Shanghai drops another -5%; Wall Street another -2%; US CPI eases back; real US wages hardly move; China raises funds easily in test; NZ holds high ranking; UST 10yr down at 3.14%; oil drops, gold jumps; NZ$1 = 65.2 USc; TWI-5 = 69.2

Here's our summary of key events overnight that affect New Zealand, with news Wall Street is following Shanghai sharply lower.

In Shanghai yesterday, shares tumbled more than -5%. On Wall Street this morning, trading had briefly stabilised, helped by the US CPI report for September showing muted inflation. But in mid afternoon trading stocks are falling again and are now down more than another -2% on top of yesterday's -3% drop. And the selloff is accelerating.

Those US inflation numbers pegged the price rise rate back to +2.3%, down from +2.7% in August. Core inflation (without food and petrol) held steady at +2.2%.

This lower inflation managed to boost real wage gains with US real earnings up at a +0.3% pa rate from August. But over the whole year things are not so bright. Real average hourly earnings increased just +0.5% in the year to September 2018. To get that, Americans actually had to work longer hours, and with those extra house they got a +1.1% real increase in average weekly earning in the year.

Also not so bright was an unexpected jump in the level of unemployment claims last week.

And staying in the US, it has been announced that retirees will get a +2.9% rise in Social Security benefits in 2019, boosting these payments to 62 mln people. This is the single largest component of the deficit spending.

For all the trouble China is facing in its economy, it has defied predictions and had a very successful bond market issue. China sold US$3 bln in US dollar bonds, raising money easily and cheaply in the midst of the global markets selloff. The amount is immaterial - this is just a test of their market standing. This tender had bids for US$17 bln and achieved a 3.63% yield on its 10yr offering, a +45 bps premium to equivalent USTs. This is much better than was expected and hardly a premium to its equivalent yuan 10yr.

In the latest HSBC ranking of the best place to live and work, Singapore came in as number one. And New Zealand came in at number two, matching its 2017 ranking. We are not so high on the earnings scale, but bat very high on most other aspects. Australia slipped one place to sixth. And France was a big mover up the rankings as it positions itself to benefit from the Brexit fallout.

The UST 10yr yield has slumped -9 bps today to 3.14%. Their 2-10 curve is now back at +30 bps. The Aussie Govt 10yr is at 2.74% and down -3 bps from this time yesterday. The China 10yr is at 3.62%, down -1 bp, while the NZ Govt 10yr is at 2.65%, down -4 bps.

Gold is sharply higher this morning at US$1,221/oz, gain of +US$32 overnight.

US oil prices are down sharply again by another -US$2 today at now just over US$71/bbl. The Brent benchmark has fallen a bit more to just over US$80.50/bbl. Unexpectedly large rises in both US crude stocks, as well as petrol inventories, is driving today's retreat.

The greenback has retreated. The Kiwi dollar is starting today at 65.2 USc and that is up +½c in the past 24 hours. That takes us back up to where we were ten days ago. On the cross rates we are firmer as well at 91.6 AUc and at 56.3 euro cents. That pushes the TWI-5 up to 69.2.

Bitcoin has dropped sharply and is now at US$6,245 and down almost -US$300 since this time yesterday. Along with the rising Kiwi dollar, in our currency the fall is more than -NZ$500. 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 ».

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NZD
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58 Comments

Is the NZX not worth mentioning?

its not houses, NZX will drop again today, the markets have been waiting for the great correction so plenty selling in the belief they have picked it and wanting to be early.
TBF who knows i picked markets would change a year ago but this could be another quick correction then again it could be the start of the big correction.
just hope its not the forerunner of GFC2
https://www.cnbc.com/2018/10/11/us-markets-focus-on-wall-street-rout-as-...
Dow tumbles 650 points to new low on day, bringing 2-day losses to more than 1,400 points

up
15

The difference between people who do stocks and people who do houses, is people who do stocks expect the market to explode at some point but it’s built into their strategy. People who do houses deny that possibility and don’t account for it.

But I can live in my house whatever its worth and rent from my apartment is not likely to drop too dramatically even if the place is worthless.

Of course if you think of property as a way of growing your wealth then you are a turkey - as a general rule prices go up progressively and then drop like a stone.

Please explain this for us...
"rent from my apartment is not likely to drop too dramatically even if the place is worthless."

It doesn't really make sense.

Dividends from my shares are not likely to be affected by the stock market falling either. If the wider economy is affected then both my dividends and my rental income are at risk.

But I can live in my house

I think a distinction needs to be drawn between 'owner occupier who is hoping their house goes up in price to 'investor who owns multiple properties'.

I don't think anyone is advocating investing in stocks instead of buying a family home. But they are arguing you should invest in stocks instead of investing in housing.

The average returns are much, much better.

I don't think you can consistently double your money on the share market every year, you can with property if you know what you're doing.

LOL what? How on earth can you double your money with housing?

Nowhere has prices increasing 100% year on year.

Exactly. I have my money in ETFs and my cash savings for a house. They're separate things. One's not going to be cashed out until I'm an old man, the other is going to be cashed out within a few years. I've used appropriate risks for each time frame.

Investing 101.

"The difference between people who do stocks and people who do houses, is people who do stocks expect the market to explode at some point but it’s built into their strategy."

I know, I know, but corrections still seem bad when they happen.Bit like the old quote"I'm not afraid of dying, just don't want to be around when it happens!!'

UPDATE:
Post-lunch NZX50 back p into positive territory after being down in morning. Seem to be following Asian markets which are starting to show positive signs; will the blip be all over by Monday morning!!!

The interesting time continues.
While the share markets had short term blips with Brexit and election of Trump, this blimp is a little different in that there are a number of deep seated factors.
There has been a long period of a bull run fueled by cheap QE cash (and who expected the housing market to continue its continuing bull market), at best uncertainty of the effects of the trade war of the global economy, and increasing US interest rates.
Over the past year markets (e.g. DAX) been cooling compared to previous decade of significant bull run. I was certainly not expecting KiwSaver and other managed growth funds to be returning 10%+ as they have done so for the last number of years.
At best this can be described as a volatile time. A couple of interesting signals; it was reported yesterday that the NZ Super Fund is holding a greater percentage of funds in liquidity to counter what they see as a volatility in the market, and my KiiwSaver fund provider currently has a greater proportion of funds in cash and less in equities compared to investment targets.
While there is uncertainty as to what will happen, I look with keen interest.

Yep, be interesting to see how my much vaunted Milford Active Growth fund does; the answer won't be pleasant in the short term....the Q is, do you buy the dip???

Hi kiwichas
As I am retired I am using my KiwiSaver as a vehicle to invest in the share market. A month or two back I shifted to a more balances/conservative fund in anticipation of the current risk and likelihood of this exact event (which I posted here). As mentioned, it would seem that NZ Super Fund and KiwiSaver providers have anticipated this volatility as the volatity signs were there.
It is now a case of waiting and looking to see what happens. It may be a few days a or week long blip; or, it could be a little longer and more significant. The underlying reasons for the volatility aren't going away and it will depend on what level of risk the large investors/fund managers are prepared to take as they will determine the market trend.
The question is when will we reach the bottom of the dip and buy/expose one self to shares? Will there be a temporary dead-cat rebound? No one knows.
I am not suggesting that this blip is necessarily on par with the 1987 crash (a lot of over-valued poorly based shares then) but the market recovered to the same level within a year.
I will move back into a more aggressive KS fund with greater exposure to the share market when a better understanding of the extent of the blip is known. I am not anticipating that I will identify the bottom of the dip.

down 40k so far, doh!

Tui moment/inane
John Lynch, chief investment strategist for LPL Financial, wrote in a note to clients Thursday.

"Volatility is also not to be feared, but embraced, as varying data points will cause bouts of market anxiety. But remember that fundamentals are still strong."

Yeah right

Sharetrader the concern is the amount of cash that has flowed into passive index funds, and Superannuation growth funds around the world. This necessitated mandatory allocation to the individual components of indices, irrespective of valuation and fundamentals. Panic with Super being switched from growth to conservative of cash funds, will cause mandatory selling of shares by Super Fund managers. This could self reinforce an epic bear market, panic = switch to cash/ conservative fund=forced liquidations of shares as less funds in growth funds=lower sharemarket= more panic.

This could crash sharemarkets, but allocation of funds to conservative/ cash funds will drive bond prices up with subsequent falling interest rates

moneyphobe: "Is the NZX not worth mentioning?"

No, not on this site, there are plenty of other sites dedicated to sharemarkets

Duplicate

Yvil - thats right, i keep forgetting that its a NZ investment/economics site i.e. its a property site

Shanghai had about 800 companies ,or about 25 percent of the market close limit down . The days index could have been worse. Another very interesting day ahead

Do people think this is a short sharp correction that will then resolve itself or the start of a big painful episode?

I think this will just be a short sharp selloff

The real pressure will come next year when a lot of corporate debt comes due, those that are still running at a loss struggle to refinance at reasonable rates in a tightening market which will put pressure on stock prices. Sooner or later investers will want a return on their investments.

Tesla is one of those https://finance.yahoo.com/news/tesla-faces-huge-bills-143-110001544.html

Current index P/Es around 20-25 are not crazy in the context of current low low interest rates:
http://www.wsj.com/mdc/public/page/2_3021-peyield.html
so not really any great reason to sell off (nothing better to do with money) unless you anticipate a sharp drop before buying the dip.

I think even a grain of salt should not be wasted on the HSBC expat ranking. It places India and China at number 14 and 15 respectively for quality of life and health, much higher than the United Kingdom. Tell that to the millions of expats who would rather get exploited living in the West than live in their own country.

Dow just closed down over 500 points

It’s going to be interesting to see how NZX opens. Like others I’m really surprised to see the Dow drop two days in a row, I really expected it to bounce back today. #passiveinvestingforthewin.

Do young savers invest too much in 'popular' tech stocks?

https://www.telegraph.co.uk/investing/news/like-moths-flame-young-savers...

Picking and choosing particular stocks is a frankly stupid thing to do, unless it's just play money.

Warren Buffett
Benjamin Graham
& Charlie Munger
Disagree.

Great, when I have their financial acumen I'll give it a try.

In the mean time I have a day job and side projects, and my training does not lie in finance.

Indeed, if you want to do well at something you'll need to put some work in.

LOL says the guy with 9% returns investing in the stock market.

If you'd just put it an index fund following the S&P 500 you'd be up more than 25%. Maybe you should listen to Buffets advice.

Buffet is a fan of index funds, however: http://fortune.com/2017/12/30/warren-buffett-million-dollar-bet/

In 2007, Warren Buffett bet a million dollars that an index fund would outperform a collection of hedge funds over the course of 10 years. This week he won that bet, but the big winner in the wager is a charity called Girls Inc.

For non professional investors in the stock market, Warren Buffett recommends using low cost index funds. Here is the relevant excerpt from one of his annual letters.

Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.

I have good news for these non-professionals: The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.

If “investors” frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice andswitched properties.

Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.

The S&P500 is a diversified equity index for the US.

Some non US investors will extend this approach and apply this approach to their own country and buy passive equity index funds for their own country. (E.g NZ, Australia, UK, etc) which may not be as diversified.

For these investors, it is worthwhile understanding what the index constituents are, particularly those companies with the highest weighting(s) in the index. Some country equity indicies have heavy weightings on some large individual companies, or certain industries and thus the investment returns are highly dependent upon the underlying performance of these businesses.

If one investor had applied this approach in Iceland, it would have resulted in a significant loss of their financial security. Why? The local stock market index for Iceland was heavily weighted towards the shares of the three local banks. The shares of these banks subsequently became worthless.

The stock index is 75% below its highs.

https://tradingeconomics.com/iceland/stock-market

Kiwis should also buy the S&P500 in addition NZ/Aus funds to get diversification. Some local bias is preferable to ensure local buying power. The S&P500 is a cheap proxy for a global fund (if you want more diversity but more cost then buy the 7000- share total world fund). 48% of its companies' income comes from outside the US

Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.

Bingo. I know enough to know that I don't know enough to play pick 'n' mix on the stock market.

For non professional investors in the stock market, Warren Buffett recommends using low cost index funds.

Yes, agreed. Although in the case of his bet, he was backing the index over the trading of professionals, not non-professionals.

It was also a demonstration of the impact of high fees of hedge funds and how they are a drag on returns for investors relative to low cost passive funds. When the bet was entered into, the fee structure at the individual hedge fund level was typically 2&20.

While it is high risk, I wouldn't necessarily call it stupid. I myself prefer mutual funds, but that is more to do with my own financial situation and risk tolerance.

The Herald is calling yesterday’s NZX drop one of the worst in its history.

Is that factually correct or is the Herald jumping the shark again?

Delboy

The 5th worst single day drop apparently, but to be fair everything is more dramatic these days and stuff that used to take a month happens in a week now as information/fear spreads faster. There are too many leveraged 'twitchers' participating as these days and they get the jitters pretty quick on the turn.

Are they talking $ terms or %? Cos if it's dollars..well, yeah, a dollar doesn't buy as much as it used to...

I would take that hsbc study with a huge grain of salt. It relates to quality of life for expats, not residents. Very different things.

I'd bet this sort of no economy class configured air travel will become the norm for most international long haul going forward;

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=121...

If you can haul/charge fewer passengers but still get the same profitability out of a flight, why you would bother squeezing in a bunch of grumpy customers.

127,000litres avgas x 2.2 kgCO2/L=279,440 kg of CO2 emitted per trip

Interesting that they are running their jet engines on AvGas.
Did they decide Jet A1 was too cheap?

just meant generic aviation fuel, as used by the Green Party on their way to a climate change conference, or by the PM to meet up for a breast feed.

What do you think that there will be an outcry in Social Security rises in the US to retirees? George W decimated VA benefits with jut a little murmur.

Glad I cashed in my savings scheme, paid the rest of my mortgage off. Just started Kiwisaver and losing money but overall a great result for me this year financially.
There is interesting times ahead, rainy day coming and I have stocked up on popcorn.

I was fortunate enough to cash in my Kiwisaver for a house deposit 12 months ago, pretty much when it peaked in value. It's sat fairly still ever since but now it's starting to drop.

Please don't tell me you have it in a conservative or moderate growth fund when you've already chased it in to buy a house.

The S&P500 or NZX50 certainly didn't peak 12 months ago. They literally both peaked a few days ago. And will likely peak again in another few days.

It always has been and will continue to be in Focused Growth. It does look like it still returned a good penny over the past 12 months so i was wrong about my statement about hitting peak, but had I held off buying our house I would have had to borrow at least 10% more today @ 5% p.a even when factoring in a higher deposit.