Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with the BNZ, including news that the Dow fell as much as 290 points overnight and Asian markets slumped on reports that North Korea's army had been mobilised and on renewed fears about the European Sovereign debt crisis.
Investors are worried tensions on the Korean peninsular could spark conflict and damage prospects for economic growth in its neighbour China, the world's most vibrant economy and New Zealand's second largest buyer of exports after Australia. The Dow rebounded off its lows in late trade and may close near the 10,000 mark, but the fears remain.
The New Zealand dollar also fell sharply. It has moved in tandem with global stock markets in recent years given it is seen as a 'riskier' currency that is exposed to commodity prices, which tend to swing around based on hopes for global economic growth. So when there are worries about the global economy, the New Zealand dollar tends to fall.
The New Zealand dollar fell to a 9 month low of 65.5 USc overnight but has bounced with the Dow to be at 66.6 USc in early trade. This is great news for exporters, who are still celebrating news yesterday from Fonterra that the milk payout could hit a record high of NZ$8/kg in the 2010/11 season if the currency stays low and commodity prices stay high. Luckily for petrol buyers, the fall in the New Zealand dollar is being offset by a fall in crude oil prices.
The European fears continue to hit credit markets in the Northern Hemisphere. The LIBOR (London Interbank Offer Rate) rose for the 11th consecutive day to 0.54%, a 7 month high and double what it was in March. This rise is an indicator of stress when banks lend to each other. They are worried the banks will have to take big losses if countries default on their debts or the European econony goes into a longer, deeper recession. LIBOR is also a widely used base rate for business loans so a rise has an effect on the real economy.
A survey of Japanese fund managers shows just how unpopular the Euro has become, the FT.com reported. Early in 2010 80% favoured the euro over the US dollar, but that has since dropped to 30%. There are renewed fears Asian investors will pull out of European debt markets.
What does it mean for New Zealand?
Credit stress in global markets is eventually here in the form of more cautious lending by banks and higher interest rates. Term depositers can bargain harder with banks because they will have to rely even more on local term deposits. That is likely to push up term deposit rates, which in turn would push up fixed mortgage costs even further over the floating rate, which itself is expected to rise on June 10 or July 29.
All this puts more downward pressure on house prices, which are already weak because of changes to taxation rules for property investors. See more here on other signs of bank market stress.
Your views? I also welcome your comments below on any other topics for discussion in the morning news.
1 Comments
Oh dear. And to think I was ridiculed for suggesting house prices might fall 30%.
I remember mentioning my prediction to Mark Hotchin in July 2008. He thought I was joking, although he did look a little nervous when he laughed. Development property values are down at least 30%...and counting.
cheers
Bernard
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