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Wall Street goes risk-off; Japan machine tool orders drop; China C/A may be in deficit; yuan management gettting tricky; US deficit issues grow; UST 10yr at 3.19%; oil up and gold down; NZ$1 = 67.3 USc; TWI-5 = 72.1

Wall Street goes risk-off; Japan machine tool orders drop; China C/A may be in deficit; yuan management gettting tricky; US deficit issues grow; UST 10yr at 3.19%; oil up and gold down; NZ$1 = 67.3 USc; TWI-5 = 72.1

Here's our summary of key events overnight that affect New Zealand, with news that stresses are building in China, and therefore in countries that trade with them.

Firstly, we should note that it is a Federal holiday in the US for Veterans Day, but Wall Street is open and down -1.2% in limited trading, but in a risk-off mood.

Japanese machine tool orders fell -1.1% year-on-year in October after rising +2.9% in September. This is the first decline since November 2016 and is because orders from China have been weak.

And these trends are worrying officials in Tokyo. Prime Minister Abe is calling for a new public works spending program to stimulate their economy as concerns heighten there about global risks.

Shanghai equities market was up +1.2% yesterday and the rises were across the board. In Shenzhen, their market rose +2.4%.

This is despite growing evidence that China may in fact have a current account deficit in 2018, the first in 25 years. A large deficit in Q1 2018 has been offset somewhat in both Q2 and now with data just published for Q3. But that still leaves a year-to-date deficit of about -US$12 bln and it is not clear it will all be overcome in Q4. This is an event that will have significant implications for China and especially its currency. It is being driven by their internal reform process to try and shift away from investment and export led growth, to consumption growth. And the demands to keep spending to keep the trade war impacts from becoming social destabilisers is a new reality for them. The implications for the rest of the world are equally important. China isn't about to become a debtor nation any time soon, but the ascent of current account deficits bring that closer.

And that may bring temporary currency support for the Chinese yuan. Such a move is being feared in Australia. The last time the Chinese let their currency 'relax' they lost almost US$1 tln in currency reserves, so this is a very high risk area if they get setting wrong.

In the US, they are staring a new reality in the face - that their massive debt will need massive interest servicing, especially if benchmark bond rates keep on rising as their gross debt balloons.

The UST 10yr yield are still at 3.19%. Their 2-10 curve is now just below +26 bps. The Aussie Govt 10yr is at 2.74%, down -1 bp, the China Govt 10yr is at 3.50% and unchanged, while the NZ Govt 10 yr is at 2.83% and that was up +1 bps overnight.

Gold is down yet again and now to US$1,203/oz. That is a -US$6 drop overnight.

US oil prices are marginally firmer today and now just under US$61/bbl. The Brent benchmark is now over US$71/bbl. Interestingly, there is some speculation that Saudi Arabia might actually pull out of OPEC. If it did, that would upend oil markets. That said, it doesn't actually seem likely any time soon. And Saudi Arabia is talking up the prospect of new cuts to production there.

The Kiwi dollar will start today at 67.3 USc and little changed, and keeping pace with a rising greenback.. On the cross rates we are a little firmer at 93.5 AUc, and stronger at 59.8 euro cents. That puts the TWI-5 up to 72.1.

Bitcoin is now at US$6,365 and up +0.5% 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 ».

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26 Comments

Be Afraid of Economic ‘Bigness.’ Be Very Afraid.

https://www.nytimes.com/2018/11/10/opinion/sunday/fascism-economy-monop…

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Thanks Andrew, another thoughtful article. Concentration of economic power leads to frustration and social instability and the rise of a totalitarian regime. Very interesting.

Is this why the Peters/Ardern government were elected? I'm not suggesting they are a totalitarian regime (despite their authoritarian tendencies in some areas) but the reason they were elected seems rather similar. Where are the unhealthy concentrations of economic power in New Zealand? Are we looking in the right places or being played?

I'm not convinced that any of our political class are on top of this, but the lessons of the consequences of excessive government debt have not forgotten yet, which is a blessing.

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At the same time big is a curse, the centralisation of resources permits big leaps forward in technology. The galvanisation of war is the wrong way to achieve it, but a lot comes out the other end of it. China has a problem because it has already used the card the USA, and other western economies, have left. Centralised control rather than private control of consumption. But I don't think the West could rally the same forces that China has over the last ten years.

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Interesting. The link between size and totalitarianism is interesting - worthy of more debate. However it triggered this thought: why did USA and Germany surge economically compared to my country of origin the UK - was it large numbers of competitive businesses? Whereas the UK went for British Leyland and British Rail and British Steel the foriegn competitors were more agile and better focused. So looking for the effective monopolies in NZ - well Air New Zealand is a minnow internationally and has competitors internally, Fonterra: would it have made better decisions if it had been say two companies say Dairy North and Dairy South? It is worth comparing Auckland council before and after amalgamation - benefits yes but certainly it is more bloated, less democratic and puffed full of PR.

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Thanks to Rodney Hide's ideological drive for the super city and its super economies of scale. Reading some interesting commentary on Croaking Cassandra a while back, it highlighted that councils often do better when they are in competition with each other for rate payers and the rates that these people contribute. (This requires that they have the freedom to fund themselves appropriately through rates.)

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I would agree with croaking Cassandra’s analysis of the super city. In the same vein I wouldn’t mind seeing the provinces having more power to also compete. Whether it’s big business or big government the issue seems to stem from size and accordingly power due to size. More decentralisation needed.

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Lapun - Before Fonterra there were two big players, they were called NZ Dairy Group and Kiwi Dairy Co and they competed hard.Their relative performance was compared each year and their respective management and governance teams remuneration reflected their success or otherwise. We are now going through the classic business cycle as small start ups bite chunks out of Fonterra until it is no longer dominant or even possibly in existence.

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Biggest mistake was making an Accountant the first CEO, Craig Norgate. They should have put a more tecnically savvy person in the position and concentrated on value added products from an early stage. They are still in commodity mode with value added products being a distraction.

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To call Craig Norgate an accountant is to call a decent whisky a beverage. His strategic thinking was years ahead of his peers. Dairy politics got him not poor performance.

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Re the UK, when did we stop calling it GB? I think it was the war debts what did it. Germany and Japan had their external and internal debts wiped clean whilst under US administration. Hence their apparently magical recovery was enabled as their borrowing capacity was huge and they invested in high productivity. Britain's trade network was destroyed quite intentionally by the US as it assumed world power status and most importantly, world banker status. So Britain stagnated and fell apart, joining the EU as an inferior member was the final act of capitulation at the end of Empire. It amazes me that May and Macron visit Commonwealth war graves without realising that Britain joining the EU was a betrayal of the Commonwealth. Appalling really.

Britain is still a more powerful country that it appears, not that they realise it. It is number 4 or 5 economically, militarily and financially. Hence the weak attempt at independence. Personally I didn't think they had it in them to vote for Brexit in the first place and it seems they still see themselves as a weak and pathetic supplicant, unable to fend for themselves. It is a sad place North of Watford Gap.

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UK formed when GB added N.Ireland. GB is the Geographical term for the largest of the British Isles.

Now to explain 'The English Channel' to the French 'La Manche'.

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Yes, great link, thanks.

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Terrifically compelling arguments.

EDIT: Fact is, China is doing the exact opposite of antitrust, right now.

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GE, now at $7

"2016: GE spent $21.4B on buybacks at an average price of $30.30

2017: GE spent $2.6B on buybacks at an average price of $19.65

That’s more than $17B gone from buybacks over the last 2 years

Meanwhile, either Trump will bail out the pension fund when $GE goes tits-up or the pension fund beneficiaries will be the bagholders."

https://wolfstreet.com/2018/11/09/ge-plunges-what-retail-investors-did-…

Mexican govt talks bank fees

https://wolfstreet.com/2018/11/09/bank-shares-in-mexico-and-beyond-plun…

Anatomy of the Housing Downturn in Vancouver, Canada
https://wolfstreet.com/2018/11/11/housing-downturn-in-vancouver-bc-cana…

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Another one in GE, eh. Handouts shareholders at the cost of the folk who built the company up to what it was.

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Damn how the mighty have fallen. I remember GE being held up as a model for all corporates to aspire to not that long ago.

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The big mistake was not the war itself but transforming the Armistice into a humiliating and punishing document of German surrender thus laying the foundations for an even bigger war to follow. Unbelievably stupid and I will never celebrate it. I refuse to buy poppies.

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Armistice Day is not about the "war" or the causes of the war - it's about those who didn't come back.

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Yeah nothing to do with the war, just modern day celebration of human sacrifice. Not for me sorry, no not sorry actually, left that behind in the Bronze Age.

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When I read about my relative's last moments on Chunuk Bair bleeding out through shrapnel wounds I don't think about celebration, I think about remembrance for a life, taken far too early and a hope that my sons don't meet the same fate.

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Well, I think you should think about it more deeply. Politicians raise the dead every year to push their political agendas even though it is likely the dead would have been vehemently opposed to them. Everything is political.
My grandfather survived combat in WW1 and Dunkirk.

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This has been in the news recently ""Emmanuel Macron has issued a hard-hitting warning about the dangers of nationalism and of countries that put their interests before the collective good – in front of Donald Trump and Vladimir Putin."" But surely WW1 was empires fighting - the British, Austrian, Russian, French, Ottoman and German empires battled and the USA Nation claimed the spoils. Before WW1 there was globalism - plenty of trade between UK and Germany and no passport controls.
WW1 was globalism and it was replaced by Nationalism. Politicians interpret history to fit their preconceptions.

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