A financial market rout

Kia ora,

Welcome to Tuesday'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.

Today we lead with news the international week has started with a financial market rout as the bears come out to play.

There has been a dramatic risk-off mood sweeping over markets today with commodity prices slumping, equity markets falling sharply, benchmark bond yields diving, and the US dollar streaking higher. The rise and rise of the pandemic delta variant now has investor attention, more so because of the clear response mistakes by both policy makers (in the UK and Eastern Europe especially) and an increasing brainless response by a sizable population in some heartland US states. Investors can see these mistakes are not going to end well.

Yesterday, the UK, which is pushing toward a full economic and social re-opening, recorded +40,000 new pandemic cases, its highest since the January spike that hit +68,000 before falling away in May to +2,000. Indonesia reported +44,000. India +38,000. Brazil and Russia also reported fast rising trends. The fear of spread from these uncontrolled hotspots is that it will reverse the re-opening plans everywhere.

In France there was an interesting pandemic development where they switched from 'encouragement' to 'threats' to improve their vaccination rate. France, a hotbed of vaccination conspiracy theories, said it would end free tests for those who want to travel or attend events. The effect was dramatic, with 926,000 people making a vaccine appointment.

Adding to unease, the United States accused China's Ministry of State Security (MSS) of a global cyber espionage campaign, mustering an unusually broad coalition of countries to publicly call out Beijing for hacking that included the EU, Japan, Australia and New Zealand.

ANZ's commodity tracker is suggesting that the strong recovery growth in commodity demand and prices may be petering out. High frequency data are pointing to a soft patch ahead for commodity markets. Nevertheless, the absolute levels of demand growth is still high they say. Ongoing supply side issue across many markets may support prices for a while yet however. The Baltic Dry Index rose yesterday.

Of particular interest for us is how dairy prices are tracking as there is another auction tomorrow morning. At this point, the local futures market is pointing to a -3.5% fall for WMP and a small -0.4% dip for SMP. However, note that in the past futures prices isn't always a reliable guild to the actual auction outcomes.

Back on the local pandemic front, there were 100 new cases in NSW yesterday (98 in the community) and another 11 in Victoria (10 in the community). Neither levels give confidence the Trans-Tasman travel bubble will re-open anytime soon. 

Wall Street has opened its week down -2.1% in mid-afternoon trade, and falling. Overnight, European markets followed the Tokyo lead with falls averaging -2.5%. Yesterday the very large Tokyo market got the wobbles first with a -1.3% drop, followed by Hong Kong which was down -1.8%. 

The UST 10yr yield starts today at just on 1.18% and down a dramatic -13 bps as Wall Street opens for the new week. Almost all of this shift is at the long end. 

The price of gold is now just on US$1808/oz which is down another -US$4/oz from this time yesterday.

Oil prices have slumped today by more than -US$5 and now in the US they are now just over US$66/bbl, while the international Brent price is now just over US$68/bbl.

The Kiwi dollar opens today just under 69.3 USc and a -70 bps fall as the greenback surges. Against the Australian dollar we are unchanged at 94.6 AUc. Against the euro we are also down -50 bps at 58.8 euro cents. That means our TWI-5 starts today at 72.4.

The bitcoin price is now at US$30,617 and down another -3.1% from this time on yesterday. Volatility in the past 24 hours has been moderate at +/- 2.5%.

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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.