The S&P500 drops sharply; China retaliates with tariff hikes; China lets the yuan slip; markets expect Fed cut; China car sales slump; Aussie lending dives; UST 10yr 2.40%; oil lower and gold up; NZ$1 = 65.7 USc; TWI-5 = 70.4

The S&P500 drops sharply; China retaliates with tariff hikes; China lets the yuan slip; markets expect Fed cut; China car sales slump; Aussie lending dives; UST 10yr 2.40%; oil lower and gold up; NZ$1 = 65.7 USc; TWI-5 = 70.4

Here's our summary of key events overnight that affect New Zealand, with news economic and investment anxiety is growing.

Firstly, the S&P500 is down a very sharp -2.6% so far on Wall Street and falling, as equity markets fear the trade situation is getting out of control. Overnight, European makets dropped about -1.3% while yesterday Shanghai was down -1.2% and Tokyo was down -0.7%. (Hong Kong was on holiday.) The ASX was also lower yesterday (-0.2%), but the NZX50 was the sole market to record a gain for the day (+0.3%). Overall, this correction has wiped -US$1 tln from global equity market values in just one day.

Driving the mood swing is the US;China trade situation. The Chinese came up with their retaliation list and it is much smaller than the American salvo but targets goods that will hurt US exporters, primarily because the Chinese have fairly easy alternatives. But they have held back by saying these increases won't come into effect until June. Duties on about 2,500 items will rise from 10% to 25%, including meat products, frozen fruits, liquefied natural gas, textiles and a wide range of chemicals. A further 2,000 items will get lesser rises. All up that will involve goods to the value of about US$60 bln in annual trade. American airplane sales may be China's next target.

One option the Chinese have that the American's don't is that they can let their currency depreciate - and they are. Since mid April they are let the yuan depreciate by -1.2%. That makes their goods cheaper to Americans and the American goods more expensive to the Chinese.

One of the core reasons equity markets are lower is that no-one seems to understand just where this dispute stands now. Tariffs are going on, but talks are continuing. In fact, indications are that Xi and Trump will meet at the G20. It is a confusing moment.

And one group as confused as any are US Fed officials. On one hand they say they have their settings about right; on the other they see risks from the trade situation. Markets have priced in a full rate cut however.

In China, car sales are still in a severe contraction with April sales down -17% year-on-year.

Meanwhile, the EU is preparing for a round of tariffs, especially on cars, from the US Administration. That too will involve retaliation.

In Australia, just how much their lending market has changed was revealed in official data released about lending commitments. Total lending to households fell more than -17% in March 2019 from March 2018. For the full year to March it was down more than -9%. That is a drop of more than -AU$40 bln and even big banks will have noticed that. Part of it was covered by a +4% rise in lending to business in the year, but that rise didn't quite amount to an increase of just +AU$300 mln. The net effect is a huge fall and has increased the odds of an RBA rate cut.

Vodafone said it will sell its New Zealand business for about NZ$3.4 bln to a group including Infratil and Canada's Brookfield Asset Management. You may recall that Infratil bought Shell's New Zealand petrol retailing operations after which margins were raised noticeably. We need to be careful of what we wish for in terms of local ownership.

The UST 10yr yield is now at 2.40%, and that is -7 bps lower in a day. Their 2-10 curve however is still at +21 bps but their negative 1-5 curve is much wider at -15 bps. The Aussie Govt 10yr is at 1.69% and down -4 bps overnight. The China Govt 10yr is up +1 bp to 3.32%, while the NZ Govt 10 yr is down -2 bps, now at 1.83%.

Gold is up +US$13 and now at US$1,299/oz.

US oil prices are a little lower today, now just on US$61/bbl while the Brent benchmark is at US$70/bbl. And that is despite a flare-up in Persian Gulf tensions where some oil tankers have been attacked.

The Kiwi dollar has weakened overnight on the risk-off mood and is now at 65.7 USc. On the cross rates the Aussie has weakened more than us so we are up at 94.6 AUc. Against the euro we are lower at 58.5 euro cents. That all makes the TWI-5 marginally softer at 70.4.

Bitcoin remains volatile but at the moment is up strongly. It is currently at US$7,802 which is +10% higher than this time yesterday. 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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Dear lord bitcoin. Dear lord!

Looks like Bitcoin here to stay, oh those "experts" calling the death knell some months ago? Its a trust game at the moment.

"It looks like a market that is lost" ( - December 2018). When Mike Hosking declared bitcoin dead at $3,150. I knew it was time to invest big. My holdings have increased 450% in 5 months (obviously not all bitcoin and with some great trades - like the exchange token boom at the start of the year and binance coin).

Just make sure you jump off before the bubble bursts this time..

Well, I suppose it is better than a real war....only our back pockets hurt. ...So far.!

I hope you get well paid for your BS Profile, you are a double the fool if not.

Yes, The denial tanks have been so successful at pouring sand in the gears of science. They could have stopped the smart phone if they wished.

We are entering a period of consequences, to quote someone....

Fights escalating over the last of the good oil (Venezuela, Iran) and over who gets to be last nation standing.

The question is whether our PM is just naively championing the repression of those dratted untra-rightists (without realising that overpopulation and lack of resource-access tends to generate resentment), or whether she is aware of where the planet is going, and that censorship/propaganda will be necessary to avoid scaring the punters. I tend to think the former.

My wife called her parents in Holland last night. They told her there is a party running for the next elections there on a NEXIT platform. The EU is looking increasing brittle. Interesting times?

..after the BREXIT shambles one would think they haven't a hope?

Hmmm. China is slowing dramatically, hence the fall (first since ???) in car sales. The US is seizing the opportunity to exert pressure on the CCP. They are pissed about China's technology theft and about their militarism. The Chinese build out of military bases across the South China Sea will be seen as a major provocation by the US Navy. Naval strategy is all about control of the sea lanes. The US will not back down until they get some major concessions. The Democrats and Republicans are united on military matters, seeking only to outcompete each other in secret trouble making.

It's funny as the big picture builds. It is apparent that in some aspects (militarism) it is the pot calling the kettle black, in others the Yanks shot themselves in the foot (the free market and finding the cheapest manufacturer all in the name of bigger profits). The Chinese are definitely not innocent but when the world's two biggest bullies face off life is very much going to get interesting.

As to the Chinese militarism, this is mostly evident in the South China Sea, and it is mostly about oil reserves that few tap at the moment. With the need to move away from hydrocarbons, I wonder if the Chinese would be better turning their talent (and they have a lot of it) to creating alternatives? Success here means another leg to ruling the world by stealth. He who holds the power (electricity, motive power) plug, controls the lights?

The Chinese back down? Doubt it. The yanks can't because they need a war to distract from the financial mess they are in. Unfortunately I believe this trade war is part of the process that will lead to conflict. I'm quite surprised how the commentary think it might resolve itself. I hope I'm wrong.

Anglo and Chinese are great people, and have achieved enormous success for the entire human kind for the past 5000 yrs.

Both are mature enough to avoid destroying the entire planet.

The US will learn to accept concepts of being equal and mutual respect once China can match with her on all fronts, which will happen unavoidably for the next two decades or even earlier.

Ah, no. Both ARE destroying the entire planet.

Whether they become mature enough to STOP doing so, is the question.

I think your faith is a little misplaced Xing. PDK is right, both are destroying the planet. Conflict will not and cannot fix what ails the world. it may even accelerate the end. Our entire culture of politics, business and economics must change radically or we are all really and truly screwed. No one is safe, it doesn't matter how much money you have, or which god or gods you believe in or not. We do not have the technology to migrate to the stars, and frankly the virus that we are (and the evidence is that we are more a curse than a benefit to this planet) means that we really should not be able to go to another place and just screw it up like we are doing to this one.

Nicely put, Xingmowang. I suspect the current spat will only make China more resilient and less reliant on fickle exports. The US political establishment are banging the Ever War drum, as they have for the last few decades, but the people are fed up with constant warfare. I think it is why Trump, an outsider, was elected.

Xingmowang - I'm very proud of Anglo success but even a besotted POM has to admit that for at least 4,500 years they did nothing. It wouldn't surprise me if while USA and China face off like Britain and Germany did 150 years ago another power will emerge like USA did back then. If India ever got its act together who could stop them. Or Nigeria? Or Brazil?

Wasn't it the easy money policies of the 1970s Federal Reserve in the US that caused the runaway inflation? Cutting rates to get full employment.

Trump's trade war stuff is a ploy to get the Fed to do want he wants on rates. To make the US economy look good for 2020.

I think rates will spike eventually. They have nowhere else to go.

"In Australia ….. Total lending to households fell more than -17% in March 2019"

No wonder their RE market is hurting, people commenting that Auckland will follow Sydney because … well because it just does, don't understand the real reason behind the OZ property value fall.