Shanghai stocks fall; 'home team' barely holds; foreign holders the main sellers; Wall St bond investors hit hard; Italy roils EU markets; UST 10yr at 3.23%; oil holds, gold slumps; NZ$1 = 64.5 USc; TWI-5 = 68.7

Shanghai stocks fall; 'home team' barely holds; foreign holders the main sellers; Wall St bond investors hit hard; Italy roils EU markets; UST 10yr at 3.23%; oil holds, gold slumps; NZ$1 = 64.5 USc; TWI-5 = 68.7

Here's our summary of key events overnight that affect New Zealand, with news bond investors are taking a huge hit.

Wall Street is lower yet again, with the S&P500 down -0.7% at one point earlier to open their week. This follows a -3.7% drop in Shanghai as their markets returned from holiday.

China's weekend reserve ratio cut, and it was a big one, just reinforced how worried Beijing policy makers are about the immediate prospects in the Chinese economy. China can roll out its "home team" of SOE's to soak up sharemarket buyer flight, but reports are that it was foreign holders who were the sellers - investors essentially taking advantage of that policy in near-record selling. Additional liquidity, and "the home team" can do a lot for a while, but it actually can't change sentiment. And where they are not active, things can get ugly, such as in their fast-cooling (that is, falling) property markets. But don't expect to see that in their official stats, at least not confidence-sapping data.

But away from finance and money issues, most of the Chinese middle classes are feeling confident. Local travelers made 726 million trips during the Golden Week holiday that ended Sunday, up 9.4% from a year before. The slowing economy clearly failed to dent demand for travel. Or online shopping either, it seems.

China may be being hit by the tariff war, and that impact is being felt elsewhere. But other main markets are also being hit by interest rate risk. Sharply higher benchmark rates is seeing corporate, and especially sub-investment grade debt riser in yield even faster. That means big losses for their holders. One estimate is this latest rate spike has wiped almost US$1 tln off the value of such holdings. The bond market may be huge, but even there a US$1 tln loss is noticed by everyone.

In Italy, jibes between the new Italian government and the EU over the EU budget rules are unsettling markets again, just after things seemed to cool. This is not helping EU bond yields either.

In Sweden, the 2018 Nobel Prize in economics has been awarded to two Americans, William D. Nordhaus and Paul M. Romer for including climate change and technological innovation in long term economic theory, and furthering research on sustainable growth.

In Switzerland, the UN IPCC issued another shrill Report on climate change - one that seems widely ignored again despite its warning of impending disaster. The issues are serious, but completely disconnected from general public interest. Disappointingly, this is science that is being rejected as a partisan overreach by people making money off it. It deserves better.

The UST 10yr yield is unchanged today 3.23%s. Their 2-10 curve is still at +34 bps. The Aussie Govt 10yr is at 2.77% and up +7 bps from this time yesterday. The China 10yr is at 3.63%, down -4 bps, which the NZ Govt 10yr is at 2.67%, up +4 bps.

Gold will start at US$1,185/oz a sharp US$18 drop overnight.

US oil prices are little changed today at just over US$74/bbl. The Brent benchmark is now just over US$84/bbl.

The Kiwi dollar is starting today at 64.5 USc having changed little since this time yesterday. On the cross rates we are at 91.2 AUc and at 56.2 euro cents. That puts the TWI-5 at 68.7 and still at a three year low.

Bitcoin is now at US$6,623 and that is a tiny net gain of less than +1% overnight. This rate is charted in the exchange rate set below.

This chart is animated here.

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

Daily exchange rates

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In flagrante delicto: On the 'Billion Dollar Whale'

"U.S. military officials have in recent months become increasingly vocal about their concerns over the vulnerability of weapons systems, many of which use microelectronics made abroad.

Ms. Lord, of the Pentagon, told reporters Thursday that 90% of the printed circuit boards used by the U.S. military came from Asian plants, half of them in China. The Pentagon has issued a no-buy list for software produced by some firms in Russia and China."

Ms. Lord, of the Pentagon, told reporters Thursday that 90% of the printed circuit boards used by the U.S. military came from Asian plants, half of them in China.

For the sake of accuracy, that other 50% would be from their allies in Asia, surely? JP/SK/TW

And the other question is are these empty boards or populated boards. One is effectively nothing more than a box full of wires, the other is a potential nightmare of fake chips, embedded software and backdoors.

Many printed circuit boards have multiple layers (up to 20 in some computer mother boards) of copper traces sandwiched between fibreglass boards. A grain of rice scale spychip as described in the Bloomberg expose could potentially be inserted into one of those trace layers and be near-invisible (other than by detailed x-raying).

But to do so would require knowing which traces carry which signals, and the protocols etc. If the pcb manufacturer just has the artwork and not the schematics that's no easy task.

and if you think the Chinese wouldn't put the effort in to reverse engineer the board to do that you'd be mistaken. Especially as they have a long and illustrious history of just that! At the most base level, for military, and some other applications, all they need to do is be able to engineer a remotely triggered interruption of service. This would effectively result in a loss of control or denial of information making military services highly vulnerable at critical times.


i miss the god old days
" it will pick up in spring"
" wait until after Chinese new year"
" its winter normal slowdown"
and the best of all
overseas buyers only make up 3% so dont make any difference to the market

Spring arrives and the Rock Star wakes up, his head is pounding, his limbs are shaking and he's struggling not to fall over. He can't remember what happened over the past few years, it felt good, but was it just a debt fuelled dream?

Are you referring to BHSL, aka BLSH?

Wow, that doesn't look good. Here's hoping for a an Australian style decline, not an Irish one...

O.2% down in Auckland & 0.3% down in Chch, scary stuff

Did you not see the 7% decrease in Omokoroa? There's like 1100 houses there!

The US Ten-Year Shows The Extent Of The Bond Bubble


"Despite rising yields, the probability of recession is low. However, it was also low just before the last recession. According to Joachim Fels, 97% of consensus economists didn’t see the last recession the quarter before it started. Even worse, 77% didn’t see a recession when it was already happening!"

jumped out at me.

In my view.... it only takes a small shift from everyone borrowing ( credit growth ) to everyone starting to pay down debt ( declining credit growth )...
This shift can have a marked effect on aggregate spending...
I don't think economists give much attention to these inflection points...
They are as much psychological ( confidence ) , as they are a function of the debt burden ( rising interest rates..etc ).... in my view.

I had previously thought that rates would rise earlier than the RBNZ forecast of 2020, suggesting Q3 2019.. However given the recent protestations about fuel prices, which if you are from the UK still look cheapish (£1.35 per/litre or $2.70 in kiwi peso's) it appears that households on the margin may be finding things much tighter already. It does suggest that the banks may have been neglecting the realities of household expenses when fuelling the fires of the housing market over the last few years. Time to fix the mortgage if you have one.

"Time to fix the mortgage"
In a rational marketplace, yes.
But Adrian has already indicated that he favours the see-saw mentality of economic doctrine. ie: If overseas interest rates rise, then the RBNZ will drop their cash rate to keep the net % rate the banks pay steady.
Lunacy, I know. But there's next to no petrol left in the Kiwi economic tank, and if things 'go bad' then what else can he do?

I understand where you're coming from bw but it appears that households are already feeling the pinch. Who do you cater for? The 8% of the country with 40% of the mortgage debt? or the 60% that don't have a mortgage? Rapidly rising prices is a likely outcome of the current NZ peso weakness and that will press retirees, renters and the over-leveraged. The banks have been given a warning so far, they will now accept reduced margins for lending and look to re-finance as much of the 60% of loans that come up for renewal over the next 12 months (Mr Chaston's numbers) as possible, thereby cushioning their loans from default as inflation continues to be 'looked through'... the rates will however have go up to calm inflation at some point.

Mr Orr's 'words' have so far been akin to giving a prisoner on death row another 12 months before the injection, that's all. Eventually the injection of higher interest rates has to come, after all our RBNZ is firing a spud gun against the FED's exocet missile and an NZ cash rate below the FED rate is an experiment that no-one has ever attempted before. Mr Orr won't want to be the governor that didn't act as inflation ripped poorer households and the economy to pieces or we'll have bigger social problems that a few people trying to organise a petrol strike.

I'm not so sure Nic. My read is the only type of inflation they take seriously is wage inflation. They think house price inflation is good, it speaks of a robust economy; oil price hikes are temporary and will wash out; but Wage Inflation is a terrible thing and must be stopped. The economy seems to be slowing, so I can't see wage inflation getting out of hand. Remember, Jacinda has to get approval from President Peters to overpay the unions, so not as big a danger as it might look. So my guess is the current slowdown intensifies first.

I'm also not convinced that putting up NZ interest rates has that much effect on the currency. How many kiwis routinely sell their NZD for USD at the first sign of trouble? Not many, unlike places with a more advanced form of monetary debauchery, like Argentina or Turkey. Our governments do seem intent on following their lead though.
They think running a current account deficit is very clever. The third generation gambles away the family fortune.

I know the government made some changes to the mandate but if they cut interest rates in response to rising rates that is going to take the exchange rate right? If that happens inflation will go through the roof. And their first priority is still price stability right?

I'm with you on that one Nic, the current 2 or 3 year rates look good so I would be locking it in now if your lucky enough to have your current mortgage come out for renewal this side of Christmas.

UK petrol is 95 octane though, so not too much more that the $2.50 we pay on average for 95.

Multiple countries facing serious economic issues. A Global downturn has started. More volatility to come...

"At the end of the day, it all comes down to the fallacy of synchronized growth. We have been hearing from international bodies, from central banks, that we were living in a synchronized growth territory, that we were seeing developed markets grow faster than what was typical of developed markets while emerging markets were also growing in tandem, and that the economies were much healthier, that everything was much better, and that 2018 was a year in which we would see the confirmation of that synchronized growth trend and the relfation trade. Well guess what? It wasn’t the case… What we were being told was synchronized growth was synchronized debt growth, and that massive increase in debt, that led to the highest level of global debt-to-GDP in history last year, was creating massive… internal problems in many economies that were getting used to cheap and easy money, and a very small reduction, completely minuscule and completely moderate reduction in the balance sheet of the Federal Reserve of less than $260 billion, has created this reckoning that the reality that we were seeing globally was not a reality of high growth, better productivity, and more positive surprises, but the reality that it was just a debt led bump up of a much clearer trend of secular stagnation."

This S&P 500 dip is hurting me just as I started to invest more into it. Oh well, in it for the long haul, time in market vs timing the market, HODL, etc etc.

Or maybe i should be calling David Chaston a 'doom and gloom merchant' for reporting news?!

You might be interested in this:

Wow, that really does put it all in perspective.

I probably shouldn't let a comment on a message board decide my financial future, but all of a sudden I want to put a lot more of my savings into ETFs..

You did notice the SPX returns axis is reversed?.. up = lesser returns.


Worst case scenario: had you started in the beginning of 1999, and held for a measley 10 years, you would be down 3.51%

Big cracks are appearing in Chinas property market;

If you give a drinker $10,000 he'll spend it all on drink, if you give a gambler $10,000 he'll eventually lose it on something.

Magnify that by 300% of Chinese GDP and you get an interesting cocktail for gamblers and drinkers.

Just wait for the loans to get called in by the banks of the PRC and watch the impact it'll have on Auckland.

This should give you an insight in what is going to happen with the property values in China.

...and we thought NZ had issues with build quality!

Haha wow.

Even though we are supposed to be a free Thinking, individualistic western country there is still so much peer pressure and group think in NZ. So imagine what it must be like in China wrt property.

One of my favorite economists is Peter Warburton ... He has written a very interesting piece on the unintended consequences of QE..

Peter Warburton wrote this..back in nov 2017..
Our conclusion is that there is no safe exit from unconventional monetary policy. Control over longterm
real rates will be surrendered as policy is unwound (tapering, tightening, etc.) Co-option of
financial leverage to exert downward pressure on long rates in an easing phase implies powerful
upward pressure when the tide turns............................

If this thesis is broadly correct, then we should expect a spike in real interest rates in 2018 that brings
the Indian summer of global growth to an end. Rising real rates will activate the next debt delinquency
cycle and bring the corporate bond bonanza to a dramatic close. Our presumption is that government
policy responses to these events will be much more focused on fiscal actions than monetary ease,
which will sustain an inflationary bias to the global economy even as growth slows.

It’s The Track Record That Is Unaccounted-for Risk

Pretty sure Alfred didn't leave any money behind for a Nobel prize in economics. It's called the "Sveriges Riksbank Prize in Economic Sciences", a prize sponsored by the Swedish Imperial Bank in memory of Alfie.

But do you know why there is no prize for economics - it was rumoured that Alfred's wife had an affair with an economist and Alfred never forgave the profession - hence no prize for economics. This is most likely myth but who knows.

I'm pretty sure we can be certain that isn't the real reason.
One google search will highlight the flaw in your myth. I'll let you work out what it is.

It is just a story / myth - it sounds just a tad scandalous with a whiff of indignation by poor old Alfred and the slighted economists / mathematicians (depending on who is telling the story) - isn't human nature interesting.......

( and it's more interesting than the boring reason put forward by others).

Dark clouds gather over the US housing market