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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- The dollar remained firm with the euro increasingly overshadowed by the unfolding Volkswagen scandal.

- The Ukraine announced a partial write down of sovereign debt and temporary suspension of debt repayments from Sept 23.

OUTLOOK

UPCOMING TODAY: There is no New Zealand data today. Today’s focal point is likely to be the Chinese manufacturing PMI for September. Overnight the focus will be on the German and Eurozone Manufacturing and Service PMIs.

CURRENCY: Global activity indicators will drive currency markets, with PMI’s from China, Europe and the US setting the tone. Markets expect continued softening, weighing on overall sentiment.

RATES: Local yields will likely open lower with pressure to flatten given the sharp fall seen in sovereign bond yields overnight.

REVIEW

CURRENCY: Risk sentiment suffered overnight, but NZD was a reluctant participant as it had fallen prior. The safety of the JPY was sought, while the ‘normalising’ GBP was the weakest performer.

GLOBAL MARKETS OVERVIEW: There wasn’t too much data out overnight, but the focal point was the unfolding scandal at Volkswagen (VW). This alongside renewed commodity price weakness led to risk-off moves in markets. The Volkswagen scandal weighed heavily on the DAX, which closed down 3.8%. Automobiles led the decline falling 9%, with Volkswagen shares down some 20% overnight. This weighed on the euro and saw core sovereign bond rally, with yields 9-10bps lower, with a widening in peripheral spreads to bunds. It’s difficult to say what extent this weighed on US asset prices, but similar sentiment was at play with the major equity indices down 1.2-1.6% at the time of writing, with US Treasury 10 year yields down 7bps. There was renewed weakness in commodities and particularly raw-materials as concern over China remain.

ANZ’S ASSESSMENT

VOLKSWAGEN IN THE PRESSURE COOKER. New Zealand certainly has had a recent taste of having its biggest export company and sector in the pressure cooker with the extremely low dairy prices and food safety issues. The German economy looks set for a similar, but different test as the Volkswagen scandal continues to unfold. Car manufacturing and exports are a major flagship industry for the German economy. Indeed exports from VW, BMW and Daimler accounted for some 18% of German exports last year. By comparison, dairy accounts for 27% of New Zealand’s merchandise exports at present. So there are a lot of parallels that can be drawn between the likes of what dairying means to New Zealand and car manufacturing to Germany. The depth of the scandal is difficult to gauge but over the weekend, the company was accused by America's Environmental Protection Agency (EPA) of cheating emissions tests. Worldwide VW sells 11 million cars, of which half a million are sold in the United States. The VW group includes some of well-known brands in the form on not only VW, but also Audi, Skoda, Seat and Porsche. The company said on September 22nd-certain types of diesel engines had been equipped with software that allowed them to detect when they are undergoing emissions tests, whereupon they switch to clean-running mode. For the majority of the 11 million vehicles involved, the software has no effect, VW said. Investors certainly have not liked what they have seen with the VW share price back some 38% since the news broke and total market cap shedding EUR25bn. VW has tried to limit the damage to its balance-sheet by earmarking EUR6.5bn to pay off fines and potential law suits from customers. But many seem to be threating this won’t be enough as the car maker could face a fine of up to EUR18bn from the EPA alone and as other regulators from Europe and Asia move to investigate the claims. While you don’t want to overstate the potential impact on the Germany economy as VW will swing into action to address the issue you can get a sense of what car manufacturing means to Germany by visiting their Ministry of Economic Affairs website. On it "In the international arena German manufacturing companies have an excellent reputation. They represent "Made in Germany", known as a seal of quality the world over. They represent innovation, quality and cutting-edge technology. The website also says "So as to be braced for the future all vehicle manufacturers are now working on environmentally friendly drives, for example on a new generation of diesel engines". Prior to this it was believed that VW were at the forefront of this development.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: In line with other regional manufacturing surveys, the Richmond Fed gauge fell to -5 vs 0.0 in August. New orders fell to -12 vs +1 in August. By contrast, the September Philly Fed non-manufacturing index rose to +29.3 vs +15.4 in August and new orders rose to +22.0 vs +10.3 in August. The story of the dichotomy between manufacturing and the non-manufacturing economy continues as manufacturing globally is hit by excess capacity.

- Eurozone: The EC measure of consumer confidence declined slightly to 7.1 in September. This suggests the consumer recovery slowed in the third quarter. On past form, it is consistent with annual household spending growth of little more than 1.0% - slower than the 1.9% growth rate recorded in the second quarter. This message contrasts with other business surveys, which suggest momentum has been maintained recently.

- The VW scandal and commodity price weakness led to risk-off in equity markets. The Volkswagen scandal weighed heavily on the DAX, which closed down 3.8%. Auto stocks led the decline, falling 9%, with Volkswagen shares down another 20% overnight to be down 35% in 2 days. The Euro Stoxx finished back 3.4% and FTSE was down 2.8%. It is difficult to definitively say that the VW crisis had a meaningful impact on US trading, but it may well have weighed on sentiment as there was little other market news to focus on today. At 7.30am NZT, the major US bourses were down between 1.2 to 1.6%. Automobile stocks were weaker on concern of tougher regulations for all companies.

- Core sovereign bond yields rallied, with lower equity prices and some renewed softness in commodity prices weighing on inflation expectations. Core European sovereign bond yields declined by 9-10bps. US 10-year yields were down 7bps at 7.30amNZT.

- Commodity prices were weaker across the board, with the CRB index was down 1%. Weakness was centred on raw materials due to continued concerns over China and reorientation of its economic growth model away from infrastructure.

NZD/USD: SENTIMENT DRIVEN…

NZD/USD followed global sentiment lower overnight, with equities and commodities reversing yesterday’s gains. US data continues to soften with the Richmond Fed declining into negative territory. The preliminary Markit PMI tonight is also expected to decline, and global sentiment will be shaped by the Caixin China PMI in the Asian session.

Expected range: 0.6250 - 0.6340

NZD/AUD: RANDOM...

This cross strengthened overnight as a sell program in AUD was evident in the market. The NZD was broadly unchanged, and this cross was forgotten.

Expected range: 0.8800 - 0.8900

NZD/EUR: ACTIVITY…

European activity indicators will be the focus for the EUR tonight. The PMI data are expected to moderate, but importantly retain strong levels. There is also a quarterly update from ECB President Draghi, which should reiterate ECB determination to stimulate the economy.

Expected range: 0.5600 - 0.5680

NZD/JPY: RISKING…

Risk sentiment suffered overnight as JPY appreciated and NZD depreciated.

Expected range: 75.00 - 76.50

NZD/GBP: SOFTENING…

The CBI trends series declined overnight, with GBP now following the US trend with softening data. Public finances also showed larger borrowing than anticipated.

Expected range: 0.4070 - 0.4140

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