A new round of unsettling volatility

Kia ora,

Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news there has been a huge change of mood in financial markets.

Normally, this week would be focused on the upcoming non-farm payrolls report for November and the results of the Black Friday/Cyber Monday retail sales events. But the sudden risk-off mood has changed the perspective.

Investors took heed of the new WHO warnings of the emerging South African variant that is probably resistant to current vaccines, and the early closing of borders again in response, and have reacted in a sharp risk-off manner globally.

Commodity prices, equity prices, and interest rates have all tanked substantially, and there has been a rush to the 'safety' of the core currencies. The NZD has not fared well.

Copper fell -3.6% in markets on Friday to US$9465/tonne. Aluminium lost -4.2% to $2,601/tonne, zinc shed -3.1% to $3,197, lead was down -0.4% to $2,261, tin eased -0.5% to $38,600 while nickel ceded -3.7% to $19,895.

Oil prices sank much more, down -13% on the day and have stayed down.

Countries around the planet have rushed in new travel restrictions. New Omicron (South African) cases have been detected in Europe, Australia and Hong Kong now, indicating broad travel spread already.

Meanwhile, it is emerging that Black Friday may have been a retail fizzer.

In China, they reported profits (¥818 bln) earned by their industrial firms rose by almost a quarter above 2020 levels (¥657 bln) in October, and almost doubling from 2019 levels (¥428 bln) in a major surge that is more than just a Covid rebound. Underpinning the jump are profits at coal and oil companies.

But China’s cement prices are going soft due to sluggish demand, and this is at a time when demand and prices are seasonally strong. However, the run-up in prices early in their season has been unusually high and with demand leaking away this year, we could see a quick retracing. There was an expectation that production curbs due to a new focus on climate policies would keep prices elevated, but it may not turn out that way with low demand trumping constrained supply.

Singaporean industrial production data for October showed an unexpected improvement.

In Germany, import prices surged +22% year-on-year in October, the largest annual increase in more than 40 years and well above market consensus of less than a +20% rise. These rises are largely driven by Russia energy prices, and given the political tussling between the EU and Russia, they may not fade like the rest of the world.

In Australia, retail sales jumped +4.9% in October as opening up generated a strong surge. But as ANZ economists have noted, their recovery is now "a supply side issue".

The UST 10yr yield opens today at 1.48% and down a massive -17 bps since this time Friday. 

NZ swap rates reversed sharply on Friday as the concerns about the new virus risks started to become evident.

After a very sharp fall on Friday to end the week (in a half-day, holiday session in New York) the S&P500 futures are down sharply again, down -2.6% indicating that Wall Street will open in a very risk-off tone tomorrow.

The price of gold will start today at US$1786/oz and getting no boost from this risk-off dive.

And oil prices have softened further from Saturday to be just on US$68/bbl in the US, while the international Brent price is now under US$72/bbl.

The Kiwi dollar opens today softer again at just under 68.1 USc and a new 100 day low. Against the Australian dollar we are holding at 95.7 AUc. Against the euro we are soft at 61.3 euro cents. That means our TWI-5 starts today at 72.8, down -70 bps from Friday and also its lowest since the end of September.

The bitcoin price crashed -8.2% in Saturday and is now slipped another -0.2% since then to now be at US$54,135. Volatility over the past 24 hours has been modest at just over +/- 1.4%.

Market volatility is likely to be the theme this week, at least until there is more information on vaccine effectiveness, how harmful the new variant is.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.