Monday, 30 July 2007

UK, Denmark and NZ most exposed to house price and interest rate shocks

Fitch Ratings said in a special report published today that the UK, Denmark and New Zealand exhibit the greatest macroeconomic vulnerability to a combination of weakening property prices and rising interest rates.

"Given record levels of household debt, rising interest rates and after several years of strong house price inflation in many countries, Fitch has assessed a range of indicators of household balance sheet vulnerabilities and house price valuation measures," said Brian Coulton, Head of Global Economics & Europe, in Fitch's Sovereign team. "For overall vulnerability, New Zealand ranks first, Denmark second and the UK third as the most exposed countries. Japan, Germany and Italy are the least vulnerable."

Fitch has ranked countries by the degree of estimated house price overvaluation and household balance sheet exposure to interest rate risk, compiling an overall index of vulnerability for 16 advanced industrialised economies. A range of financial indicators have been used to estimate these exposures, discussed in detail in the report.

On the house price front, France is the most exposed country to housing overvaluation, followed by UK, Denmark and New Zealand, which all exhibit the highest (i.e. most vulnerable) rankings, reflecting rapid house price growth including relative to incomes and rents. The US, Spain and, to a lesser extent, Ireland, show lower risk on this front although housing supply dynamics - not captured in the exercise - undoubtedly play an important role in current and prospective house price movements.

With regard to balance sheet exposure, the Nordic countries and Australia and New Zealand have the highest ranks. Norway is the most exposed to household debt vulnerability followed by New Zealand, Australia, Denmark, Finland and then Sweden. However, on this score, the UK fares somewhat better thanks to lower debt and interest service ratios and overall household net worth. France also scores much better on balance sheet risk, sharply reducing its overall vulnerability.

Again, the US and Spain fare relatively well but this may be misleading to the extent that both countries currently have high overall household debt service ratios (i.e. including interest and principal repayments), an indicator that has not been captured in the study due to data limitations. Moreover, both Spain and the US have arguably experienced the largest interest rate "shocks" among countries in the sample as real policy rates have moved rapidly into positive territory in the last couple of years.

The full report, "House Prices and Household Debt – Where are the Risks?" is available on the agency's public website,

Saturday, 28 July 2007

NZD has topped, retracement headed to 0.7400 area

The NZ dollar has topped out at 0.8109, nearly 17% from the lows seen at 0.6715 in March 2007. Now looks to retrace and could pull back into the 0.7400 area before stabilising.

The reason?

Not our economy, Not the RBNZ actions, Not any Government moves.

Purely offshore pressures.

See story below: Volatility sweeps global markets.

That's the reason: the rise of global risk aversion; something the RBNZ has been praying would happen.

Investors are pulling money home, worried about potential losses. It could run some way yet, as the US property market disasters come home to roost.

That means, currencies that were weak, like the Yen and Swiss franc, will be stronger, as funds are repatriated.

Currencies that were strong, like the NZD, AUD and GBP, will be weaker, as funds are withdrawn.

That means the NZD will weaken.

Might not go too far yet, but that is the trend, with the first target 0.7500.

What would stop this going too far are calm markets.

8.25% return is hard to beat, and that means the NZD cannot stay down for long. Equally the Japanese will not want a strong Yen, and may talk of intervention again.

But for now, and the next few weeks, the NZD is finally on the back foot.

Volatility sweeps global markets

From the BBC site:

US stock markets have dropped sharply, extending a global share sell-off amid fears about the effect of higher interest rates on the world economy.

There are concerns that higher rates will hit corporate profits and takeover deals, and dent consumer spending. European markets were also jittery, with London's share index closing down for a fourth day and ending at its lowest level since the middle of March. Analysts have warned that markets could remain volatile for a number of weeks. "I think you've got bargain hunters out there for sure and I think you've got some people who are still scared," said Randy Frederic of Charles Schwab & Co. "We're seeing the convergence of a whole host of sort of unrelated or only slightly related issues," he explained.

Share fall
By the close of trading in New York, the Dow Jones Industrial Average of leading shares was 208.1 points, or 1.5%, lower at 13,265.47.
Since Monday the index has lost 4.2%, its worst weekly decline in almost five years. The wider measure of the US stock market, the S&P 500, ended down 1.6%, while the Nasdaq index, which largely tracks technology stocks, was 1.4% lower. Earlier, the FTSE 100 index of leading shares on the London market had closed 36 points, or 0.6%, lower at 6215.20. France's Cac-40 index of leading shares and Germany's Dax also declined. In Asia, the Wall Street slump on Thursday led to Japan's Nikkei closing down 418.28 points, or 2.4%, at 17,283.81, while Hong Kong's index ended 2.7% lower.

Credit crunch
The main underlying problem is that many investors are worried about an impending credit crunch. In past years, financial markets, companies and consumers have all benefited from low interest rates and easy access to money, helping fuel a boom in spending, house price inflation and corporate takeovers.

Now, interest rates are rising and set to stay higher as central banks try to rein in inflation. A large part of the rise in share prices in the past year has been driven by the takeover boom, with private equity bidders pushing up the value of the firms they are targeting. Most of these deals are paid for with borrowed money and the banks who have loaned this cash have been laying off a large proportion of the loans by selling them to other investors.

However because investors are bruised by their losses in the US sub-prime mortgage market, they are now less keen now on buying the risky loans from the banks, taking away the credit needed for takeovers and prompting share prices to fall. "When there's uncertainty about financing, then private equity is not so quick to make deals," said Elliot Spar of Ryan Beck & Co.
Fred Dickson of D.A Davidson & Co said that: "We've had this massive change in investor expectations in terms of new deal flow." "The lifeguards have shouted, and investors are now starting to heed their warnings and head back to shore."

Downhill track
At the same time, oil prices have climbed, raising fears that inflation could also pick up again because of higher energy costs. US markets bounced back slightly on Friday after figures showed that the US economy had grown more quickly in three months to June than analysts had first thought. US Commerce department data showed that, on an annual basis, the US economy grew by a robust 3.4% in the second quarter of 2007. However, the respite was short-lived as analysts fretted that the figures may increase the chances of further interest rate rises in the US.

BBC News