90 seconds at 9am: Dow down 4% since Friday; NZ$ hits 65.8 USc; G20 scrap bank tax

Bernard Hickey details the key news over the weekend in 90 seconds at 9am in association with the BNZ, including news the Dow Jones Industrial Average has fallen more than 4% since New Zealand markets closed on Friday. 

The Dow fell more than 3% on Friday after very weak US jobs figures raised fear of a double dip recession in the world's biggest economy. It has fallen a further 1% in late trade this morning as the fears about a global slowdown deepen and Goldman Sachs falls, Bloomberg reported. The US Congress has subpoenaed Goldman asking for information it says Goldman has withheld, meanwhile China has started criticising Goldman Sachs. There are fears Goldman may therefore miss out on lucrative Chinese government stock market floats.

All this fear and uncertainty on global markets drove the New Zealand dollar down to a fresh 10 month low of US$65.8 USc in morning trade as global investors avoid currencies and economies seen as riskier and exposed to volatile commodity prices that are dependent on strong global growth. See our interactive currency chart here and below.

Meanwhile, late on Friday Allied Nationwide Finance was downgraded by Standard and Poor's to a B rating with a negative outlook on fears about its liquidity position. See more details here.

Also over the weekend, Finance Ministers for the world's 20 richest economies decided to scrap a proposal for a global bank tax, Reuters reported. Canada, Japan, Australia and Brazil campaigned against the tax, arguing their banks were strong and stable and should not be punished for the sins of those banks in Europe and the United States that took on too much debt and were poorly regulated. Individual countries will now push ahead with their own taxes. Britain has already announced plans for its own tax.

So what?

New Zealanders should watch these early indicators of global growth closely. The US stock market tends to look over the horizon and it's worried about a double dip in not just the US economy but the global economy. 

Weaker consumer demand from Europe and the United States could drag commodity prices and export returns lower, although the automatic stabilising effect of the fall in the New Zealand dollar helps somewhat to soften the blow.

And what does it mean for interest rates? The question this week if signs of a fresh global slowdown are enough for the Reserve Bank to delay its expected rate hike on Thursday. The New Zealand dollar's fall, however, adds a little inflationary pressure into the economy and there are still fairly robust signs of growth in Asia and Australia, where our economy is now most closely connected. Most economists are still picking a rate hike either this Thursday or on July 29.

Allied Nationwide now has really battle on its hands to survive past the end of the Deposit Guarantee Scheme on October 12. It has not been granted entry to the extended scheme and will now need multiple upgrades within months to win an extension.

The end of the global bank tax is not too surprising but is disappointing. It was supposed to be one of the mechanisms to slow the big US and European banks down and stop them from going back to their bad old ways of gearing up with lots of debt and paying out big bonuses to their star traders. This will eventually become a political rather than a financial issue. I suspect the finance ministers chatting in a luxury hotel are a long way from how their voters feel about this. Any piecemeal tax is likely to be easily circumvented by banks going 'tax shopping' in different jurisdictions.

This is particularly bad news for Britain and the City of London, which really needed a global agreement to stop an exodus of banks. This won't stop the Brits however. The government needs the money now. 

Your  view? I welcome your thoughts in the comments below