Equities drop on risk aversion, lower earnings outlooks; second-tier data underwhelms; secret Aussie tax enforcement deals; UST 10yr at 3.15%; oil down, gold up; NZ$1 = 65.6 USc; TWI-5 = 69.9

Here's our summary of key events overnight that affect New Zealand, with news that markets are extending their losing streak.

And in a change of some irony, we are seeing large volatility in equity markets just as volatility has disappeared from bitcoin!

Shanghai was down -2.3% yesterday, erasing some of the +8.5% rise we have had over the past three days. The level it ended at yesterday is still a -27% fall since the start of the year. These are enormous value changes.

Wall Street was down as much as -1.5% in morning trade today but those losses are being pared back and it is now down just -0.5%. Today's level of the S&P500 is -3.0% lower in a week, but is a small gain of +1.3% since the start of the year.

Today's sentiment shift is driven by weak data everywhere, and a consequent risk-off tone. Sagging earnings outlooks among some large companies also weight on markets. Benchmark bond yields are retreating and rate curves are narrowing.

Updated data from Mexico shows a slowing in the growth of industrial output there. It was up less than +1.7% year-on-year in August and well below expectations (+1.9%), and much slower than the +3.3% growth recorded in July.

Similarly, data out in the Richmond Fed district also records a slowing. Their data is for October and the expansion recorded came in well below expectations, itself a discount to the growth recorded in September. It does report growing inflation pressure however.

In Canada, their central bank is widely expected to raise its benchmark overnight interest rate by a quarter of a percentage point tonight in response to solid economic growth and the new NAFTA deal.That will take their benchmark rate up to 1.75% and the same as ours. But it will still be below the US Fed rate of 2.25%, itself expected to rise at least once more this year.

Perhaps one small bright spot is that Japanese machine tool orders grew at a faster positive pace in September than earlier indicated, but this is just a small blip in an overall growth rate that has been declining for most of 2018.

Also somewhat underwhelming is EU consumer sentiment. It has been negative for so long, it seems normal. The September data has come in a little less negative and still well above its long run average. But there is no escaping the fact there are more EU consumer pessimists than optimists.

And staying in the EU, Brussels has delivered a rare formal rebuke of Italy's budget plan, requiring it to make changes to stay within EU deficit rules.

The latest update for the share on trade transactions being done in the Chinese yuan shows a further retreat, now down to under 1.9% in September. That is a tiny share indeed and down from a tine 2.1% in August.

In an odd move in the time of the Hayne Commission and the drive for corporate and regulator transparency, the Australian Tax Office is building a set of secret agreements with lawyers and accountants to stop them promoting tax 'exploitation' schemes, arrangements that can range from illegal evasion, to tax reorganisation using legal minimisation structures. These secret schemes allow the organisers to avoid public scrutiny.

The UST 10yr yield will start today at 3.15% and down -4 bps from this time yesterday, with their 2-10 curve now under +28 bps. The other yields we follow have moved differently; the Aussie Govt 10yr is at 2.68% and down -3 bps, the China Govt 10yr is at 3.60% and up +1 bp, while the NZ Govt 10 yr is at 2.68% and down -1 bp.

Gold is at US$1,231/oz and up +US$9 overnight.

Oil prices have dropped dramatically today on indications the Saudi's are raising output. US oil prices are down more than -US$3/bbl to just over US$66/bbl. The Brent benchmark has fallen even more and is now just over US$76/bbl.

The Kiwi dollar will start today little changed at 65.6 USc. On the cross rates we are at 92.6 AUc, and at 57.1 euro cents. That leaves the TWI-5 at 69.9.

Bitcoin is now at US$6,431, little-changed from yesterday. 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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34 Comments

Something is going on with all this migration, I suspect it's being organised and that it's going to cause a lot of pain for a lot of people trying to escape crappy countries in Central America and Africa, often countries abused by corporations for the benefit of a few.

and almost all of those companies a owned from abroad.

Nic wrote a good summary from a link I posted from Wolf street.

Nic Johnson | Tue, 23/10/2018 - 19:20
up3
Andrewj.. Thanks again..
A couple of thoughts before you listen though.. The combined valuation of the FAANG stocks, (Facebook, Apple, Amazon, Netflix and Google (alphabet) have a valuation similar in size to the GDP of Germany or Japan.... Consider these 2 realities, 1. with the exception of Apple, the valuations to earnings are enormous. (200 times earning in the case of Amazon) 2. How many employees do they support, pay who can use their employment to cover a mortgage? - info below.

Facebook employ 25,105 people
Amazon employ 556,000 people (that has doubled in the last 18 months as more drivers clog up the M1 and M25 in the UK).
Apple 123,000 people
Netflix employ 5,500 people
Google (alphabet) employ 25,105 people...... Cumulatively 734,000 good souls worldwide who we are relying on to save the financial system!.
Population of Germany. 82.52 million. Population of Japan 126.8 million. Do the valuations of these firms make any sense to anyone here on price to earnings or return by value to jobs created?

Wolf streets latest

https://wolfstreet.com/2018/10/22/us-bank-stocks-decline-euro-bank-stock...

up
10

US investors haven't worried about P/E ratios for a long time. In fact the FAANG stocks remind me a lot of the sentiment in 1999 when all .com stock prices went crazy and had no connection to earnings.

Snapchat may be the template? Debuting at about $27, 18 months ago, and $7 today. Somehow the 133 years worth of forward earning built into the IPO didn't stand up for long!

netflix is a fascinating company to watch, or maybe its investors for what I think is shear stupidity. Its a bargin basement service but priced like its another Apple, bound to end well.

The Bank of Canada held its benchmark overnight rate steady at its last meeting in early September. Like the Federal Reserve, Canada’s central bank has been “tightening.” The policy lever had been lifted four times starting in July 2017. It is expected that when monetary officials meet in Ottawa tomorrow they will vote for a fifth.
https://www.alhambrapartners.com/2018/10/23/canada-trade-plain-and-simple/

The world needs dollars for globalization and trade, and the eurodollar system of closely connected banks (balance sheet capacity) supplies them.

But what happens when it doesn’t?
https://www.alhambrapartners.com/2018/10/17/the-aid-of-tic-in-sorting-so...

Oil drops by 3-4 percent. on World Markets...expect a rise in fuel costs to counter their loss.
https://finviz.com/futures.ashx

If you look at the year or 5 year, as opposed to what happened this week you can see there is a long term uptrend and this drop is within the noise band.

https://www.oil-price.net/

(So $100 oil by 2020 doesnt seem that impossible).

The saw tooth really becomes apparent in the 1 year graph.

The only Q is combined with the near panic in the markets right now is if this will reverse as we see a second severe recession in a decade kick off.

I'm sure I remember Don from Solid Energy saying they were predicting $200 a barrel shortly. That was about 10 years ago. Then again, he was trying to sell coal at the time.

Indeed some were predicting $300 even $500US a barrel however they didnt consider how the oil price impacts an economy. The data indicates that every time energy gets to 6% of US GDP the US goes into recession. Similar our global economy which was arguably stronger in 2008 collapsed at $148?US a barrel in July of that year.

So the Q is how high can the price get before the global economy falls over again? $120US? doubt it, $100? well I was thinking so but look how bad things are looking and we have not yet reached $80US.

Then consider that new fields cost more than $80US a barrel to bring on line.

The Q is then how long will shale oil take to play out before we really end up in the poo. Hoping to have got me a EV before that happens.Of course taht assumes I'll be allowed to keep it and not have the Govn confiscate it.

Solid energy, gone by lunch time and good riddance IMHO.

More like not anticipating fracking. I accept that oil puts a break on the economy at a certain price but at this point fracking and efficiency are big restraints on price as well. When oil was at $100+ SUV sales tanked and everyone was buying efficient cars. When it hit $50 everyone went back to big trucks. Now it’s heading up people are thinking efficiency again and that’s at $80.

Not sure on your point(s) here.

At $100 yes some moved away from SUVs but that is a minor effect compared to what it does to the economy. Big thing about switching to an EV is the cost of purchase after that the savings are huge eg in NZ about $1000 saved per 5000km but if you have lost your job due to the recession you cant afford an EV.

Yes sure people then moved back to SUVs pretty obvious that many consider EV's an awful choice as they are conditioned to big trucks running cheap gas for some generations. Actually the stranded asset costs are simply huge. By this I mean a new car bought today that will last 20~25years is quite likely to see the end of oil sooner than the end of it.

US fracking is making the US close to "energy independent" for a while, maybe 5~10 years but they have been drilling the sweet spots so the Q is how long it will last even if you ignore the science on CC which isnt a wise thing to do IMHO.

My point is I agree there are resistance points such that oil stuggles over $100 and probably can’t go over $150 for any significant period of time (barring geopolitics).

But my other point is there are three reasons for resistance:
• the economy as was pointed out
• the impact of fracking and other ways of expanding supply
• improvements in efficiency as people cut usage, particularly through more efficient cars.

Efficiency isn’t about EVs, although it might be this time. It is about going from an SUV to a compact. It’s about carpooling and catching the bus. It’s about moving closer. It’s about using LNG if you are a taxi driver. You see a lot of responses when gas gets expensive.

The NIWA soil moisture chart isn't looking too flash. I remember reading an article that I can't find online about a Taranaki farmer and how he'd built up his own forecasting of droughts from years of data and observations. He said that droughts were predicted with low soil moisture months ahead of when drought is recognised. At some point the deficit can never be caught up no matter the rain events that might come through summer.

Two articles, both by Angelo M. Codevilla, both in a distinctly elegiac tone regarding the fate of the USA. His core theory is that a revolutionary threshhold has been crossed, and that what happens next is uncertain in the extreme. The links are in date order, and need to be read in sequence in order to make much sense.

From 'After the Republic':

We have stepped over the threshold of a revolution. It is difficult to imagine how we might step back, and futile to speculate where it will end. Our ruling class’s malfeasance, combined with insult, brought it about. Donald Trump did not cause it and is by no means its ultimate manifestation. Regardless of who wins in 2016, this revolution’s sentiments will grow in volume and intensity, and are sure to empower politicians likely to make Americans nostalgic for Donald Trump’s moderation.

From 'Our Revolution's Logic:

The Democratic Party and the millions it represents having refused to accept 2016’s results; having used their positions of power in government and society to prevent the winners from exercising the powers earned by election; declaring in vehement words and violent deeds the illegitimacy, morbidity, even criminality, of persons and ideas contrary to themselves; bet that this “resistance” would so energize their constituencies, and so depress their opponents’, that subsequent elections would prove 2016 to have been an anomaly and further confirm their primacy in America. The 2018 Congressional elections are that strategy’s first major test. Regardless of these elections’ outcome, however, this “resistance” has strengthened and accelerated the existing revolutionary spiral. We begin with a primer on such spirals, on the logic of mutual hate that drives them, and on their consequences; move to a general description of our evolution’s driving logic, describe the 2016 elections as the revolutionary spiral’s first turn and the “resistance” thereto as the second. Then we examine how the “resistance” affects the other side, and how this logic might drive our revolution’s subsequent turns.

Deleting Post - was an old article

Heh...what? The Republicans have written a memo saying that all coverage of Donald Trump's background dealings etc. is a politically-motivated hit job?

Well, that's proven it then! Nothing to see here.

That's funny......its like fox news they live in lala land.

True, however CNN was once reputable

I should have got this up earlier today. Tesla shares are on the move after a Tesla short-seller went long.

“People who are making their current car choices are moving away from other brands. – It is not just pent-up demand from people on the reservation list. If it were pent-up demand, those car classes wouldn’t be exhibiting such sharp declines year over year. TSLA is not just pulling customers from BMW and Mercedes but also from Toyota and Honda. Like a magic trick, while everyone is focused on Elon smoking weed, he is quietly smoking the whole automotive industry.”

https://www.teslarati.com/tesla-tsla-short-seller-long-q3-earnings-call-...

Tesla have moved up the Q3 results to tomorrow so we’ll find out if they have made that magic profit.

Also, was interesting to see that LG is reportedly jacking up their battery prices for Audi who are looking to get to market. Will be interesting to see how different battery acquisition strategies pay off for Tesla versus competitors. My pick is building the Gigafactory and developing their own chemistry is going to pay big dividends in terms of competitiveness.

Telsa haven't developed their own chemistry. The gigafactory assembles panasonic battery cells.

From what I’ve read Tesla comes up with the recipe and Panasonic makes them. Also, Tesla has been somewhat unique in not using pouches.

https://www.google.co.nz/amp/s/electrek.co/2018/05/03/tesla-model-3-batt...

“Cells used in Model 3 are the highest energy density cells used in any electric vehicle. We have achieved this by significantly reducing cobalt content per battery pack while increasing nickel content and still maintaining superior thermal stability. The cobalt content of our Nickel-Cobalt-Aluminum cathode chemistry is already lower than next-generation cathodes that will be made by other cell producers with a Nickel-Manganese-Cobalt ratio of 8:1:1. As a result, even with its battery, the gross weight of Model 3 is on par with its gasoline-powered counterparts.”

I think its more of a partnership, but it is interesting with Panasonic being one of the biggest battery manufacturers in the world (biggest?) that they are so quiet about the deal.

Interesting. A problem the established dealers have is all that plant and parts network on the bs. A huge asset write off if they follow the tesla model. To write off would destroy there asset backing...so what do they do?

Watched a vid last night of a young guy with an older tesla - out of warranty period. A days drive+ from a service depot - so he trained himself. Reckoned it was like working with lego - easiest car he had ever worked on. Unplug the broken bit, buy second hand part online and click back in.

But if this latest outbreak of eurodollar trouble now takes out India, who around the world would that leave for anyone anywhere to pin their hopes on?

The US and Europe are out; China, too. If India suffers the tidal wave of deflation as one of the last untouched inland economic outposts, then the worldwide economic “L” will truly be global. It would finally be synchronized, but in every way abhorrent to the original idea.

This is why, I believe, India matters in 2018 whereas it might’ve skirted along under the surface three years ago. People rightly focused on China in 2015 since the Indian economy remained largely stable. If India gets the worst of the eurodollar, too, then there is nothing left but risk.
https://www.alhambrapartners.com/2018/10/23/the-last-holdout/

Not much mention anywhere, but Pakistan are in a right pickle at the moment. Borrowed big from China for Belt and Road and now facing a debt crisis. Ah the Chinese and their web of influence over other Nation states!

https://www.thenews.com.pk/latest/384193-pm-imran-says-pakistan-desparat...

Indeed.... desperation, maybe some corruption. Lost of nasty possibilities on the near horizon for a trigger event to send us into a Second Great Depression.

I am still betting on Trump mind.

..and interesting take on Trump...did get me wondering?

Dr. Dave Janda -

"President Trump has been pointing the finger at the Fed. He’s been pointing the finger at the Fed, and that is exactly where he should be pointing. The globalist syndicate’s tentacle is the central banking system, and, in particular, in the United States, the Federal Reserve. The Federal Reserve is one of the entities that is directly responsible for this financial mess our country is currently in"

https://usawatchdog.com/trump-blaming-fed-for-next-market-crash-dave-janda/