90 seconds at 9 am: Financial stress widens

US Fed chooses 'patience'; US inflation falls; the ruble stabilises on official support; UK banks in stress tests; UST 10yr yield 2.08%; oil and gold unchanged; NZ$1 = 77.3 USc, TWI = 78

18th Dec 14, 7:22am by David Chaston

Here's my summary of the key issues that affect New Zealand overnight with news there is stress around the world in the financial system.

Today's US Federal Reserve decisions have signaled they plan to wait and see on interest rates in 2015. The key phrase "low rates for a considerable time" has been modified and a "patient approach" adopted given the current lower than desired inflation rate. No mention has been made of international turmoil. Basically, a sturdy US recovery has trumped global economic worries in their decision making.

Meanwhile, American consumer price inflation came in slightly lower than expected in November at +1.3% pa. Excluding food and energy, it is +1.7% pa. which was also slightly lower than expected. Including food and energy, prices actually fell between October and November by -0.3% which is the biggest price drop in six years.

Also falling was the American current account balance but to be fair the variation from what was anticipated was very small. and it is steady at -2.3% of GDP. For comparison, New Zealand's equivalent number which we got yesterday is -2.6% of GDP.

In Russia, the ruble has stabilised - actually it rose - as authorities there deployed a range of measures to help struggling firms. It also said it would spend even more of its reserves to defend the currency. So far it has spend more than US$80 bln. But panic buying of retail goods ahead of expected sharp price rises has gripped the country.

In Japan, their nuclear regulator gave safety clearance to two more reactors, raising the prospect that the country could have four nuclear generating units back online next year

In the UK, the latest central bank stress testing showed that three well known banks there would have failed those tests at the end of 2013. Lloyds Bank has since been given the all clear, RBS is in the middle of a major capital raising program to get out of danger, and the Co-operative Bank is still failing.

Benchmark UST 10 year bond yields have stayed down after yesterday's fall and are now at 2.08%. The 1-5 yield differential in New Zealand swap rates is now down to just 26 bps this morning, the more corporate 2-10 differential is at just 33 bps. These are six year lows.

The oil price has had a small bounce overnight, now at US$58/barrel and the price of Brent crude is now at US$63/barrel.

The gold price is unchanged at US$1,195/oz.

We start today at 77.3 USc, 94.6 AUc, and the TWI is at 78.

If you want to catch up with all the changes yesterday we have an update here.

The easiest place to stay up with today's event risk is by following our Economic Calendar here »

Daily exchange rates

Select chart tabs

Source: RBNZ

Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

6 Comments

by MortgageBelt | 18th Dec 14, 8:04am 1418843087

NZD is destined to go higher & higher.

NZ has the answer to global financial crises' - we simply keep raising interest rates, keep a tightening bias, and money just keeps flowing into the NZD.

And we allow our property and assets to be sold to anyone with the cash - still have plenty of business assets, houses and commercial property to sell.

by fat pat | 18th Dec 14, 11:24am 1418855094

Yep, It's Nationals master plan to reduce our private debt to GDP ratio and current account deficit. "Sell everything" I see lots of my peers who are in the top 10% of earners in their mid 30's who don’t any property - nothing! not a sausage. Given up competing wiht the Chinese. Meanwhile foreigners quietly buy everything using our generous tax deductions to simultaneously erode our tax base.

National will leave in its wake an entire generation of middle age New Zealanders who will live from hand to mouth paying rent to a foreign landlord. A ridiculously overvalued housing market and huge unfunded liabilities associated with retirees. No capex or subsidies for renewables means that when oil becomes scarce we'll be totally devistated. An overvalued housing market means there will be no entrepreneurial activity, only more misallocation of capital into speculation.

by steven | 18th Dec 14, 8:56am 1418846184

$42 / barrel?

https://www.youtube.com/watch?v=IskjbxIddOA

by steven | 18th Dec 14, 9:24am 1418847889

econbrowser,

Copper down as well as oil.

http://econbrowser.com/archives/2014/12/oil-prices-as-an-indicator-of-g…

How complex this looks!

BDI,

Every september for some years we have seen a September peak, xmas goods being shipped? look at this september rather lower, trend it back over several septembers, its down hill....hmmm

http://www.bloomberg.com/quote/BDIY:IND/chart  (5 year)

by steven | 18th Dec 14, 9:28am 1418848135

Rubble stabilizes?

hmmm,

"When you have big balance-sheet problems involving foreign-currency debt, an interest-rate hike that tries to discourage capital flight damages the economy, and hence those same balance sheets, from another direction, and it’s common, even standard, for the effort to fail. Most notably, tight-money policies were really really unsuccessful during the Asian financial crisis of 1997-8, on which you can read my take here."

Short term view, maybe, longer term view the effect might actually be worse.

"So Russia isn’t that unusual a story, except for the nukes."

Indeed....

http://krugman.blogs.nytimes.com/2014/12/16/the-ruble-and-the-textbooks…

Kind of interesting that we have some great examples of the outcome of tightening, but they still do it.

That is the problem with financial markets v industry, placidating the financial "guru's" short term buggers the real makers of goods a bit later.

by Stephen Hulme | 18th Dec 14, 10:19am 1418851160

When you have big balance-sheet problems involving foreign-currency debt, an interest-rate hike that tries to discourage capital flight damages the economy, and hence those same balance sheets, from another direction, and it’s common, even standard, for the effort to fail.

Krugman - a lazy journalist at best.

At the start of December, Russia’s foreign exchange reserves stood at $418 billion, which far exceeds the $16 billion Russia had saved up ahead of the 1998 default. Read more

European banking institutions are bearing huge marked to market losses/costs.

Overall Societe General, known as Rosbank in the Russian market, has the most exposure at US$31 billion, or €25 billion, according to Citigroup Inc. analysts. This is equivalent to 62 percent of the Paris-based bank’s tangible equity, Bloomberg News reported.

Following the drop, Raiffeisen, which has €15 billion at risk in Russia, saw its stocks plummeted more than 10 percent. Raiffeisen also has significant exposure in Ukraine, which is facing a similar currency sell-off as Russia. Read more

Moreover, it seems Obama is waving the white flag.

Since the administration of Pres. John F. Kennedy in the 1960s, restrictions and sanctions have kept the American and Cuban ways of life from all but converging policies put in place at the dawn of the Cold War in an attempt to curb the spread of Communism.

Yet Obama said Wednesday that, while rooted in the best of intentions, this “rigid policy” has “had little effect” a half-century later. Indeed, Obama acknowledged, a Castro still sits atop the Cuban government as during the Kennedy administration, and that similar restraints concerning how the US dealt with China and Vietnam, “once controversial,” have long been lifted following decades of disagreements. Read more