Here's our summary of key events overnight that affect New Zealand, with news we are ending the week on a calmer note, but one that may only be temporary.
Wall Street opened strongly today, up more than +1.5%. But as trading has progressed those gains are slipping and it is up only +0.3% in mid afternoon trade. This comes after 'the home team' got cranked up in Shanghai, reversing the falling trend and posting a +0.9% rise on Friday. However, that was after Shanghai was down -5.8% over the week with most of that loss on Wednesday. Wall Street is heading for a -4.9% weekly loss.
Perhaps behind today's bounce is that the falloff in Chinese exports just isn't happening. This is now five consecutive months where markets were expecting to see sharp declines from the effects of the trade war and rising tariffs, but there is no sign even yet. China’s exports strengthened unexpectedly in September, up almost +15%, and the countries’ trade gap with the US hit a fresh high of -US$34 bln. More American tariffs are on the way, but so far the ones imposed only seem to have juiced up the trade between the two countries. Its a trend full of irony and quite unexpected. The "rush-to-beat-tariffs" narrative can't go on forever. On the other hand, Chinese imports fell -14% reflecting subdued domestic demand.
And car sales in China fell for a third straight month in September, and it now looks like they will have their first yearly decline in passenger-car sales in almost three decades.
The World Bank has released a new index comparing 'human capital' in most countries. New Zealand ranks creditably, juts slightly behind Australia and Canada, and marginally ahead of the US.
In the UK, there are indications that a Brexit deal may be close. All eyes will be on the terms when it is released.
"History suggests that the world is about due for another financial crisis. One of the places it might start is Italy. Many of the ingredients are there. A pile of questionable debt. Weak banks. An erratic government. And a sizable economy able to inflict collateral damage outside Italian borders." And its new unstable government might find an angry Germany, fed up with all challenges, only too ready to push it out of the EU. A fuse could be lit as soon as the Brexit situation becomes clearer.
In Australia, house prices are likely to slip further as the demand for new mortgages dries up. The number of new mortgages fell by a larger-than-expected -4.5% in August, to be down more than -10% over the year. It is weakest result in almost eight years when the property market was still struggling in aftermath of the GFC.
The UST 10yr yield is actually little changed from where we left it yesterday at 3.15%. Their 2-10 curve has at +31 bps. The Aussie Govt 10yr is at 2.74% (down -1 bp overnight), the China Govt 10yr is at 3.61% and also down -1 bp, while the NZ Govt 10 yr is at 2.68%, and up =1 bp. New Zealand swap rates have risen a minor +3 bps across the curve over the past week.
The VIX has risen sharply this week and is now at 25, up from 16 last week. It is considerably above its average over the past year of 12 and indicating that volatility has returned to markets. And the Fear & Greed index has moved to the extreme end of the 'fear' side. It has been a fast jerk from this time last week.
Gold is down -US$3 overnight to US$1,218/oz and that puts it up +US$17 for the week.
US oil prices are little changed today at just over US$71/bbl. The Brent benchmark is now just under US$80/bbl. But both a large pullbacks from this time last week. The US rig count was up strongly this week.
The Kiwi dollar is ending the week little changed from yesterday at 65 USc, but up +60 bps in the past seven days. On the cross rates we are little changed at 91.5 AUc and unchanged on the past week, and little changed at 56.3 euro cents (although more than +60 bps up on the week). That puts the TWI-5 at 69.1 and a good weekly gain.
Bitcoin is now at US$6,229 and unchanged from yesterday but a net loss of almost -5% over the past week. 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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23 Comments
Dead cat bounce?
A question - even with NZ's economic slowdown coming - if the overseas markets get more nervous wont they take their money home and drive up our interest rates?. Interesting article by Colliers saying with overseas buyers no longer buying large farms in Canterbury the impact is about to be felt by all farm vendors as $100's of millions less in circulation, trickle down effect.
Unsure whether or not markets are a dead-cat bounce or not.
What is apparent is that the global economic situation is a state of change as it has been for the last 12 months. The tightening QE is a driver and rising US interest rates mean that the future of cheap money is not the medium to longer term outlook. Factors such as the trade wars - and probably to a lesser extent Brexit - are other factors in the global outlook following a period of stable conditions.
As with any transition many of the consequences can be uncertain hence volatility in global markets.
While there is uncertainty, those with a risk apatite will stick with their growth KS while more conservative investors will be taking a more conservative view. A very likelihood scenario is that the next couple of years is likely to be the sunset period for what has been a long period of low mortgage rates and those with large mortgages (especially those who think such rates are the norm) probably should be looking to pay down debt as much as possible.
Depressions are the result of the opposite set of dynamics: growth is the result of a vast expansion of credit that drives mal-investment and risk-laden speculation. Productivity stagnates as capital flows to speculative gambles ("sure things" in a bubble euphoria) and expansions of capacity that far outstrip demand.
In these credit / speculative driven economies, capital is forced to "chase yield," i.e. seek a return in risk assets rather than in low-risk secure investments. Soon, everyone is dependent on credit / asset bubbles for their paychecks, increases in wealth, pensions, sales, tax revenues, etc.
Economies prone to depressions have high debt levels and high fixed costs.Both generate self-reinforcing feedback loops: as loans issued to uncreditworthy borrowers default, liquidity dries up and marginal borrowers are pushed into default. As credit dries up, sales decline, profits drop, employees are laid off to cut operational costs and previously sound borrowers slide into default.
As defaults beget more defaults, lenders are pushed into insolvency, sparking a banking crisis. Borrowers sell assets at fire-sale prices to raise cash, pushing assets prices lower, putting borrowers underwater. As this insolvency is liquidated in bankruptcy / defaults, lenders must sell assets, driving prices ever lower in a self-reinforcing feedback loop.
https://www.zerohedge.com/news/2018-10-12/heres-why-next-recession-will…
Key sentence “growth is the result of a vast expansion of credit that drives mal-investment and risk-laden speculation.” Credit creation is the issue. We will lurch along from boom to bust enhancing inequality and speculation due to credit creation until we realise and do something about it.
https://www.alhambrapartners.com/2018/10/12/how-close-are-the-clouds/
https://www.zerohedge.com/news/2018-10-12/jim-kunstler-exposes-great-fa…
and for Nic the most import thing you will watch all weekend, you can jump to 3.00
Andrewj
Thanks for that, it was worth the three minutes leading up to 3 minutes mark as well. And one for you in return. The intro and the song.
Quick comment on the Chinese record exports to US.
If you were an importer and thought that things were going to get expensive quickly (due to Tariffs) would you not load up on inventory whilst it was cheap?
I would argue the same happened here with our imports of cars and machinery in April-July. You load up on important capital expenditure items before the price of them goes up due to a falling NZ dollar.
They're similar principles, buy before things go up. It has been a similar mindset in housing for the last few years although that seems to be abating now given the low volumes.
Chinese Mocking the yanks in their press, suggesting they'd happily buy a few aircraft carriers as a swap for the deficit.
https://www.telegraph.co.uk/business/2018/10/12/china-mocks-us-proposal…
Big questions from Martin North about systemic failure in New Zealand's media in communicating risk to the public.
Charlie Munger, preaching to the Chinese about the risks of gambling. 6 days ago. He understands that they love a bit of a flutter. 'We don't give a damn about all these gamblers in the market'
That is a bit scary! How do we get a change in Policy about deposits? Most people I know are oblivious about that. How to get change, do we have to get onto our local MP?
All deposited money should be safe otherwise what is the point of having a bank. You might as well put your money under your mattress. Couldn't bank have a mandatory insurance in case of bail out to garanty the safety of deposited money.
Savers shouldn't have to pay for reckless banks lending money like there is no tomorrow!
A nice and relatively easy read as to a couple of things going on in the bond market – the recent years in the Interest rates vs. Inflation graph towards the end is quite telling.
Still interested to see how and when various NZ rates get sucked into this vortex.
https://www.cnbc.com/2018/10/12/one-big-reason-why-trump-can-blame-the-…
Hussman
"A $20 trillion loss in market capitalization
On the subject of Federal Reserve policy, the current back-slapping about the success of extraordinary monetary policy is a lot like declaring victory in a football game at halftime, just before a flock of fire-breathing dragons swoops onto the field and eats the leading team. As we saw in the collapse of the mortgage bubble (another product of yield-seeking speculation brought to you by your friends at the Federal Reserve), we have to allow for the possibility that the second half of the game will be violently unrecognizable.
I describe recent Fed policies with the word “deranged” intentionally – not just because those policies took interest rates and the monetary base far outside of their historical range, but also because doing so has encouraged an even more grotesque round of yield-seeking speculation than the preceding mortgage bubble, which ended in global financial collapse. In the interest of protecting the jobs of bank executives, and protecting bank bondholders from perhaps a few hundred billion dollars in losses (depositors were never at risk, which should be immediately obvious from studying any bank balance sheet), the Fed created yet another yield-seeking bubble that has encouraged vastly expanded indebtedness in every sector of the economy, and has set U.S. equity market investors up for a likely loss in excess of $20 trillion in market capitalization in the coming years."
https://www.hussmanfunds.com/comment/mc181002/
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