12 February 2018 bnz.co.nz/research Page 1 Markets Outlook RESEARCH Slump or Hiccup? Market correction worrisome But not yet significant NZ relatively well-placed this time around Economic momentum good Fiscal and monetary authorities have head room to act We have been expressing for some time now our concern that just about every asset looks overpriced and that a correction was long overdue. Is this that correction? Maybe. Whether it is or not, it is a timely reminder that asset prices of all descriptions have been running strong for a very long time now and, accompanying that strength, volatility has been very low. At the root of the asset strength has been the fact that the major global central banks have left the world awash with cash. Not only has there been lots of it but its cost (namely interest rates) has also been uncharacteristically low for an extended period of time. Accordingly, lots of cheap money has pushed up equity prices, house prices and even such things as antiques, stamp and art collection prices. Now, central banks are reversing the process. The pace of quantitative easing is slowing and, in the United States, Canada and the UK at least, interest rates are actually rising. Accordingly, it should come as no surprise that assets should respond to this. And when they do there is really nowhere to hide. Correlated price gains on the way up means correlated on the way down. Just how far this process goes (or for that matter when, exactly, it all plays out) is open to debate but the signs are increasing that a significant correction might be sooner rather than later. At this stage, the good news is that, despite all the hype, global equity markets (in aggregate as measured by the MSCI) have fallen only 8%, are only back to where they were mid-October 2017 and are still up 9.8% on this time last year. The bad news is that if this is the start of a correction then there could be a very long way to go. Does this portend the end of the world as we know it? In one way, yes. Our developed sense of security that asset prices can only go one way has been shattered. This will dent confidence and force a rethink of folks’ investment strategies. This shift will become even more extreme if sentiment towards the housing market is also dented. Crunch! In Perspective The Worm Has Turned 1450 1500 1550 1600 1650 1700 MSCI World Index Source: Macrobond, BNZ 0 200 400 600 800 1000 1200 1400 1600 1800 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 MSCI World Index Source: Macrobond, BNZ Tech Bubble Pre GFC Bubble Another Bubble? 0 1 2 3 4 5 6 7 8 9 08 09 10 11 12 13 14 15 16 17 18 Cash Rates NZ RBA Fed ECB BOE BOC BOJ Source: Bloomberg, BNZ
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12 February 2018
bnz.co.nz/research
Page 1
Markets Outlook RESEARCH
Slump or Hiccup?
Market correction worrisome
But not yet significant
NZ relatively well-placed this time around
Economic momentum good
Fiscal and monetary authorities have head room to act
We have been expressing for some time now our concern
that just about every asset looks overpriced and that a
correction was long overdue. Is this that correction?
Maybe. Whether it is or not, it is a timely reminder that
asset prices of all descriptions have been running strong
for a very long time now and, accompanying that strength,
volatility has been very low.
At the root of the asset strength has been the fact that
the major global central banks have left the world awash
with cash. Not only has there been lots of it but its cost
(namely interest rates) has also been uncharacteristically
low for an extended period of time. Accordingly, lots of
cheap money has pushed up equity prices, house prices
and even such things as antiques, stamp and art
collection prices.
Now, central banks are reversing the process. The pace
of quantitative easing is slowing and, in the United States,
Canada and the UK at least, interest rates are actually
rising. Accordingly, it should come as no surprise that
assets should respond to this. And when they do there is
really nowhere to hide. Correlated price gains on the way
up means correlated on the way down.
Just how far this process goes (or for that matter when,
exactly, it all plays out) is open to debate but the signs are
increasing that a significant correction might be sooner
rather than later. At this stage, the good news is that,
despite all the hype, global equity markets (in aggregate
as measured by the MSCI) have fallen only 8%, are only
back to where they were mid-October 2017 and are still
up 9.8% on this time last year. The bad news is that if this
is the start of a correction then there could be a very long
way to go.
Does this portend the end of the world as we know it?
In one way, yes. Our developed sense of security that
asset prices can only go one way has been shattered.
This will dent confidence and force a rethink of folks’
investment strategies. This shift will become even
China, (circa) Aggregate Financing (RMB), Jan CNY1,140b
Tuesday 13 February
NZ, Crown Financial Statements, 6m-ended-Dec 2017
Aus, RBA's Ellis Speaks, ABE Conference
Aus, NAB Business Survey, January +11
UK, CPI, January y/y +2.9% +3.0%
US, Fed's Mester Speaks
US, NFIB Small Business Optimism, January 105.7 104.9
Wednesday 14 February
NZ, RBNZ 2yr Inflation Expectations, Q1 +2.02%
NZ, Food Price Index, January +2.4% -0.8%
Aus, Consumer Sentiment - Wpac, Feb 105.1
Jpn, GDP, Q4 1st est +0.2% +0.6%
Euro, Industrial Production, December +0.1% +1.0%
Euro, GDP, Q4 2nd estimate +0.6% +0.6%P
US, CPI ex food/energy, January y/y +1.7% +1.8%
US, Retail Sales, January +0.2% +0.4%
US, Business Inventories, December +0.3% +0.4%
Thursday 15 February
NZ, REINZ Housing Data, January
Aus, Employment, January +35k +15k +35k
Aus, Unemployment Rate, January 5.4% 5.5% 5.5%
Jpn, Industrial Production, Dec 2nd est +2.7%P
Jpn, Machinery Orders, December -2.3% +5.7%
Euro, Trade Balance, December s.a. +€22.3b +€22.5b
US, Jobless Claims, week ended 10/02 228k 221k
US, Philly Fed Index, February +22.0 +22.2
US, Empire Manufacturing, February +18.0 +17.7
US, PPI ex-food/energy, January y/y +2.1% +2.3%
US, Industrial Production, January +0.2% +0.9%
US, NAHB Housing Index, February 72 72
Friday 16 February
NZ, Concrete Production, Q4
NZ, BNZ PMI (Manufacturing), January 51.2
Aus, Lowe Testifies
UK, Retail Sales vol., January +0.6% -1.5%
US, Housing Starts, January 1,231k 1,192k
US, Mich Cons Confidence, Feb 1st est 95.5 95.7
Historical Data
Today Week Ago Month Ago Year Ago Today Week Ago Month Ago Year Ago
CASH & BANK BILLS
Call 1.75 1.75 1.75 1.75
1mth 1.80 1.80 1.77 1.85
2mth 1.85 1.85 1.82 1.94
3mth 1.91 1.89 1.88 2.03
6mth 1.93 1.92 1.92 2.07
GOVERNMENT STOCK
03/19 1.77 1.78 1.78 2.18
04/20 1.85 1.94 1.98 2.40
05/21 2.04 2.13 2.15 2.54
04/23 2.38 2.45 2.41 2.81
04/25 2.72 2.76 2.67 3.12
04/27 2.95 2.98 2.87 3.21
04/33 3.32 3.34 3.19 3.56
04/37 3.47 3.50 3.34 3.88
GLOBAL CREDIT INDICES (ITRXX)
Australia 5Y 66 59 54 89
Nth America 5Y 60 56 47 63
Europe 5Y 56 47 45 73
SWAP RATES
2 years 2.15 2.18 2.22 2.35
3 years 2.36 2.40 2.41 2.60
4 years 2.56 2.59 2.58 2.80
5 years 2.73 2.76 2.73 2.96
10 years 3.27 3.32 3.23 3.47
FOREIGN EXCHANGE
NZD/USD 0.7240 0.7265 0.7300 0.7175
NZD/AUD 0.9276 0.9222 0.9165 0.9392
NZD/JPY 78.80 79.24 80.69 81.61
NZD/EUR 0.5917 0.5875 0.5953 0.6772
NZD/GBP 0.5241 0.5204 0.5293 0.5729
NZD/CAD 0.9117 0.9109 0.9073 0.9380
TWI 74.8 74.9 75.2 78.6
Markets Outlook 12 February 2018
bnz.co.nz/research
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