All markets now expect more stimulus

Kia ora

and welcome to Friday's Economy Watch where we follow the economic events and trends that affect New Zealand.

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

This podcast is supported by Hatch.

Looking at the markets ahead, investors will be watching the G-20 Summit next week - namely, relations between Chinese President Xi and US President Trump. The markets have been volatile of late thanks to the escalating trade war, but many analysts believe that trade talks will resume as an outcome of the Summit. It has undoubtedly been a bumpy ride for investors. Whatever the markets are doing at the moment, a buy-and-hold approach to investing can be a great way to earn long-term returns.

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Today this podcast leads with news all about interest rates.

The big story today is the sharp turn to risk aversion. And locally, we can see investors piling in to NZ Government bonds as one of a number of safe havens. This demand for risk-free bonds is such that it is pushing down yields very sharply. Part of the problem is that the traditional risk-free benchmark, US Treasuries, have an odour over their risk-free status. US Government debt is racing higher and can only get much worse if the US economy wobbles. That means debt ceilings will be reached sooner and defaults are an increasing possibility. Defaults and "risk-free" are not compatible. So investors are piling out of the US dollar and into government bonds that have low or zero histories of defaulting. There are a number of these, especially in Europe; but the Australian and New Zealand Government bonds are part of this.

The New Zealand dollar is rising. New Zealand benchmark interest rates are falling sharply.

In the US, their Q1 2019 current account deficit came in marginally worse than expected, but it is very small as a ratio to their GDP.

In China, the stimulus is rolling out faster - but there is a deliberate effort not to call it stimulus. Instead, they are  "accelerating progress", "upgrading infrastructure", and "expanding safety". Stimulus with Chinese characteristics. None of these projects will dampen their demand for iron ore.

In the EU, their latest consumer sentiment survey came in more negative than analysts were expecting.

The Norweigian central bank hiked rates last night, taking them up +25 bps to 1.25%, and said it is likely to do so again in the near future.

In the UK their central bank has left its policy rates unchanged, but they have sharply downgraded their view on economic growth.

Do you know that we have a full database of all bonds on issue in New Zealand? You casn access that resourse at interest.co.nz/bonds-data/issues

In Australia, after their prudential regulator signaled that its sensitivity test was too tight, Westpac moved to loosen the qualifying criteria for mortgages. Westpac's changes were not available to investors or owner-occupiers with interest only loans. But hours after making the changes, the regulator reacted "with fury" and Westpac backtracked, reinstating the 7.25% serviceability floor.

The UST 10yr yield is now just under 2.00% and down -3 bps from yesterday. We should note that the New Zealand 1-5 swap curve has now gone negative at -2 bps.

Gold has jumped a remarkable +US$40 today to US$1,389/oz. That is a gain of +3% in 24 hours.

US oil prices have jumped today, up +5% as Persian Gulf supply tensions move to front-of-mind. They are now just on US$56.50/bbl. The Brent benchmark is now at US$64.50.

The Kiwi dollar is firm against a falling greenback, now at 65.9 USc a gain of +½c since this time yesterday. On the cross rates we have risen too to be at 95.2 AUc. Against the euro we are holding at 58.4 euro cents. That puts the TWI-5 up at 70.6.

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

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I'm David Chaston. We'll do this again on Monday.