one.
The UST 10yr is unchanged at 2.86% and their 2-10 curve is still at +23 bps due to the US holiday. The Aussie Govt 10yr is at 2.52% (unchanged), the China Govt 10yr is at 3.61% and up +1 bp, while the NZ Govt 10 yr is at 2.55%, down -1 bp.
Gold is unchanged at US$1,201/oz.
US oil prices are marginally firmer and now just over US$70/bbl. The Brent benchmark is now just over US$78/bbl. Questions over Iranian crude supply after sanctions hit are keeping the market well bid.
The Kiwi dollar is holding lower at 66 USc. On the cross rates we are lower at 91.6 AUc, and softer at 56.8 euro cents. That puts the TWI-5 at 69.8 and a three week low.
Bitcoin is now at US$7,271 and essentially unchanged. That takes it over NZ$11,000 for the second day in a row and the first time in a month. This price is tracked in the exchange rate chart below.
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51 Comments
More likely the OECD is, rightly, terrified by the counterparty risk involved in the Derivatives markets.
You only have to have one BIG player in the OTC market go down ( as AIG could have done last time, along with assorted TBTF banks) and the Domino Effect that will cascade through the derivatives markets will be cataclysmic.
China has been playing the OBOR game very well by targeting countries that are usually "insignificant" in the global scheme of things. These tiny nations gladly accept billions in infrastructure investment without assessing their future ability to service huge debt piles as their haste stems from the fear of missing out.
There is something curious about the low NZ Govt 10 yr and Aussie Govt 10yr. Is this a realistic assessment of our future economy or is something else going on? If so what might it be? I like the creativity involved in coming up with a plausible conspiracy theory, so here goes. Has the CCP got its thumb on the scales? They are terrified of excessive capital flight and inflation from a falling Yuan, and well aware that Trump can play his currency manipulator card at any time of his choosing. They know this is an existential threat to the Party and especially its leadership. Is this the cause? The trouble with conspiracy theories is the smoke may in fact be only mist or fog; the people behind it are keen to hide their fingerprints; and the reason for their actions are their secret. Still, the question arises.
That is a large number, but it needs to be put in perspective. Australian owner-occupied housing debt is A$1.186 tln. Investor housing debt is $0.593 tln, total is A$1.776 tln. So interest-only represents less than 30% of all lending.
But the total value of all Aussie housing is now more than A$7 tln. So, on average, house prices would have to fall -75% to put the whole system under water. So far it is down less than -2.5%.
Yes, the conversion of IO debt to P&I debt will cause some people some pain. But it is no threat to financial stability on its own.
Most definitely.
The conversion from IO to P&I during 2019-2020 is going to have a significant impact. There will be a big rise in defaults and forced sales, reinforcing a negative feedback loop for prices.
Australia will not be as safe as it has been for international money and wholesale funding will probably keep getting more expensive.
I'm not suggesting the Australian banks will fail, but the next 1-2 years could be much more painful than many are expecting.
Base case would be a sovereign rating downgrade, Australian bank rating downgrade, house prices down by 15% over the next 1-2 years, and a 'surprise' cut from the RBA that really shouldn't be a surprise.
People might disagree that there will be a rise in defaults and forced sales, claiming that the banks have affordability buffers built in to prevent this from happening.
I think the mere fact that the increase in money coming out every week/month in Principal payments would be hard to stomach for anyone with a portfolio, even if they can afford to do so. It's the same mentality that sends people on the other side of town to save 2 cents a litre on petrol.
For sure. If there's one thing the Royal Commission has uncovered it's that the buffers that were meant to be built in aren't there. That's why so many are now trapped with their bank and can't refinance with other banks that are applying 'proper' lending criteria.
Like the USA we have become more focused on servicing the debt than paying back principle. I have always thought that this leaves us exposed in the event of another financial crisis.
If everything is a cycle, if we still even have cycles now Reserve banks go out of their way to support those in debt and banks?
Eventually the wheel should turn onto the next phase of the cycle. The Royal commission didn't give me confidence.
Also the banks capital requirement is only $2 for every $100 of loans.
Its in here
https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Speeche…
The most recent report3 has the large internationally active banks reporting a median Common Equity Tier 1(CET1) ratio of 12.1%, with 25th and 75th percentiles of 10.9% and 13.8%. At the same date, our four largest banks reported a weighted average CET1 ratio of 10.5%, putting them, on an unadjusted basis, in the bottom quartile. For the entire New Zealand banking system, Tier 1 capital ratios have also been at the lower end of international comparisons.
Martin North continues to nail it.....
"So no surprise to see mortgage stress continuing to rise. Across Australia, more than 990,000 households are estimated to be now in mortgage stress (last month 970,000). This equates to 30.4% of owner occupied borrowing households. In addition, more than 23,000 of these are in severe stress. We estimate that more than 57,900 households risk 30-day default in the next 12 months. We expect bank portfolio losses to be around 2.7 basis points, though losses in WA are higher at 5.1 basis points. We continue to see the impact of flat wages growth, rising living costs and higher real mortgage rates"
http://digitalfinanceanalytics.com/blog/household-financial-pressure-ti…
That's the beauty of people using averages - it hides a lot of sins. While on average NZ may not owe much - what is owed is concentrated and if those fail it is them that will set the market value. In this context it could be argued that this is a misuse of statistics to deceive
Hi David
I just love aggregated property values. I read somewhere that in Feb this year, NZ housing had become worth a cumulative $1 Trillion dollars...... Tends not to be the reality though if you were to put them all on the market at the same time.
I would argue that 1 house on a road 'for sale' has a market value which is immediately very different if 2 other similar houses on the road present themselves for sale at the same time, heaven forbid the whole street wanted to sell. I doubt if Australian housing is really worth $7 Trillion AU. Just as a doubt NZ property is worth $1 Trillion..... But we do know what the debt levels are for each market. 30% interest only lending is absurd and over double the volume that the UK had before their GFC housing crash. Housing is not something that you can just mark to market.... Stocks are never worth their price when more sellers simultaneously arrive over buyers.
heres the UKs completely worthless piece of valuation - ie the value cant be monetized
https://www.telegraph.co.uk/business/2018/08/29/land-house-prices-push-…
":Globally, our problem is the rising energy cost of energy, combined with unfettered growth in population numbers.
The world in general seems to think it can borrow and spend its way out of this problem, even though the problem itself is founded in physics, not money. "
ham n eggs,
You have regularly posted on the rising cost of energy-EROI- and I think you are right. I also think that the still rising global population is a serious concern,but it is certainly not unfettered. The net rate of increase has fallen to around 1.10%pa and that will continue. At some point,probably before the end of this century,it will peak around 11bn and then start to fall.
you might find this site of interest
http://data.footprintnetwork.org/#/
you can click on any country and see population trends / ecological deficits over time ...
Re your end of century predictions, I think youre assuming that BAU can continue to roll along... but Capitalism effectively snapped in 08 .... The can kicking Ponzi in place now is keeping supply chains ticking... But for how long ...
"The very long bull run will end at some point and memories have faded on how these things turn. Over-reaction is a common outcome."
The next couple of months could be interesting; no certainties but risk on.
Why not consider moving that growth/aggressive KiwiSaver fund to a more balanced fund for the next three months? Worst case scenario in the event that the bull market continues is that one miss out on 0.5% - worth it?
Haven't really been keeping an eye on my kiwisaver, but other aggressive type investments are doing 2-3% per month. So you'll probably miss a lot more than 0.5% over three months... And then at the end of the three months when it hasn't crashed but still "feelz" a bit wobbly, what do you do? Another three months and another 3+% gone. Market timing is a mugs game.
Is Simon Bridges trying to out Jacinda Jacinda? https://www.nowtolove.co.nz/parenting/family/simon-bridges-admits-its-a-challenge-juggling-family-and-career-38909
Spengler hits one out of the park yet again...RTWT.
The ideological commitment of the Establishment to a new global order made facts irrelevant. If things weren’t that way, they should have been that way.
Being an Establishment means never having to say you’re sorry. The first task of an Establishment is to insulate its inmates from the consequences of their errors. Never mind that America’s adventures in Iraq threw the Middle East into a new Thirty Years War, as I warned 10 years ago it would.
The only senior US official to warn of the consequences of the Establishment’s blunders was General Michael Flynn, whose career has been ruined by Establishment holdouts in the intelligence community. The opportunists, careerists, ideologues and fools who ruined America’s strategic position in the world should be the continuing object of public ridicule, but they have safety in numbers.
Because the whole of the Establishment signed on to a failed policy, the whole of it will band together to protect its right to rule.
And the concluding paragraph;
Trump’s style has been obstreperous and sometimes rowdy, and he eschews the air of regal noblesse oblige that some of his predecessors brought to the Oval Office. But the hatred he elicits from the Establishment has nothing to do with style, or indeed, with any of his shortcomings: Trump is hated because the American people elected him to bury the Establishment. Last weekend the Establishment obliged by conducting burial services for itself.
But will he succeed? Their force is strong - stronger than he, or any of the American people, would ever have imagined.
This is where the young are at ...
"As a young professional person with a young family trying to make my way with no financial support from parents. I feel like I have turned up late to a game of Monopoly and all I can now do is pass Go and pay rent, because everything has been bought up.
There are 3 things I am anticipating:
1. Gradually go bankrupt through increasing costs and declining wages.
2. The Chance deck gives me something to help (I play the lottery)
3. Someone flips the board and we start again.
Working hard and being honest doesn’t seem to be working out for us.
The young can always look to how the poor flipped the board in the late 19th and early 20th centuries. With democratic power comes power to change the tax base, for example. Rather than all tax coming off workers' wages, revert it to a mix of land and income tax. This was part of how land banks and aristocratic holdings were broken up and average citizens gained access to a little land and capital, enabling them to be stronger participants in capitalism.
It's going to require much stronger activism in politics, and potentially won't happen till home ownership dips further.
It's a very apt analogy. I recall playing the game as a primary school kid with my Dad who required strict playing by the rules - for example, he wouldn't allow us to put money paid in taxes, or to get out of jail and the like into Free Parking (to be won by the next person landing on it) as he explained that in real life there are no windfall gains like that.
It was a good lesson in discipline - even though capitalism went in another direction :-).
Word. I was going to suggest going to a friend's house to start a new game of monopoly, but you mentioned there's kids in the mix, and they need to be cared for.
If you complete a trade or finish a degree, the years between 22 and 30 are when you need to knuckle down, cut your Netflix subscription and save every dollar. I'm not trolling here, I'm deadly serious. You can spend heaps of money on needless crap these days, in ways that our parents and grandparents never would have dreamed.
If you complete a trade or finish a degree, the years between 22 and 30 are when you need to knuckle down, cut your Netflix subscription and save every dollar. I'm not trolling here, I'm deadly serious. You can spend heaps of money on needless crap these days, in ways that our parents and grandparents never would have dreamed.
What happens when people stop spending money into the consumer economy? Do you really understand what you're saying?
Don't make me laugh. My advice is only for the disciplined. Most other economic players simply will not behave rationally. People are always going to buy stuff they don't need, and those people probably never have heard of interest.co.nz, and even fewer will read this. The consumer economy will be alright, especially here in NZ where people have comparative freedom, and space for this and that.
J.C.,
So you advocate that everyone goes forward and spends beyond their means, just so that the consumer economy gets a happy number this quarter? What about the finances for these people next year, or next decade? I've seen how this plays out in the long term so many times, with many people that spent what they had instead of saving for their future. It isn't pretty when they get old.
I strongly agree with the idea that one should save for the future. It is easiest to earn when you are young, or at least, not elderly. If you make it to 60 and all you have is the equity in your house, you are likely to have a rather spartan existence for the remainder of your time.
For me, the hard part is to shift from the saving mentality to the mentality of using what I have saved in the prior three decades. Many of my cohorts have spent large during their saving years, and now, well... are still living paycheck to paycheck. My frugal early years have allowed for me to enjoy life in a way that wouldn't have been possible if I was a spendthrift. That, and be able to retire before the age of 50...
"The OECD is pointing out that global financial system risk is high with interconnectedness through high levels of financial derivative exposure, as high as it was just prior to the GFC. They also want global standards to manage and restrain cross-border infrastructure investment like that of China's Belt+Road Initiative, pointing out the extreme risks building for emerging economies through China's shadow lending. They see the current Chinese track based on corruption, a lack of transparency, ignoring environmental risks, and a twist to the dominance of state-owned enterprises."
You recently recycled a UN Report touting the Chinese model as the way forward. Hmmm...
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