Equities in remarkable about-turn; China growth sags; IMF trims 2019 world growth forecasts; iron ore prices rally; UST 10yr at 2.79%; oil unchanged, gold down; NZ$1 = 67.3 USc; TWI-5 = 71.6

Here's our summary of key events overnight that affect New Zealand, with news of more global growth warnings.

Firstly however, today is a public holiday on Wall Street (Martin Luther King Day). Markets closed overnight in Europe a little softer, down about -0.3%. However they followed Asia yesterday which was up about +0.3%.

But now may be a useful time to assess how Wall Street has opened in 2019. The S&P500 has actually risen +6.5% in the first thirteen trading days of the year. That is enough to take it back to the same level it started at in 2018, so wiping out some of the ugly losses that kicked in from the start of October until Christmas. In that period, the S&P500 index fell -19.6%, but since it is back up +13.6%. It has been a remarkable turnaround in these early days of 2019.

In those same 13 days Shanghai has risen +5.9% but that pales in terms of its losses from the start of 2018 which now have accumulated to -21.0% even after the recent bounce.

Yesterday, all eyes were on the release of a raft of official Chinese data. That shows 'fixed asset investment' rose +8.7% in private companies but only +1.9% in State-owned enterprises, a clear sign of the dead weight China's central and local SOEs have on their economy. Retail sales in Q4-2018 rose +8.2%, a lowish rate for them in terms of recent activity.

But the big data was their Q4-2018 GDP release which showed growth slowed to +6.4% in Q4-2018. That is the lowest quarterly rate in 9 years but was as expected. However it was below the third quarter (+6.5%). That this signal is the official data suggests the real rate might be slower. A drive by Beijing to get its provincial governments to report accurately may be taking a toll. We should also note that electricity production grew at an average of +4.9% for the quarter. Electricity production is often used as a proxy for the real, unsanitised Chinese growth rate.

But to keep things in perspective, the slower China growth still added more than Australia's annual GDP.

This China slowdown, and the rising risks in the US - not to mention the signs the EU is stalling - has seen the IMF cut its growth forecasts for 2019 and 2020. Their forecast cuts are modest and off the best rates since the GFC, but they do make the points that the risks are to the downside, the fall-off is slightly faster than they had expected, and that the 2018 decoupling of financial market expectations from the global policy tensions, especially over trade, is probably not going to last much longer.

So those recovering equity markets might falter in the shadow of the China slowdown and the IMF adjustment. But then again they may not. Overnight iron ore prices rose strongly in China as inventories of the ore fell and expectations rose that more official stimulus will sharply raise demand soon.

The UST 10yr yield is little-changed today at 2.79%. Their 2-10 curve is settled at +17 bps. The Aussie Govt 10yr is at 2.31% and down -2 bps, the China Govt 10yr is down -3 bps at 3.11%, while the NZ Govt 10 yr is at 2.35% and unchanged.

Gold is down -US$2 to US$1,280/oz.

US oil prices are little-changed overnight at just under US$54/bbl while the Brent benchmark is just under US$63/bbl.

The Kiwi dollar has stayed down at 67.3 USc with virtually no change overnight. On the cross rates, we little-changed against the Aussie at 94.1 AUc and holding at 59.2 euro cents. That puts the TWI-5 at 71.6.

Bitcoin is at US$3,539 and virtually unchanged. This rate is charted in the exchange rate set below.

This chart is animated here.

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24 Comments

'New data released Monday confirmed the fears of many demographers: the decline in China’s birth rate is accelerating.

China saw just over 15 million births in 2018 — 2 million fewer than the year before, the National Bureau of Statistics (NBS) announced.

Many experts had expected such a drop. In fact, one U.S.-based critic of China’s population policies, Yi Fuxian, says the 2018 numbers are likely even lower, and that when you account for the number of new births and deaths, China’s overall population is already shrinking.'
https://www.caixinglobal.com/2019-01-21/new-data-confirm-worrying-fall-i...

So the gross market for baby formula there has already peaked?

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So if AI and robotics fail to meet expectations then China might have some issues in 25 years time?

Lucky for China. Imagine NZ with only 2m people - disadvantages would include fewer tours by rock bands, fewer players for the All-Blacks to select but the advantages - more wealth and more space per person, zero congestion, emptier beaches, less dependency on tourism.

It seems the whole story about the dangers of a falling population may really be a ghost story:
https://www.telegraph.co.uk/business/2019/01/21/declining-population-may...

It seems Japanese GDP per capita has been doing okay. I seem to remember that workers got paid much better wages after the Black Death in England, too.

So maybe the whole thing is just a scary story to keep those naughty workers in their place. Special interests are very good at finding an economist with a theory and data that supports their case. It's called public relations.

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While there may be some business issues with a low pop growth in China, the planet will be applauding. There is already too many people on this small rock.

Amen to that and I get sick to death of economists painting a lack of growth as a negative thing. It is exactly what this planet needs. We just have to figure out how we continue to thrive while doing it. And taking Japan as an example aint it, they relied on growth in other countries as their numbers began to shrink

One for David....

“For the first time in my life, I bought gold because it is a good hedge,” Sam Zell, the founder of Equity Group Investments, said in a Bloomberg TV interview. “Supply is shrinking and that is going to have a positive impact on the price.”

https://www.bloomberg.com/news/articles/2019-01-17/billionaire-zell-buys...

Zell is far wealthier than me. He knows how to make money, that's for sure. But the "supply is shrinking" view may just be a way for him to short gold. The facts are (WGC data), in the year to September 2018 (latest data) supply grew +1.9% while demand fell -1.5%. Comparing the year to Sept-18 to the same year five years ago, gold supply grew +2.4% while demand fell -1.1%. So no evidence in history this is right.

Presently, four major producers are looking at mergers (two each), pressured because the price is 'low' and supply is too high. Will that bring Zell's supply decline? Hard to say of course, but previous mergers didn't.

And never forget that about a quarter of all 'supply' is from scrap/recycled sources. When prices are low, this is low. When prices are high, this supply volume responds quickly, usually dousing the effect. The major gold companies can't control/manipulate this supply by mergers.

So I wouldn't be betting on shrinking supply just yet.

David paper gold also affects the price of gold. There are many more claims to gold than actual gold.
When you buy a gold ETF or a nation stores their gold in another country does that gold really stay in the vault as promised? Who audits it? Are they trustworthy or just another S&P or HSBC?

Germany repatriated their gold from the US and it seemed to take a while for them to "find" it again and Fort Knox hasn't been audited in decades. Who knows what the truth really is but I don't trust the numbers.

Then again, the conspiracy theories maybe over-egged and the delay relates to mundane matters like the gold being leased out at interest to a short seller. All perfectly respectable, unless the short seller goes bust, of course, but only the very wealthiest, most privileged and government protected, such as JP Morgan, would be allowed to do that, possibly on government instructions.

I love a good conspiracy theory as I enjoy the mental gymnastics and creative alternative explanations. Trouble is, it is unlikely the conspiracy is so obvious that the story teller knows anything about it. The world is full of conspiracies, but only the conspirators know about them.

With global debt currently at US$247 Trillion, which equates to NZ$48,000 for every man, woman and child alive on the planet today, its no surprise that the global economy is starting to slow down.

Sooner or later Debt gets maxed out at which point the ability to purchase subsides.

Unfortunately all the company's that have indebted themselves based on unsustainable growth are going to hit a brick wall.

At the end of the day debt is just a matter of spending our future earnings in advance, and this debt cycle is certainly coming to an end some time soon.

Everyone knows this but we keep our blinkers on and she'll be right mate!

"debt is just a matter of spending our future earnings in advance"
In a System based on capital gains and speculation, debt is actually hoping to spend someone elses' future earnings in advance.

All that debt is owed to someone else. So, one person's debt is someone elses's asset (most likely pension funds or retirement savings of some sort). Whatever you tally the debt to be, the assets will tally to an equal or higher value. See this. And if they don't (where a writedown is forced), both the debt and the asset value will go down.

The big concern is over derivatives, their unchecked growth, and back in 2002 Warren Buffett warned (p15) of the risks.

That Buffet doc on derivatives well worth a read..

While that is true it doesn't change the burden of that debt on the world

If all debt was serviceable at just 2% p.a. it takes 5.5% of global GDP just to service the interest.

IMO this level of debt is unsustainable and will eventually cripple the global economy.

“So, one person's debt is someone elses's asset” “Whatever you tally the debt to be, the assets will tally to an equal or higher value.”
This is the issue. If one sector fails due to debt then that filters through to everything under or system. Assets will tally to debt when everything is smooth however that can very quickly change and debt can greatly outweigh assets. The interconnected nature of our debt system puts us all at risk. Hence why in the US they socialised the loses during the GFC. The way we create debt is a big issue and again, to whose benifit does our current system work?

The way we create money/debt is a big issue (impact on environment, impact on social systems). In the long run, it benefits no one.

The problem with that, David, is that both lender and borrower expect to buy real stuff. The numbers are going up, the supply is going down. That's not 'balancing out', that's 'increasing lack of underwrite'. Pension 'funds' and 'retirement savings' expect to be traded for real parts of the planet. 2008 was just a warning. Derivatives were an attempt by a growth-requiring system to keep growing in a no-growth environment. Interesting times for interest.

So how many people followed the advise of commentators here to get out of growth funds and into defensive? Have you enjoyed riding things down and getting off at the bottom?

Personally I followed Davids advice and rode it out. Its a long game.

It is a long game ...exactly - the very reason not to get overly excited about a little lift post xmas (on the excitement of a China deal - which is unlikely)

Not all out, but happy to lock away the year on year extraordinary gains. A downward correction is more likely at this stage of the game. So if I'm wrong, I can't see I'll miss out on too much. Time will tell, but the smoke will clear eventually.

Rastus,

I’m with you on this. The NZ stockmarket. Has had a wonderful run over the past 6/7 years and for the past couple of years I have been taking some profits. Yes,I have missed out on some of those gains,but I now have a high level of liquidity to take advantage of any substantial correction.

After fb post that I made friends commented on it and a number had modified their Kiwisaver fund composition from some type of growth fund to a cash fund. It's painful to see.

I think a big issue with the Kiwisaver funds is that they are always reported in dollar terms. Many people think their money is disappearing when the fund value goes down even though they still own the same number of units of whatever ETF or equivalent.

I went full defensive December 2017 with KiwiSaver. Not a bad decision yet. It didn’t surprise me that growth/indexes went down, what is surprising me though is the rise back up. A softening fed would be my guess as we all know that it’s only intervention keeping markets up, not productivity or fundamentals.