US current account deficit grows; Canada and Mexico 'win' in trade war; China profits dive; Turkey roiled; Draghi rethinks; UST 10yr under 2.37%; oil unchanged and gold down; NZ$1 = 68 USc; TWI-5 = 72.6

US current account deficit grows; Canada and Mexico 'win' in trade war; China profits dive; Turkey roiled; Draghi rethinks; UST 10yr under 2.37%; oil unchanged and gold down; NZ$1 = 68 USc; TWI-5 = 72.6

Here's our summary of key events overnight that affect New Zealand, with news of spreading economic anxiety.

Equity markets are generally in negative territory today, even though yesterday Shanghai delivered another strong (+0.9%) gain. Elsewhere the anxious mood is palpable.

In the US, their current account deficit increased more than expected in the fourth quarter of 2018 amid declining exports, pushing the overall shortfall in 2018 to -2.6% of GDP and its highest level in 10 years. And this came even though American companies repatriated a record amount of foreign earnings last year but that was relatively small, and a brief blip at the beginning of the year. The Administration's goal was repatriation of US$4 tln of the US$6 tln parked offshore avoiding tax. Their policies actually only encouraged back US$465 bln. The policy is a failure; it was a key basis for giving large corporate tax cuts.

Most of that current account deterioration was because of poor export growth and rising imports. But the data for January 2019 shows exports picking up for the US (+3.3%) faster than the rise in imports (+1.1%). Services trade is unchanged from the same month a year ago. The deficit with China decreased -US$5.5 bln to -US$33.2 bln in January as imports fell. The balance with Canada shifted from a small deficit to a surplus of +US$1.4 bln.

The American trade war with China is delivering a winner; Mexico. Supply chain companies are basing themselves there for trade with the US and the US deficit with Mexico is up more than 23% year-to-date.

Canada also reported a narrowing of their trade deficit in January, more based on stronger prices for oil exports.

Official data in China reveals that industrial profits dived there in February, down -14% from the same month a year ago. Actually state-owned enterprise profits were the hardest hit, down -24% on that same basis. These are the steepest drops on record.

Japan is set to raise GST to 10%. The move is not popular and may affect the election of Prime Minister Abe.

In Europe, ECB boss Mario Draghi said they are starting to worry about the adverse effects of negative interest rates, a controversial policy tool it introduced almost five years ago to encourage European banks to lend.

In Turkey, a crackdown on short selling has seen a sudden withdrawal of liquidity; short tem interest rates there shot up to over 1200% for overnight funding. And all this comes in the middle of an election campaign, one where their strongman president installed son-in-law into the top finance job. He is out of his depth, as perhaps is the President.

In Australia, regulator zeal to 'claim scalps' in the banking industry has lenders fearful. ASIC is pursuing any misstep, APRA is threatening to regulate pay. Bank boards are instructing bankers to lend. But simple fear of being an unwitting scalp for something missed that creates an issue in the future is building a growing credit crunch. Regulators have become deaf to the issue and implications. There could be echos felt in New Zealand.

The UST 10yr yield has fallen again and is now just on 2.37%. Their 2-10 curve is now +13 bps while their negative 1-5 curve is at -24 bps. The Aussie Govt 10yr is down -5 bps at 1.76%, the China Govt 10yr is up +1 bp at 3.10%, while the NZ Govt 10 yr is down a disconcertingly large -11 bps to 1.78%.

And we should note that Germany has sold its government bonds at a negative yield for the first time since 2016.

Gold has slipped, down -US$3 to US$1,312/oz.

US oil prices are softer today and now just under US$59/bbl while the Brent benchmark is just under US$68/bbl.

The Kiwi dollar is down the -1c that yesterdays RBNZ induced tone brought at 68 USc. On the cross rates we are softer at 96 AUc. Against the euro we are lower at 60.4 euro cents. That puts the TWI-5 sharply lower at 72.6, but just where it was at the start of the month.

Bitcoin is up a bit more than -1% at US$4,001. 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 ».

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10 Comments

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“In Europe, ECB boss Mario Draghi said they are starting to worry about the adverse effects of negative interest rates, a controversial policy tool it introduced almost five years ago to encourage European banks to lend.”

Say it isn’t so! What on earth would they use instead of interest rates as their intervention of choice?

15
up

Yes, that's the standout quote. Classic.

Growth was a temporary thing - a frontier mentality, that there was an untapped, limitless planet just beyond the boundary. That attitude colonised the USA east-to-west, the planet from both directions, and is still visible in the narrow attitudes of 'land developers'.

But it's over - and the folk who built a system to fund (and track) growth are being shown up as having no tools to cope with stagnation, let alone the coming de-growth. Draghi was pushing the end of a piece of spaghetti.

Very over cooked spaghetti by the time he had his way.

Something I only realised in the last few weeks (after watching a documentary) is that a number of EU banks are still holding MBS or CDO products on their balance sheet. I knew that they were intentionally violating the banking regulations but I assumed they were just low in capital and liquidity. However holding onto this junk and pretending it has any value is insane. They would be better off separating it into a shelf company and recapitalising the banks, but the time for that was at the GFC, rather hard to explain more than a decade later.

"Official data in China reveals that industrial profits dived there in February, down -14% from the same month a year ago. Actually state-owned enterprise profits were the hardest hit, down -24% on that same basis. These are the steepest drops on record."

With China's debt issues, slumping profits is the last thing they need......

Wow , 1,200% interest for overnight funding in Turkey , now that's a monster sized over-reaction ............which could be devastating.

Something has to give .

The currency has dropped from US$0.50 cents to about US$ 0.17 cents in just 60 months , and this could make it worthless

1,200% is simply unsustainable, because Banks ALCO's will never be able to balance their books each evening, and worse, inter-bank lending will dry up , all could have devastating effects on their whole banking system as Ratings agencies reduce the banks to junk , and banks stop lending .( if they have not already done so )

How long do you think until their economy collapses completely? Erdogan will see the masses rioting on the streets, giving him an opportunity to put his jackboots on. Just like Venezuela.

It really is bemusing that our economists have been failing to see the economic headwinds.
Again, points to Taleb.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=122...

Hmmm, wonder if they'll look to emulate others by "going agile" instead of calling it job cuts.

Ha ha. The ‘A’ word is one of my pet hates. Jargon...