An earthquake for fossil fuel investors

Kia ora,

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.

Today we lead with news of a sudden change in the value of fossil fuel investments.

But first, the April durable goods orders data in the US came in surprisingly weak. They are -1.3% lower than the March level which is far away from the +0.7% gain expected. Of course they are hugely higher on a year-on-year basis but that is just the pandemic base effect. Compared to April 2019 orders are +0.4% higher so the recovery in the factory sector is still lackluster by this metric. 2021 orders for non-defence capital goods however recorded a good +3.5% gain.

US initial jobless claims fell again, down to +420,000 last week and the lowest since before the pandemic started. There are low 3.5 mln people on these claims, well down from the 22 mln at its peak, but still well above the pre-pandemic level of under 2 mln.

Pending home sales for April fell when a rise was expected. Record low inventory levels are the declared reason.

The Kansas City Fed's factory survey also reported softer conditions in May than for April. But they are still reporting a strong expansion and also reporting very sharp pricing pressures, just like every other similar survey nationwide.

And we should note that the coming weekend includes the Memorial Day holiday in the US on Monday. Memorial Day weekend serves as the unofficial beginning of the US summer driving season and more than 37 million people will be on the road this weekend and petrol prices are expected to spike as a consequence. They are paying more than US$3/gallon for petrol and complaining about it, or NZ$1.09/liter.

And in courtrooms, a Dutch court found in favour of environment groups and ordered Royal Dutch Shell to set deeper and faster emissions cuts targeting a 45% reduction by 2030. The case, which industry experts say may serve as a precedent for other European oil majors, came the same day as ExxonMobil was dealt a blow with an small hedge fund unseating two board members in a bid to force the US company to diversify beyond fossil fuels, and to fight climate change. Current investors in oil and gas are going to find it very hard to quit their holdings without taking huge haircuts. These two rulings have caused an earthquake in the fossil fuel industry.

One likely strategy for these investors is to now maximise their returns in the short run, as they stop investing. With little competition, prices for fuel may well rise sharply even as demand falls.

Meanwhile, profits at large China’s industrial companies grew at a continuing fast pace in April, despite high commodity prices and weaker performance in the consumer goods sector. While the year-on-year comparisons distort the usual benchmarks, compared with April 2019 those profits were 49% higher and operating revenues were +33% higher.

In Australia, Victoria is now in a 7 day lockdown, causing a suspension of flights to and from New Zealand. And other states are closing their border with Victoria too.

The UST 10yr yield starts today +2 bps higher at 1.61%. 

The price of gold starts today up at US$1897/oz, a gain of +US$4 since this time yesterday.

Oil prices start today marginally firmer at just under US$66.50/bbl in the US, while the international Brent price is just under US$69/bbl.

The Kiwi dollar opens today marginally firmer at 72.9 USc and holding its RBNZ induced slightly higher level. Against the Australian dollar we are up at 94.3 AUc. Against the euro we are still at 59.8 euro cents. That means our TWI-5 starts today at 74.5 and that is an appreciation over the past week of +124 bps.

The bitcoin price is now at US$39,175 and a mere +0.7% higher than this time yesterday. It might seem like it is trading sideways but volatility in the past 24 hours has still been very high at +/- 4.3%.

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 on Monday.