sign up log in
Want to go ad-free? Find out how, here.

Stocks drop and retail struggles in US; Canada CPI rises; Italy financial stability waivers; Shanghai stocks tank; Hayne hearings become bar fight; UST 10yr 3.05%; oil plunges and gold holds; NZ$1 = 67.8 USc; TWI-5 = 72.3

Stocks drop and retail struggles in US; Canada CPI rises; Italy financial stability waivers; Shanghai stocks tank; Hayne hearings become bar fight; UST 10yr 3.05%; oil plunges and gold holds; NZ$1 = 67.8 USc; TWI-5 = 72.3

Here's our summary of key events overnight that affect New Zealand, with news the oil price is plunging.

But first, Wall Street is in limited holiday mode today, it being their Thanksgiving holiday weekend in the US. However, it is down -0.7% in early afternoon trade. All eyes are on retailers and signals of Black Friday trading and early indications are for deep in-store discounts to lure buyers away from online platforms, so sales may rise but profitability may be a big problem. Certainly Wall Street is worried about that. Plus the oil price plunge.

Not helping is the latest US PMI data, with both factory and services expansions slowing and at 3 month lows. EU PMIs are sinking faster, dragged down by Germany.

In Canada, consumer price inflation jumped unexpectedly in October, up +2.4%, and above the expected +2.2% rise. But because the jump was largely from petrol prices that were up +12%, and oil prices have fallen sharply since then, this result probably won't change the track the Bank of Canada was on for monetary policy.

Canadian retail sales rose +2.0% in real terms in September from a year ago, after removing the impact of price changes. (Online sales were up +17%.)

The Italian central bank is warning of rising risks for financial stability in the country in its latest financial stability report. It is pointing to fast rising yields on debt which will cost billions in interest payments. And it is not only banks they are worried about; they are pointing to special risks to their insurance sector.

A new stumbling block for a Brexit deal has emerged. The Spanish have said they will veto the deal unless it deals with their Gibraltar issues. The EU was expected to sign off on the interim deal this weekend, and then it was to be up to the London parliament. But will it get that far?

China is also facing some serious pushback in its Belt & Road strategy. Based on mushrooming debt for the China-linking projects in Pakistan, public reaction is turning negative even as Karachi is cosying up closer to China. But as they do in Pakistan, things have turned violent with attacks at the Chinese consulate. China is not happy.

Also not happy are Chinese investors. The Shanghai stock exchange fell -2.5% yesterday in yet another sharp fall. Since the start of 2018 this market is down -23%.

In Australia, the Hayne Royal Commission has descended into an all-out bar fight. Banks, insurers, regulators, brokers, aggrieved customers, the covering journalists, and even the Commission itself are all fighting each other in increasingly aggressive and partisan ways. It is an unseemly and unedifying way to sort out the public policy issues involved. One casualty is funding for their housing markets; the growing credit crunch is a direct result of the confusion about what the new rules will be and how the law will second-guess what is going on now. Lending is only happening now in the most conservative manner.

The UST 10yr yield is ending the week at under 3.05% and a net dip of -2 bps for the week. Their 2-10 curve has also slipped -3 bps to be at +23 bps. The Aussie Govt 10yr is at 2.64% (down -2 bps overnight and down -4 bps over the week), the China Govt 10yr is at 3.42% and up +2 bps overnight and up +5 bps for the week, while the NZ Govt 10 yr is at 2.70%, unchanged overnight and down -4 bps over the week. New Zealand swap rates fell this week down -5 to -7 bps except for the one year which was little changed.

The VIX has risen slightly to over 21 this week. And it is still above its average over the past year of 15. And the Fear & Greed index has gotten more extreme on the fear side in the past few days.

Gold is little changed at US$1,222/oz.

US oil prices are very weak again today and at new low levels at just on US$51/bbl. That is a -$US5.50/bbl weekly change. The Brent benchmark is now just over US$59/bbl and a -US$6.50 plunge. Oddly, the US rig count is still holding at its 200 week high despite these low prices. Industry insights suggest that US frackers will remain cash positive all the way down to US$40/bbl and will keep pumping until then. In fact, there is more North American domestic production than can actually be transported to markets right now. Saudi Arabia is mulling sharp production cutbacks.

The Kiwi dollar is ending the week lower at 67.8 USc, which is a whole -1c down from this time last week. We have now settled back to where we were at the beginning of the previous week. On the cross rates we are unchanged at 93.7 AUc, and marginally softer at 59.8 euro cents. That settles the TWI-5 at back to 72.3 and off its recent highs.

Bitcoin is now at US$4,240 which is a massive loss of -US$1,316 for the week and a crash of -24% in just seven days. The risks are all to the downside. So far, US$700 bln has been 'lost' in this rout. This rate is charted in the exchange rate set below.

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

Daily exchange rates

Select chart tabs

Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
Daily benchmark rate
Source: RBNZ
End of day UTC
Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

28 Comments

Chris Cook, on oil
"It was never a matter of if this would happen: merely when this structural change would occur. Market became accustomed to thinking sell-side market dominance is the natural market state. That is no longer the case "

Up
0

"In fact, the ECB is now virtually the only significant net buyer of Italian bonds left standing. This raises a key question, Nowotny said: With the ECB scheduled to exit the bond market in roughly six weeks time, “who will purchase the roughly €275 billion of government securities Italy is forecast to issue in 2019?”

https://wolfstreet.com/2018/11/22/qe-created-dangerous-financial-depend…

Up
0

...like with our housing market at the moment, it's a standoff.

Up
0

Italy should just default like Iceland did in 2008 , and then restructure its entire economy by canning the Euro as its currency .

There will be pain in the short term , but the long-run will leave them far better off

Up
0

Boatman - Good call history shows that defaulting and going broke rather than endless bailouts countries can get back on their feet much quicker as long as they restructure their economy properly.

Up
0

Shoreman, Boatman, I suggest you watch this series before drawing such insouciant conclusions. When in the thick of it, the only road forward is paved with pain; https://www.youtube.com/watch?v=A_Ii15DRKDA

Bail out culprits using taxpayers funds, you risk serious social disorder. Let them fail, you risk global financial seizure as interconnections and negative consequences are unknown until it's too late.

Up
0

Banks make the vast majority of their profits from lending. If the Haynes Commission is causing the Aus banks to slow down lending in Australia until the new rules are established what will they do? One option would be to push more money into their NZ subsidiaries and into our housing market. At least that way they keep generating income.

Up
0

Interesting thought

Up
0

Too bad if you're wanting a mortgage in Aus.

Up
0

Sounds about right to me, but it's all about timing:

"It is becoming difficult to find places to hide in this market... bear markets don’t look like bear markets early on. There is still lots of hope and the collective intelligence is believing in ever higher prices. Markets have come back a long way. Oil is down over 30% in dollars. But my money remains on the likelihood that this is the early stages of a profound bear market in assets..... We are at the start of a 25-year cycle so get used to it.
(Crispin Odey, who was 'wrong' because he was 2 years too early. Get your timing wrong, and you are just plain wrong.)

Up
0

It's hard to know what to believe going forward. We're debt free which we think is a good start, but we also know not everyone can be. If housing falls (and it has begun in Auckland) then it will come up again down the line. America closed down over 4 million mortgages from 2008-12 but look at them since then. Boom.
Sometimes we need the pain in order to get to the gain.
NZ has become so soft over the last 30 years it's pathetic to watch in places. Come on, let's toughen up.

Up
0

"If housing falls (and it has begun in Auckland) then it will come up again"
It depends on where one is long from.
The Japanese property and share markets; for decades the No 2 markets in the World, fell in 1988. Today neither of those two asset markets have 'come up again' to where they were ( the Nikkei was 38,000 then; today its only 'recovered' to 21,000 - after 30 years). Anyone who buys near the top in any asset market ( say, the Auckland property market) might never see it 'come up again' to their break-even level - given that forever is only as long as any individuals' lifetime.

Up
0

bw, good point. Post the 87 crash, BOJ steadily reduced interest rates to near zero, where they've remained for the last 20 years. There's little cheap money could achieve after it all imploded. Once deflation starts, its hard to kill. If the population think it will be cheaper tomorrow, why borrow and spend? That's why I personally consider the next global crisis as more of an "L" shape event. Next time, no quick recovery should be assumed when global interest rates are already on or near rock bottom at present valuation heights.

Spruikers, you are welcome to argue this; https://tradingeconomics.com/japan/interest-rate

Up
0

The real damage from the Japanese bubble was really to SMEs and small businesses. Contrary to what many people think, the Japanese were not speculating on house prices or equities en masse. Yes, there were speculators, but they were not the majority. Furthermore, the Japanese banking system was not geared towards mortgage lending for investment priposes for all and sundry. To own a rental property is not something that most Japanese h'holds would ever consider.

Japan has learnt its lesson. The Anglosphere is addicted to bubble economics. It's all we know and seems to be the onlty carrot that the "planned economy" can come up with.

Up
0

Discussion on Aussie Bail in legislation. CEC Australia on DFA. New Zealand legislation get's particular attention from 14.22

https://www.youtube.com/watch?v=FZrk-42fJPs&t=897s

Up
0

I can't believe that Farmers has fired Santa Claus for not being diverse enough. I wont shop there again.

Up
0

The discussion about an NZ Hydrogen industry is getting really annoying.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12…

First of all this Allen cycle sounds useful. If it’s the same thing I read about somewhere else it’s a very carbon and energy efficient way of burning gas for power - we should therefore be investing in this for the NZ power grid to drive down the price and manage the scarcity issues that drove up wholesale rates this year. It will also future proof us for electric cars where we will need more generation capacity.

However, this hydrogen business sounds like a complete joke. What do we need hydrogen for? Yes hydrogen is theoretically great but practically it’s useless due to the storage and transport challenges. The best thing that can be said for it is you can store it and use it for generation later but you can do that with gas too.

I realise the politics of fossil fuels are difficult for this coalition but the fact is gas is pretty clean compared to goal. If we have to supplement wind, solar, geothermal and hydro with little non-renewable energy then gas, and apparently this Allen cycle, sounds like the way to do it. So let’s skip the hydrogen show - seems a dumb way to disguise that it’s fossil fuels we are taking about - and just go for gas.

Kickstarting a fifth (sixth?) generation company based on this tech would be a great way of building up the competition. The big four might be more aggressive generation wise if they knew there was another player waiting to pick up any demand they left on the table. I suspect at the moment it’s a case of - if I don’t generate the price goes up - which doesn’t exactly encourage competition. Better to just sit on what you’ve got and benefit from price inflation from scarcity.

Up
0

China is also facing some serious pushback in its Belt & Road strategy. Based on mushrooming debt for the China-linking projects in Pakistan, public reaction is turning negative even as Karachi is cosying up closer to China. But as they do in Pakistan, things have turned violent with attacks at the Chinese consulate. China is not happy.

One wonders whether we will see a growing backlash against China's One Straitjacket debt-trap diplomacy program.

Up
0

Bitcoin US$3.884. Down another 10% odd.
All assets are likely to be hit with a correction like this - Property, Oil, Shares, Art, even Precious Metals - all of them. ( And, yes, the market is still trading)
https://markets.telegraph.co.uk/#!/Currency/Y31

Up
0

Seem to be drawing a long bow here. Certain property assets like cash positive rentals should be fine, sitting quietly pumping out modest amounts of money.

Up
0

Yes, and No!
The pace I rented out in London had a gross yield of 12%, and the 'value' of surrounding identical properties ( a new development of 32 terrace homes)...still fell. Mortgage rates at the time were about 7%. So being 'positive' didn't protect the capital value. Yes, the capital value rose over time but there are no guarantees that it will either happen similarly again, or..(my current view!) at all.

Up
0

Sounds like there will be opportunities to make money though. Hard to go wrong if you intend to hold for ten years or more, all the while making money.

Up
0

Just like the Bitcoin plunge! Any asset is 'easy' to hold in hindsight ( and Ten Years mean nothing. It's an arbitrary timespan). But holding it when it's in freefall ( as property was in London at the time, and is likely to be here and London again soon!) is the hard part. No one knows where the bottom is. And assuming 'it will always come back' is what can kill even the most optimistic view.
Do holders of Bitcoin sell today at $3800? Or hold for it to bounce back to $19,000? Or do they sell today and hope to 'get back in' at $1,000? It's no different with property. At some stage it looks like "$1,000" is probable and even the most die-hard holder sells expecting to get back in lower down. Why wouldn't they?! It makes sense at that time. But assuming it will eventually get back above 'where we are today' relies on two things:
(1) That it does ( the Nikkei is still 45% below where it was in 1988. That's a long 'hold!') and
(2) You, personally, can survive the time required both financially and physically ( many people have, and will, die before the Nikkei recovers etc and many have gone broke trying to pick the bottom - Nick Leeson being one!). I suspect that property is going to do a "Victorian Times' where it took 70 odd years to get back to where it was after a shakeout. But we'll see.....

Up
0

Just like the Bitcoin plunge!

Bitcoin generates rental income?

I think we might me talking at cross purposes here. One may never need to sell the positive yield property. It would practically just sit there pumping out money. I'm imagining this asset apocalypse of yours and thinking that as there are no better assets why not just perpetually cream off the profit from the rental income? Smallish money but if you had a few it would add up.

Up
0

" One may never need to sell the positive yield property" ' The operative word there is 'may'. There is any number of reason to sell a property, positive or negative geared. Divorce, bankruptcy and loss of job being the 3 obvious ones. And as for "Bitcoin!" It's an analogy in my writing for any asset. It just happens to be in the news recently. But here's the thing. No matter what asset people hold, they have an inherent belief in its store of value. And that...can prove financially fatal.
If you or anyone wants to buy and hold property. Fair enough. I just happen to think it's 'had its day', as have most assets valued in undervalued currency terms. I could be wrong. But if I'm not, having a positively geared asset, no matter what it is, and having one of the 3 things I mentioned earlier happen, especially if they have been used as collateral for a loan, will be of no comfort if their sale price does a 'Bitcoin' and plunges.....

Up
0

Bitcoin! is a very poor analogy. Don't you think that yielding assets will be quite valuable in your rather extreme scenario? Why would you sell an income earning asset if you lost your job? Why would the bank be worried if the asset was paying the mortgage?

Look, what you envisage is just not going to happen. It' so unlikely it's not worth considering. It would be like the end of civilization. It's almost inconceivable.

What underpins the true value of an asset is its yield. In this respect property is way more valuable than gold.

Up
0

Bitcoin in freefall - US$3,835, down just 12% today ( our Sunday)
US$3,810....

Up
0