90 seconds at 9 am: Risk-on but data uninspiring

US trade deficit with China widens; Fed's Beige Book uninspiring; Canada positive; China services PMI rises; Australia in a funk; UST 10yr yield at 1.46%; oil and gold up; NZ$1 = 63.4 USc; TWI-5 = 68.9

5th Sep 19, 7:29am by David Chaston

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Here's our summary of key events overnight that affect New Zealand, with news that risk appetites seem to be improving.

Wall Street is positive today with the S&P500 up +0.8% in afternoon trade. Overnight European markets were even stronger, generally up more than +1% (although London was a laggard). Yesterday, Hong Kong had a massive recovery, up almost +4% on the day as the hardline Hong Kong governor caved a bit in her dealing with protesters. (It doesn't seem to have tamed them.) Shanghai was also positive, up almost +1% too.

The US trade balance for July was reported showing a minor improvement from June, but year-on-year it is -15% worse and for the year to July, it is -14% worse so in reality, things are not improving despite the trade war. Merchandise exports are down -2.5% year-on-year and merchandise imports are up +1%. Even in services where the US traditionally runs surpluses, even that is down -9.6% year-on-year. A withdrawal from trade by the world's largest economy is underway. Oddly, their deficit with China surged to a six-month high and almost a record.

US mortgage applications were down too, and for a third week in a row, and somewhat the trade war was cited as the reason as well.

The Federal Reserve's September Beige Book survey indicates only modest growth in the US as the trade tensions dents prospects. That reason got 16 mentions in their summary of their 12 reporting districts.

Canada also reported its trade balance for July and that showed a larger deficit too.

The Canadian central bank reviewed their official interest rate overnight, leaving it at 1.75%. Theirs was a positive review with growth high, inflation at target and their economy operating at about full capacity. Only the trade situation risks kept it from signaling their next move might be up on the inflation risks of fast rising wages.

In Vancouver, house sales volumes rose in August but prices fell to a 27 month low.

In China, there is more data showing that their economy is not hurting quite as much as the Americans assume. The independent Caixin survey of services (conducted by American firm Markit) shows their Services Business Activity Index posting 52.1, up from 51.6 in July, signalling the strongest rise in services activity for three months. It is still modest however. Earlier this same survey showed factory activity expanding (50.4).

And the iron ore price is turning back up again. Not sure why because the Chinese Communist Party wants clear skies for its upcoming 70th anniversary celebrations and is instructing steel mills to shut production ahead of the celebrations.

In the UK, the mood seems to have improved with a hard Brexit less likely and the new prime minister looking neutered. And in Italy, the recent political storm looks like it has passed as well with their hard-line political force also rejected.

In Australia, their economy grew +1.4% in the year to June, according to the 'real' GDP data released yesterday. This is the slowest in ten years, but as analysts were expecting. It was held back by their household sector.

And staying in Australia, new car sales plunged there in August, down -10% from the same month a year ago. The industry claims vehicle finance is now much harder to get.

Not helpful either is their latest services PMI which shows the sector in a small contraction. All this negative data may be why the ASX200 fell -0.3% yesterday, contrasting with the +0.6% NZX50 gain, to a new record high.

The UST 10yr yield is down -1 bps to 1.46%. Their 2-10 curve is now just positive again at +2 bps. Their negative 1-5 curve is still at -40 bps. And their 3m-10yr curve is still a negative -60 bps. The Aussie Govt 10yr is up +3 bps at 0.95%. The China Govt 10yr is unchanged at 3.08%, while the NZ Govt 10 yr is down -1 bps at 1.06%.

Gold is up at US$1,555/oz, a rise of another +US$11 since this time yesterday.

US oil prices are up strongly today, rising more than +US$2 at now just on US$56/bbl. The Brent benchmark is also higher at just on US$60.50.

The Kiwi dollar is up marginally to 63.4 USc. On the cross rates we also unchanged at 93.6 AUc. Against the euro we are the same at 57.7 euro cents. That leaves the TWI-5 at 68.9.

Bitcoin is now at US$10,619 and virtually unchanged from this time yesterday. The bitcoin 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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Source: RBNZ

Source: CoinDesk

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Source: NZFMA

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16 Comments

by gingerninja | 5th Sep 19, 8:46am 1567630007

Re; Brexit; there is zero surprise here. Hard Brexit does not have the numbers. Not even when the government use blackmail and threats, the anti-Hard-Brexit numbers in parliament are actually significantly higher but there are many Tory MP's who don't want to be sacked so they are towing the party line. The longer the Tories keep threatening a Hard-Brexit the longer the whole process will take. How many times do they have to be shown that they have no parliament support for a No-Deal? EUURRRGGGHHH. May's deal has more support than a no-deal! And what a load of nonsense that somehow playing no-deal chicken with the EU will strengthen the UK hand. Even when the likelihood of a no-deal was at its highest, the EU didn't even blink and they are more prepared for a no-deal than the Brits at this stage. Being anti-no deal is NOT the same as anti-Brexit, another Brexiteer lie. They just don't want to eat humble pie after promising that they could deliver a cake and eat it.

by ShoreThing | 5th Sep 19, 9:48am 1567633684

As I understand it, the current strategy is to threaten to exit with no-deal if the EU refuse to renegotiate on May's deal. A no-deal exit will be damaging to both parties, and both parties will seek to avoid it. However, the EU does not have to renegotiate anything if the British parliament keeps scoring own-goals and hamstringing their own ability to negotiate. I think it is absolutely appalling what Corbyn and Labour are doing.

by northman46 | 5th Sep 19, 10:10am 1567635000

And I think it's appalling what Boris is doing. He's a proven liar. He's more than willing to push through no-deal exit. He won't suffer, and neither will his friends, and he'll get his sweet-heart deal with USA. The NHS isn't for sale.

It's also Corbyn and Labour... and SNP... and Lib Dem... and Green... and Torys rebels. Or in other words, the majority of Parliament. This isn't unelected Boris' show to run.

by ShoreThing | 5th Sep 19, 10:15am 1567635311

Show me one politician that isn't a liar. This isn't about the man, it's about the issue. He has to be willing to exit the EU without a deal - that's what happens when you trigger Article 50 and don't take it seriously for 2 years and counting. The issue at hand is that if Parliament forces it so that Britain cannot leave the EU without a deal, then they lose all leverage in the negotiations and the EU will force the most detestable deal upon them. Brexit is happening, and the actions taken by Corbyn and Labour will ensure that the British public suffer all the more for it.

by gingerninja | 5th Sep 19, 10:55am 1567637741

Shoreman, if this is true, how come this is the first we are hearing about it in the last 3 years? You poor brain washed love! The Tories have been trying to negotiate Brexit for three years and have failed to deliver what they promised at every turn. If the no-deal Brexit strategy was so fundamental why have they not tried this strategy in the last 3 years? Are you trying to suggest it only just occurred to them in the last few months? Nonsense. And if the no-deal strategy was going to be so effective, why didn't the EU show any signs of capitulating when the odds of the no-deal scenario greatly increased last month? Why? Because you and your ilk are delusional and can't admit that the "cake and eat it" fantasy was never going to happen. May's deal was the best that 3 years of Brexit's finest could achieve. The EU have been amazing reasonable and fair in the face of British toddler tantrums, so they may yet, offer a little more, but the EU are not going to be blackmailed.. The EU have faced blackmail before too and unsurprisingly, they didn't yield to it on those occasions either. Brexit-hardliners are simply over stating and exaggerating their hand for popular support and to avoid eating humble pie.

Not only that but in the 2017 election they lost support, in every single local and EU election they lost further support. The only way that speculation can be laid to rest about what the British people actually want is to take it to the polls. So sensibly, parliament have removed the threat of the no-deal from the hysterical Brexiteers and then they can have a General Election. If the Tories win a mandate, then clearly that can be construed as support for a no-deal chicken game with the EU and the Tories should be allowed to play it then..... but to suggest that the Tories currently have that mandate is utterly preposterous.

Thanks to parliament, democracy can now resume. If Boris wins a General Election majority, he will have no problem at all in pushing his no-deal games as far as he wants and no opposition party will have the numbers to stop him. So we shall soon find out what the British want because the opposition parties will support the GE as soon as they are given enough time to do it, without all the proroguing, no-deal threat nonsense imminent.

by ShoreThing | 5th Sep 19, 11:18am 1567639090

Shoreman is a different chap. I'm going to ignore the ad-hominem, if you don't mind, and attempt to address the few arguments you make.
Please don't put words in my mouth - May was a staunch remainer, and tried at every turn to stymy Brexit. Her awful deal was rightly voted down repeatedly. I think you and I can agree that the British parliament has been an international embarrassment for the last few years.
I don't think they are over-stating their hand at all - if they can't come to an agreement with the EU that suits both parties, then no deal is a reasonable and expected outcome.
If you want to talk about election results, the Brexit Party had a superb result this year in the European Parliament elections, the largest of any UK party.
The government has a mandate to deliver Brexit, not just the Tories. The people of the UK voted to leave the EU, and it is up to the government to make that happen. Obviously they should seek to get the best deal possible for the UK, and certainly not agree to a deal that would leave them worse off than no deal. The opposition, in my opinion, is not acting in the best interests of the voters in this regard.
Agree on General Election, but why wait?

by northman46 | 5th Sep 19, 11:20am 1567639212

So it's one of two things. One, it's a clever bluff and he wouldn't do a no-deal. In which case, I know it, you know it, the EU knows it. Or two, he means it and is willing to rip apart the UK (in terms of Scotland) and reigniting violence (in terms of NI) to get what he wants. So it's either pointless or dangerous.

It's just crazy at this point that you can still be blaming Labour for this. The main criticism for them is they shouldn't have waited this long on the fence, not that they stopped Boris throwing us into the abyss.

by ShoreThing | 5th Sep 19, 11:44am 1567640666

I think he means it, and he should. I don't think a no-deal exit is the end of the world. It's likely to be painful, and a reasonable deal and managed exit is definitely the preferable scenario, however it must happen if such a deal cannot be found.
You are also putting words in my mouth - I am not "still" blaming Labour for this, for the last two years I have been blaming May for this situation. The Labour party has the blame for what they have just done in Parliament, which is to completely neuter the governments ability to negotiate the reasonable deal and exit scenario.

by Sammy D | 5th Sep 19, 3:35pm 1567654505

The EU doesn't have to renegotiate anything, they have negotiated and agreed a deal. Furthermore they provided the UK an extension on the basis that negotiations wouldn't be reopened.

Despite this the EU have graciously offered the UK their ear should they come up with a viable alternate to the backstop - which Johnson and Co. have loudly proclaimed there are many and subsequently produced nothing (leaked Tory internal analysis has shown however that no viable options actually exist).

You're correct in saying that there will be downsides for both parties however the downsides are significantly larger for the UK than the EU, furthermore the risks to the EU of offering further concessions are greater than that of a no-deal Brexit.

Finally the referendum never specified what leave would specifically entail hence people falsely assumed it could mean what ever they wanted without consideration to the other parties involved. It's like asking someone if they want a better Job ( who doesn't) only to later find after consulting with other employers that toilet cleaning is the only job available. There is no clear mandate for any leave option that is realistically available, it is a nonsense to claim that leave is what was voted for so must be delivered because what leave would entail was never specified. What leave means is now known - May's Deal or No Deal, the UK now needs a STV referendum between these three (or four of Corbyn somehow wins the GE and negotiates something different I e. Customs Union).

by sit23 | 5th Sep 19, 10:02pm 1567677734

The British people told the politicians to get out of the EU. The parliamentarians are refusing to do what the people told them to do. Britain wasn't in the EU, then it was, And in the future it won't be. Not a big deal. Just get on with it.

by Andrewj | 5th Sep 19, 8:56am 1567630615

"Big Short" Investor Michael Burry Explains How Index Funds Will Trigger The Next Crash

Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from the equity markets.

The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies - these do not require the security- level analysis that is required for true price discovery.

"This is very much like the bubble in synthetic asset- backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue."
https://www.zerohedge.com/news/2019-09-04/big-short-investor-michael-bu…

by Cowpat | 5th Sep 19, 9:19am 1567631965

In a week where Fonterra caps pay increases for overpaid staff, Danone a company with a number of similarities, sees its share price reach an all time high, up 33 percent year to date. Simply put , it is better managed.

by Gummy Bear Hero | 5th Sep 19, 12:58pm 1567645137

.. be of good heart , my splendidly named Cowpat . . Kiwi domiciled dairy firms can match Danones magnificent profit growth and share price heights . . Think A2 Milk ... or Synlait ..

And why are they better managed than the death spiralling Fonterrrible ?

.. my theory is because they are open to competition , they're by necessity innovative , hungry & lean ...

by sit23 | 5th Sep 19, 10:13pm 1567678426

Danone is run by the usual bunch of globalized crooks. Remember the fake Fonterra Clostridium contamination? Check their infant formula crookery. On a level playing field without an obvious $43million crook in charge, Fonterra can compete with any competitor. It's biggest problem these days is the loud minority nonfarmer shareholders wanting a share of the turnover without doing any work!

by waymad | 5th Sep 19, 10:11am 1567635102

Time to update the BEFU....TWI - 71.08, Treasury BEFU assumption 'The trade-weighted exchange rate index rises from 73.7 in the June quarter of 2019 to 74.1 in the 2022/23 fiscal year.'
WTI - 56.26 Treasury BEFU assumption 'The price of West Texas Intermediate (WTI) oil is stable at US$60 per barrel across the forecast period.'

by Andrewj | 5th Nov 19, 4:10pm 1572923456

“October was the largest deficit the U.S. manufacturing industry has had with China in the nearly eight-year history of the Caixin survey”
Nomi Prins