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Saturday, 16 December 2017

Shock in New Zealand has nothing to do with rugby

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Anthony Peters, Swiss Invest Strategist

Anthony Peters, Swiss Invest Strategist

Merely looking at the closes on the US markets tells only a partial story; although the Dow closed up 1.3% and the S&P 0.8%, both had a very mixed day with the latter spending most of the afternoon session in negative territory. Part of this might be down to the shock of what can only be termed the “drive-by” downgrade of both New Zealand’s domestic and external debt rating by Fitch which followed S&P’s earlier move.

Rugby fans will think this is a foul move, coming as it does in the middle of the World Cup which is in full swing in the land of the kiwi and which the home side is fully intent on winning. However, the signs have been on the wall for the past two or three years. Older market players will remember that just 20 years ago New Zealand was the epitome of a fiscal basket case but it also set the standard of going into austerity lock-down, slashing spending at huge pains to the population, wiping out its deficit and returning to the top table.

Bill English’s credibility as opposed to Youknow Whopoulos

Incidentally, the Scandinavian debt and banking crisis of the 1990s had the same effect, especially on Sweden, which also put its sacred social security system on the chopping board and looks to have come out of it intact. Listening to Bill English, the kiwi finance minister was interesting; he made big play of how the nation has begun to deliver improved debt/GDP figures and falling external debt levels but he did confess that they were still not overly pretty. Why is it that when he declares that he intends to drive the country to a primary surplus by 2015, that he sounds so very credible as opposed to Youknow Whopoulos?

Alas, the agencies also cited the high levels of household debt which indicates yet another developed country where the standard of living exceeds its productive capacity.

US equity prices initially dropped, much seemingly on the fear that the downgrade which had not been signalled in advance might set the scene for a similar raid on the Unites States’ AAA credit rating which Fitch still holds in place.

However, a late rally into the close had us close on another up-day with the Dow 6.3% off its low of last Thursday but still below the close of Tuesday this week – there is a positive and optimistic feel to the trading environment but as I pointed out yesterday, it is still not broad-based in the slightest. The risk on trade mainly looks to be affecting those risks which can be dumped again in a hurry, if desired.

As the central banks run out of bullets, the politicians have to stand up and be counted. Europe is showing a few nascent signs of realism – in the US there is nothing of the sorts

However, there are quite a few bottom fishers around, especially with the likes of Greece, who want to jump on the train after it had seemingly departed. It always hurts to get excited phone calls declaring that X or Y is a buyer of Z – but at the levels which were prevalent before the good news were out. Greek bonds did in fact find something of a bid yesterday but still at yields and prices reflecting recovery levels well below the 50% haircut which is being mooted by the authorities.

Worst fears exaggerated?

Time for some good news in all the gloom – the entire raft of releases out of the US yesterday swept in ahead of forecasts – from Q2 GDP to initial jobs claims every single number was better. This does not indicate that the US is out of the woods yet, but it does show that some of the worst fears of a linear decline in activity might well be exaggerated.

However, as Fed president Bernanke pointed out, America is sitting on a jobs crisis and it looks as though Washington power politics will do nothing to help. Europe is in the process of proving that it can be brought, albeit kicking and screaming, to constructive political decisions. As the central banks run out of bullets, the politicians have to stand up and be counted. Europe is showing a few nascent signs of realism – in the US there is nothing of the sorts.

Alas, it is that time of the week again. All that remains is for me to wish you and yours a happy and peaceful weekend. When England meet Scotland in the World cup tomorrow, may it be right and bright to be white and may it leave the blues who lose with the blues…

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