Equity investors approve of China-US deal, but bond investors don’t; US factory data unchanged, others weaker; ECB adjustment; Sydney house prices fall; UST 10yr at 2.99%; oil and gold up; NZ$1 = 69.3 USc; TWI-5 = 73.8

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Here’s our summary of key events overnight that affect New Zealand, with news some investors are pinning a lot on post-G20 assumptions, others are far more sceptical.

All eyes are on markets to assess investor reactions to the G20 summit decisions between the US and China. Yesterday, Shanghai raced higher, up +2.6% narrowing their 2018 loss to -20.7%. Today, Wall Street’s S&P500 index is up in midday trade, showing a daily gain of +1% and that means its full 2018 gain is just +3.2%.

Equity markets may have given a thumbs up, but bond markets are far more sceptical. In fact the UST 2-10 curve is now under +17 bps and at that is its lowest level since June 2007. This is a sharp reduction from yesterday’s +20 bps and last week’s +23 bps. But at least its not negative yet. In four of the past four instances when this differential turns negative, the US falls into a recession lasting at least six months.

Meanwhile in the engine room of the real American economy, construction spending fell for a third straight month, while private-sector figures showed an uptick in manufacturing order growth but offered a mixed view on overall factory activity.

In Mexico their factory sector slipped into a contraction, while Canada achieved a small gain in an already healthy expansion.

China’s factories have stopped expanding, but they aren’t yet contracting either. Clearly Shanghai investors think that is about to change for the better.

In Europe, the ECB is to adjust the capital shares of its member national central banks, a step that will have implications for its bond-buying program and the amount of stimulus reaching the euro area’s weakest members.

In Australia, CoreLogic reports that since peaking in July last year, Sydney’s housing market is down -9.5% which is on track to eclipse the previous record peak-to-trough decline set during the last recession when values fell -9.6% between 1989 and 1991. Melbourne dwelling values peaked four months later than Sydney, in November 2017, and have since fallen by -5.8% through to the end of November 2018.

Although their core housing markets might be weak, their equity markets caught the US-China truce bug, rising +1.8% yesterday. Those investors are betting that China is the winner here and they will need more of what Australia sells them. The only problem is that they are not looking at the iron ore price; it fell -10% over the past few days.

Tomorrow we get data on Australia’s Q3 GDP growth. It is expected to come in at +3.3% pa, just marginally lower than the +3.4% result for the June quarter. This result will have an outsized influence on the NZD if it surprises.

The UST 10yr yield is unchanged at 2.99%. More importantly however, their 2-10 curve has slipped another -3 bps to now be under +17 bps and its lowest since June 2007. The Aussie Govt 10yr is at 2.60% (up +1 bp), the China Govt 10yr is at 3.40% and up +2 bps, while the NZ Govt 10 yr is at 2.61% and also up +2 bps.

Gold is up +US$11 to US$1,233/oz.

US oil prices are higher today having gained about +US$1 US$52.50/bbl. The Brent benchmark is now just on US$61/bbl. Russia and Saudi Arabia have agreed to extend their production cuts.

The Kiwi dollar is starting today firmer again at 69.3 USc, which is a ½c gain overnight and its highest since mid June. On the cross rates we are unchanged at 94.2 AUc, and up at 61.1 euro cents. That puts the TWI-5 at up to 73.8 and its highest since April.

Bitcoin is sharply lower, now at US$3,812 which is a -6.8% loss overnight. This rate is charted in the exchange rate set below.

This chart is animated here.

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

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End of day UTC
Source: CoinDesk

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