Equity markets drop; bond yields down too; US jobs markets soften; US orders and trade fall; Huawei arrest sours relations; CO2 emissions grow; air travel up; AU regulators score own-goal; UST 10yr at 2.86%; oil down, gold up; NZ$1 = 68.7 USc; TWI-5 = 73.

Here's our summary of key events overnight that affect New Zealand, with news market signals are all turning negative.

First on Wall Street, markets are very sharply lower. The S&P equity index was down -2.8% in morning trade and in early afternoon it is still -1.7% lower. And that is important because that means the market is now lower that when it started in 2018. UST yields are also a lot lower reflecting the risk-off retreat. Wall Street has followed Shanghai down which lost -1.7% yesterday. Hong Kong fell an eye-popping -2.5% and Tokyo fell -1.9%. In between, European markets lost more than -3% overnight. We are in a major correction now.

Not helping is data from the real economy. We get the US non-farm payroll data this weekend, and the precursor ADP survey has come in weak. In October, they reported a jobs gain of +225,000 and markets were picking November to be lower at +195,000. However it has come in at only +179,000, and that is well below the average gain for the past year of +206,000 and also well below the November 2017 level.

Initial claims for unemployment which jumped last week have stayed high this week, compounding the feeling the giant US economy has gone off the corporate-tax-cut-induced boil.

And new orders for US-made goods recorded their biggest drop in more than a year in October and business spending on equipment appeared to be softening, suggesting a slowdown in activity in their manufacturing sector. And the American trade deficit in goods got even larger in October, making their deficit their largest since the GFC.

Any trade improvement agreements China thought it has with the US took a blow yesterday with the arrest of the Huawei CFO in Canada for extradition to the US. Huawei is a company closely tied to Beijing and controlled by the PLA and the move is sure to damage trade talks. It looks like hostage-taking. The trigger issue is Iran sanctions violations.

There is other news, and some of that is not good ether: Carbon dioxide emissions from fossil fuel burning, the primary cause of climate change, will grow for a second consecutive year in 2018, according to a new report. China’s emissions will increase by +4.7%. Total global emissions are set to increase by +2.7%, after a +1.6% rise in 2017.

The growth in passenger air travel, which sagged in September, picked back up in October. But that uptick is more modest that the earlier rates of growth. Asia/Pacific international passenger travel growth is up +5.8% year-on-year

In Australia, there are growing concerns about how their prescriptive regulation of banks is working out for them. Regulator pressures (ACCC, APRA, ASIC, RBA, Hayne) are driving banks to all behave and respond in the same way - essentially as regulated utilities. But that will have a huge economic impact, essentially lessening competition. The regulators might complain about it (and the RBA did overnight, calling out banks for pack behaviour), but that is the natural consequence of their own micro-managing, prescriptive regulation actions. New Zealand's principles-based regulation approach is far better for retaining competitive instincts in these central financial markets.

The UST 10yr yield is sharply lower than this time yesterday at 2.86% and compounding its recent fall. Their 2-10 curve has stabilised however at +12 bps. The Aussie Govt 10yr is at 2.45% (down -6 bps), the China Govt 10yr is at 3.33% and down -2 bps, while the NZ Govt 10 yr is at 2.48% and also down another -3 bps.

Gold is up +US$4 today at US$1,241/oz.

US oil prices are sharply lower today at just US$51/bbl. The Brent benchmark is now just on US$59.50/bbl. These are big one-day drops exceeding -US$2/bbl and come even after OPEC signaled a production cut. The problem is that they look like they are being gamed by Moscow and the deal may unravel quickly. And here's an interesting twist; the US is now a net oil exporter. Without that market for crude, oil's future looks dim especially if it has to compete with the Americans.

The Kiwi dollar is starting today softer at 68.7 USc. On the cross rates we are stronger yet again at 95.3 AUc and this is a level last seen in July 2017. Against the euro we are at 60.4 euro cents. The result is the TWI-5 lower 73.3.

Bitcoin is lower again today, now at US$3,559 and another -3.4% reduction. 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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40 Comments

The next Global downturn has begun. Fasten your seatbelts because we are in for a wild ride!

And there hasnt really been a trigger as yet. Some will blame the US/China trade war, but there is a
lot more going on under the surface.

When worldwide growth is going at 3%annually but stock markets are growing 15%+ annually like we've seen in the last couple of years, there is a huge imbalance.

Stock markets are now traded based on sentiment and speculation rather than growth and profit outlooks and you only need to look at the rise and fall of the shanghai composite in 2015 as a glaring example of this.

More to come I fear..................

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12

And what wise, soothing words does the RBA have for the masses?

" This is not a situation we have seen before - it is uncharted territory..what we haven't seen anywhere in the world is a decent fall in house prices in two capital cities at the same time unemployment is going down and the economy is growing at a reasonable pace...Westpac chief economist Bill Evans asked where Dr Debelle saw this house price cycle ending up given the last house price downturns all ended up with interest rate cuts.
"I don't know Bill," was the simple response."

At some stage they will have to admit, they haven't got a clue. On the other hand, maybe this is that admission! Because a closing comment from Dr Debelle was:
" the GFC provided many lessons, some old, some new. One of the main lessons was an old one: leverage matters."
It sure does Guy, and you've only just figured that out!

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when you restrict credit supply to affordable ratios after letting things run away, thats what happens.

A lot of global housing markets have been left to run up to affordable levels for the population that inhabit them while politicians have sat on there hands. Now when governments are forced to act there is alot of pain while things correct.

If governments had acted when the bubbles were starting to inflate we wouldn't be in the predicament we are in now, thats why I foresee Auckland having major correction of 25-30%

Reserve Bank of Australia deputy governor Guy Debelle has warned that the Australian banking industry's habit of acting as a pack could exacerbate the housing slowdown.

In a speech to mark 10 years since the begining of the global financial crisis, Dr Debelle said there were a number of unresolved questions from the events of the past decade as well as lessons learned.

https://www.smh.com.au/business/the-economy/banks-pack-behaviour-could-d...

One element the banks share is that of institutional investor.
Here is the NAB/BNZ example

http://www.tai.org.au/sites/default/files/TB%2015%20The%20rise%20and%20r...

Common ownership of the big banks raises serious concerns – in particular, there is
always the potential to boost profits by acting as a monopoly. These concerns are
worrying, especially in the context of allegations that when a bank attempts to
introduce price competition, it is the common owners of the banks that pressure the
‘culprit’ to desist from such behaviour.

and

The ownership of the banks is highly significant in understanding the extent of competition between banks. According to newspaper reports, Cameron Clyne, the CEO of the National Australia Bank (NAB), was pressured to increase interest rates by some of the NAB’s biggest shareholders, who wanted to see NAB mortgage interest rates rise in line with the other banks.8

In May 2012 it was alleged that ‘some of Clyne’s biggest shareholders have leaned on him to raise rates’ to effectively undermine the NAB’s strategy when it sacrificed revenue but grew market share in its home loan book and deposits and set itself apart from the three other majors at a time when cynicism about the banks was at record highs.

Earlier the NAB claimed in its marketing that it had tried to ‘break up’ from the other big banks and set its mortgage rates below the others. The NAB said in its press release that ‘we broke up with the other banks’
in order to offer lower interest rates to customers. It is therefore a very serious allegation by the Australian Financial Review that some owners of the listed banks are in position to reverse the NAB’s
competitive strategy.

The institutional investor issue was identified sometime ago in articles on this site about who actually owned the big banks. I seem to remember that there were five major, common ones. and yes i think this will be a significant issue. To put the blame of pack behaviour on the regulators may well be a little misplaced.

And a critical aspect of Guy Debelle's speech;

Monetary capacity matters too. The Reserve Bank has repeatedly said that our expectation is that the next move in monetary policy is more likely up than down, though it is some way off. But should that turn out not to be the case, there is still scope for further reductions in the policy rate. It is the level of interest rates that matters and they can still move lower. We have also been able to examine the experience of others with other tools of monetary policy and have learned from that. Hopefully, we won’t ever have to put that learning into practice. QE is a policy option in Australia, should it be required

The next RBA move will be a cut.

Mortagage Stress in Australia published by ABC news a couple of days ago.

https://www.youtube.com/watch?v=dUlV9xETEOU

That's not a very compelling news item. Kay bought her house in Adelaide 20 years ago but is under mortgage stress? Kay lost her job in a period of high employment. Kay is letting her son live in the property for free? Kay let the house fall into disrepair along with other things..
Adelaide still has a fairly hot property market:

House prices are still rising in Adelaide, Canberra and Hobart, and investors say the property boom isn't over

Indian guy has over-valued his house. I find I always get less for a house than I expect at first.

I think the news media want a financial calamity. They either want houses to be rocketing up or crashing. Goldilocks just doesn't sell, too dull.

I suspect Kay used her house as an ATM. Only ever use equity in your home to purchase appreciating assets.

Thanks bw. That made me laugh. A good antidote to an expensive evening!

The corn belt has enhanced rainfall and lower average summer temperatures over the last century. Trump voters doing their bit on the front lines fighting runaway global warming.
"In the central United States, for example, observational data indicate that rainfall increased, surface air temperature decreased, and surface humidity increased during the summer over the course of the twentieth century concurrently with increases in both agricultural production and global GHG emissions. However, the relative contributions of each of these forcings to the observed regional changes remain unclear. Results of both regional climate model simulations and observational analyses suggest that much of the observed rainfall increase—as well as the decrease in temperature and increase in humidity—is attributable to agricultural intensification in the central United States, with natural variability and GHG emissions playing secondary roles."
https://agupubs.onlinelibrary.wiley.com/doi/full/10.1002/2017GL075604

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Dear Sharebroker; in confidence. Sell everything!!

JK

sent from my Huawei Mate 20 Pro Smartphone

'New Zealand's principles-based regulation approach is far better for retaining competitive instincts in these central financial markets.'

Otherwise known as the 'three monkeys' approach to bank regulation!

I think we could add a couple of more to them Nic, one aimlessly playing with the tip of his tail while picking his nose, and the other with his head in a hole in the ground! That would effectively cover most if not all our regulators.

Oh by the way - they'd all be sitting on lumpy carpet!

Yes, and that's also why bank profits in NZ are so low!

Fruit loop economics from the Greens. The green blob rent seeking class will be rubbing their hands. "The Government has given the company no guidance as to the timeframe over which a commercial return is to be achieved. "We didn't want to tie their hands," Shaw said."
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=121...

Just carrying on from the previous government Profile...Lanzatech, BBC Tech...

Not disagreeing with you there frazz - it's disgraceful.

The payback timeframe makes sense in this instance. If there were good short-term gains to be made then traditional banks would be all over it. By using a longer timeframe, they can fund projects that others would ignore.

For example, solar payback is around 12 years - too long for most banks but the long-term return is very good (as modern panels have a minimum lifespan of 40 years).

Yes but do they have any skin in the game..equity?? Or just another grant flushed down the toilet?

Yes, they can take equity positions or they can offer loans or be guarantor on loans.

There are no grants - every investment is expected to make a return (likely some may fail but the overall book should be positive)

On the domestic front , I am astonished at the current levels of industrial action by workers in many sectors of the economy .

Its reminiscent of the 1970's when workers struck at the drop of a spanner .

I dont get get it , because there is way less antagonism between the workers and management in New Zealand where the pay gap is not that wide , than we find in places like the UK

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16

Probably in good part because governments have let housing and living costs get way out of hand, to the point many salaries don't enable people to build a life. Sure, it's been fun for people who were lucky enough to be in at the right time, but there's no reason other folk should just lie down and accept lower standards of living as a result.

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Boaty the causes are obvious. AK is too expensive too live in for ordinary working Kiwis, Stuff are running an article today about $2 million CEOs. Even our Government MPs pay and conditions are a part of the problem. The slide has been slow, but evident. Even on this site thesre has been commentary on the erosion of living standards. If the gap is really not that big, then the problem will be easier to fix. But this is just the tip of a much bigger iceberg.

New Zealand's housing shortage? Or is it just a Credit bubble? Developers already seeking exemptions to sell apartments in Auckland to foreigners, don't we have a housing shortage?

https://www.stuff.co.nz/business/109117400/apartment-developments-seek-e...

What's wrong with them? Why don't they just sell apartments at prices that locals can afford. Basic supply and demand.

These exemptions only apply for developments started before the FBB was announced. The argument being that the developers started these in good faith at the time. It will not apply to new developments starting now. It's similar to the bright line test not being retrospective.

Better to see these get built than mothballed as at least some will go to locals and the employment it will generate.

So anyone that holds shares in, say, Spark should be able to get 'current market price' if the Government changes the Telecommunications Act as the holder bought them before any change is enacted? I don't think so.

( NB: The Government did exactly that some years back when it was called Telecom - changed the rules after it was floated on the stock market and those that 'got caught' with the changes were disadvantaged ( think Corus being hived off and bailed out as one more example). Shares fell from $12 odd to $4 over that time). Markets and market rules change all the time. It's the nature of capitalism.

Conversely, if there are legislative changes that influence an upward impact on share prices the Government should be paid out the difference.

Better to see these get built than mothballed as at least some will go to locals and the employment it will generate.

they will get built anyway.

shame the developers, that seem to be identified as large international property groups,
didn't get the pre sales to cover the construction finance done.
that their business....

building on spec is that, doing it on apartments is brave.
though, if they are international property types, they will have the resources to complete build, may not like to, but by having sold a portion of the apartments already.....

How about Ex Expat as well. Sure his worth worth $20,000,000 before the ban... Come to think of it I may put my hand up too!

Not sure where that comment came from. I've never said I'm wealthy, just comfortable. If you must know, I'm 60% owner occupied property and 40% cash. I even switched my Kiwisaver to cash back when RP suggested it. If the economy turns to cra@p, I'll be very happy. Even better if the COL get turfed out because of a slump.

Yeah, my Kiwisaver cash has performed well when compared to the rest :) It was a good decision.

I wish I had switched to cash. Instead I went more aggressive. It's fun watching it roller coaster though.

Zac. Best to not watch the roller coaster to avoid motion sickness and a crick in the neck. I've been in the market for decades, watched the bear rampage a number of times before but he always eventually goes into hibernation.

And the NZ market today goes meh...

Switched on 14 August. Ironically I can see my Core Logic house estimate but not KiwiSaver fund prices. It’s only play money in there anyway so I won’t be partying on the relative opportunity gains

Please let us know what your CoreLogic house estimate is we’ve been hanging out for it all day.

Already posted this week.

Nothing that's going on overseas can effect little old NZ. Everyone is saying interest rates are lower for longer, asset prices are staying high with upside to infinity, and at the first sign of trouble immigration can be goosed to flood us with half a percent of either India's or China's population, doubling population in NZ.

What could go wrong?